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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9254
UNUM Corporation
(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware
01-0405657
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
2211 Congress Street, Portland, Maine 04122
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (207) 770-2211
Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
Title of each class Name of each exchange on which registered
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Common stock, $0.10 par value New York Stock Exchange
Pacific Exchange
Preferred stock purchase rights New York Stock Exchange
Pacific Exchange
8.8% Junior Subordinated Deferrable Interest New York Stock Exchange
Debentures, Series A, Due 2025
6.75% Notes, due 2028 New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 19, 1999, was approximately $6,721,800,000.
As of February 19, 1999, 138,905,041 shares of the registrant's common
stock were outstanding.
Exhibit Index appears on page 80.
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<PAGE>
TABLE OF CONTENTS
PART I
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<S> <C> <C>
Item Page
- - ---- ----
1. Business ................................................................................. 1
A. Description of Business ............................................................... 1
B. Disability Insurance Segment .......................................................... 2
C. Special Risk Insurance Segment ........................................................ 4
D. Colonial Products Segment ............................................................. 5
E. Retirement Products Segment ........................................................... 5
F. Investments ........................................................................... 5
G. Risk Management and Reinsurance ....................................................... 5
H. Reserves .............................................................................. 6
I. Employees ............................................................................. 6
J. Competition ........................................................................... 6
K. Regulation ............................................................................ 6
L. Participation Fund Account ............................................................ 7
2. Properties ............................................................................... 7
3. Legal Proceedings ........................................................................ 7
4. Submission of Matters to a Vote of Security Holders ...................................... 7
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters ................ 8
6. Selected Financial Data .................................................................. 9
7. Management's Discussion and Analysis of Financial Condition and Results of Operations .... 10
7A. Quantitative and Qualitative Information about Market Risk ............................... 26
8. Financial Statements and Supplementary Data .............................................. 27
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..... 62
PART III
10. Directors and Executive Officers of the Registrant ....................................... 62
A. Directors of the Registrant ........................................................... 62
B. Executive Officers of the Registrant .................................................. 63
11. Executive and Director Compensation ...................................................... 64
12. Security Ownership of Certain Beneficial Owners and Management ........................... 69
13. Certain Relationships and Related Transactions ........................................... 71
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .......................... 71
Signatures ............................................................................... 72
Index to Exhibits ........................................................................ 80
</TABLE>
<PAGE>
UNUM Corporation and Subsidiaries
PART I
Item 1. BUSINESS
A. Description of Business
UNUM Corporation is a Delaware insurance holding company organized in
1985. Operations of its subsidiaries, described below, account for
substantially all of UNUM Corporation and subsidiaries' ("UNUM") consolidated
assets and revenues. UNUM Corporation is based in Portland, Maine, and through
its affiliates has operations in North America, the United Kingdom, the Pacific
Rim and Latin America. UNUM is:
o the leading provider of group long term disability insurance ("group
LTD") in the United States and the United Kingdom;
o the leading provider of group short term disability insurance ("group
STD") in the United States; and
o a major provider of group life, individual disability ("ID"), long
term care ("LTC") insurance, special risk reinsurance operations and
payroll-deducted voluntary employee benefit products.
UNUM conducts operations in North America through wholly-owned subsidiaries
including:
o UNUM Life Insurance Company of America ("UNUM America"), a Maine life
insurance company licensed in 49 states, the District of Columbia and
Canada;
o First UNUM Life Insurance Company ("First UNUM"), a New York life
insurance company;
o Colonial Companies, Inc. ("Colonial Companies"), a Delaware holding
company whose wholly-owned subsidiary, Colonial Life & Accident
Insurance Company ("Colonial"), is a South Carolina life insurance
company licensed in 49 states and the District of Columbia;
o Duncanson & Holt, Inc. ("D&H"), a New York corporation; and
o Options and Choices, Inc. ("OCI"), based in Wyoming and acquired in
1997, which delivers integrated information and analysis to help
organizations manage their health and disability program costs.
UNUM's United Kingdom operations are conducted by:
o UNUM Limited, a wholly-owned subsidiary of UNUM European Holding
Company, which is wholly-owned by UNUM Corporation; and
o Duncanson & Holt Europe Ltd., a wholly-owned subsidiary of D&H.
UNUM's Pacific Rim operations are led by:
o UNUM Japan Accident Insurance Company Limited ("UNUM Japan") a
wholly-owned Japanese non-life insurance company established in 1994.
UNUM's Latin America operations are led by:
o Boston Compania Argentina de Seguros SA ("Boston Seguros"), a general
lines property/casualty, life and workers' compensation insurance
company, purchased in 1997 and based in Argentina.
On November 22, 1998, UNUM entered into an agreement with Provident
Companies Inc. ("Provident"), pursuant to which UNUM and Provident will merge
under the name UNUMProvident Corporation ("UNUMProvident"). Under the merger
agreement ("the merger"), each outstanding share of Provident common stock will
be reclassified and converted into 0.73 of a share of UNUMProvident common stock
and each outstanding share of UNUM common stock will be converted into one share
of UNUMProvident common stock. The merger will be accounted for as a pooling of
interests.
The transaction is expected to be completed by midyear 1999, and is
subject to clearance or approval by certain federal and state regulators,
approval by shareholders of both companies, and customary closing conditions.
Shareholders who collectively have beneficial ownership representing
approximately 26% of Provident's common stock have agreed to vote in favor of
the merger. As a result of the merger, approximately 58% of UNUMProvident will
be owned by current UNUM shareholders immediately prior to the merger and 42%
of UNUMProvident by current Provident shareholders immediately prior to the
merger.
1
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In October 1996, UNUM America and First UNUM closed the sale of their
group tax-sheltered annuity ("TSA") businesses to two insurance subsidiaries of
Lincoln National Corporation. The sale involved approximately 1,700 group
contractholders and assets under management of approximately $3.3 billion. The
contracts were initially reinsured on an indemnity basis. Upon consent of the
TSA contractholders and participants, the contracts are considered reinsured on
an assumption basis, legally releasing UNUM America and First UNUM from future
contractual obligation. As of December 31, 1998, consents for assumption
reinsurance have been received relating to substantially all assets under
management.
B. Disability Insurance Segment
The Disability Insurance segment, which in 1998 accounted for 57% and 59%
of UNUM's revenues and income before income taxes, respectively, includes
disability products offered in North America, the United Kingdom and Japan. UNUM
America and First UNUM market their group insurance and individual insurance
products, included in the Disability Insurance and Special Risk Insurance
segments, through a network of 40 offices in the United States and Canada
utilizing brokers. As of December 31, 1998, these branch offices were organized
into five regions and were staffed with approximately 1,140 management, sales,
service and administrative personnel.
<TABLE>
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Product Description Customer Focus Other Information
- - -------------------------------------------------------------------------------------------------------------------------
UNUM America and First UNUM
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<S> <C> <C> <C>
Group LTD Coverage for loss of earned Employer groups consisting of Group LTD is UNUM's principal
income due to injury or sickness, executive, administrative, product. Since 1976, UNUM
effective after a waiting period, to management personnel; America and First UNUM
specified maximums as a professionals such as educators, combined have been the leading
percentage of income and length consultants, health care providers, provider of group LTD, based on
of time. accountants and engineers. inforce cases and premium,
according to Employee Benefit
Plan Review.
Sold primarily on a basis
permitting periodic repricing to
address the underlying claims
experience and the interest rate
environment.
- - -------------------------------------------------------------------------------------------------------------------------
Group STD Coverage for loss of earned Employer groups consisting of UNUM America and First UNUM
income due to injury or sickness, executive, administrative, combined are the leading provider
effective immediately for management personnel; of group STD based on premium
accidents, and after one week for professionals such as educators, and inforce lives according to
sickness, for up to 26 weeks, to consultants, health care providers, Employee Benefit Plan Review
specified maximums as a accountants and engineers. for 1997.
percentage of income.
Sold primarily on a basis
permitting periodic repricing to
address the underlying claims
experience and the interest rate
environment.
- - -------------------------------------------------------------------------------------------------------------------------
LTC Pays a benefit upon the loss of Group LTC is offered to employer Marketed on a guaranteed
two or more Activities of Daily groups of 15 or more participants. renewable basis. All policies cover
Living (e.g. bathing, dressing, Groups can offer coverage to costs related to licensed nursing
feeding) and the insured's retirees and employees, and their home care; optional coverage is
requirement of standby assistance spouses, parents and grandparents. available for professional and/or
or cognitive impairment; pays on informal home care and inflation
an indemnity basis, regardless of Individual LTC is offered on a protection.
expenses incurred, up to a lifetime single customer basis and to
maximum. smaller employer groups.
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</TABLE>
2
<PAGE>
UNUM Corporation and Subsidiaries
<TABLE>
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- - -------------------------------------------------------------------------------------------------------------------------
Product Description Customer Focus Other Information
- - -------------------------------------------------------------------------------------------------------------------------
UNUM America and First UNUM
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<S> <C> <C> <C>
Lifelong Disability Coverage for loss of earned Professionals, corporate UNUM America and First UNUM
Protection income due to injury or sickness. executives, business owners, and combined are a major provider of
("LDP") administrative support personnel. individual disability income
policies measured by inforce
premium for the United States and
Canada, according to the Life
Insurance Marketing Research
Association's 1997 Individual
Health Issues and Inforce Survey.
Issued on a guaranteed renewable
basis, with the right to reprice
inforce policies subject to
regulatory approval.
Provides benefits and transitional
support for moderate disabilities,
with richer benefits for severe
disabilities. Common options
include additional coverage for
catastrophic injury or illness and
an option to convert to an LTC
policy at retirement age.
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Association Coverage for loss of earned Members of professional UNUM America is a leading
disability income due to injury or sickness. associations. provider of disability insurance in
the association marketplace.
UNUM introduced new
conditionally renewable products
in 1997.
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LTD reinsurance Reinsurance of other insurance Insurance companies participating Managed by Duncanson & Holt
companies' LTD insurance risks. in reinsurance facilities. Services, Inc., a leading manager
of group LTD reinsurance in the
United States and a wholly-owned
subsidiary of D&H.
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Non-cancellable No longer actively marketed by UNUM America or First UNUM in the Refer to Item 8 Note 6
ID products United States. "Reinsurance" for a detailed
discussion of reinsurance coverage
of the active life reserves of
UNUM America's existing United
States non-cancellable ID block of
business by Centre Life
Reinsurance Limited.
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UNUM Limited
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Group LTD Similar to United States product. The leading provider of group
LTD insurance in the United
Kingdom, based on premium
Executive, administrative and revenue, per ERC Frankona
management personnel and other Reassurance Ltd's annual group
professionals. risk survey for 1997.
- - -------------------------------------------------------- -----------------------------
Individual Similar to United States product, Marketed through a network of
disability subject to local welfare independent financial advisors and
regulations. selected United Kingdom
insurance companies.
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UNUM Japan
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Group and Similar to United States products. Executive, administrative and Marketed through contracted
individual LTD management personnel and other independent agents and brokers.
professionals.
- - -------------------------------------------------------------------------------------------------------------------------
Credit LTD Protection for mortgage/home Salaried workers. Marketed through banks and
lease payments in the event of credit unions.
disability.
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</TABLE>
3
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Product Description Customer Focus Other Information
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<S> <C> <C> <C>
LTD reinsurance Assumption of certain insurance Insurance companies participating Primarily quota share coinsurance
risk through long term disability in reinsurance facilities. with the direct insurer subject to
reinsurance operations for policies compliance with UNUM Japan's
in Japan and Hong Kong. risk management standards for
pricing, underwriting and claims
management.
</TABLE>
Refer to Item 7 under the caption "Disability Insurance Segment" and Item
8 Note 16 "Segment Information" for more information.
C. Special Risk Insurance Segment
The Special Risk Insurance segment in 1998 accounted for 28% and 31% of
UNUM's revenues and income before income taxes, respectively. The Special Risk
Insurance segment's group insurance products are sold primarily on a basis
permitting periodic repricing, enabling UNUM to adjust the pricing of its
products to address the underlying claims experience and interest rate
environment.
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<CAPTION>
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Product Description Customer Focus Other Information
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<S> <C> <C> <C>
UNUM America and First UNUM
- - -----------------------------------------------------------------------------------------------------------------------------------
Group life Term life insurance; universal life Broad range of employees. UNUM America and First UNUM
products insurance; accidental death and combined were the fourth largest
dismemberment riders. writer of group life insurance in
the United States for 1997 based
on number of inforce contracts
per Employee Benefit Plan
Review. Marketed through
independent brokers and specialty
agents; also offered through the
association group channel.
- - -----------------------------------------------------------------------------------------------------------------------------------
Group special risk Travel and voluntary accident To employees on an employer or Marketed through a network of
insurance. employee-paid basis. independent brokers and specialty
agents.
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Duncanson & Holt
- - -----------------------------------------------------------------------------------------------------------------------------------
Reinsurance Provides reinsurance facility Insurance companies participating Special risk reinsurance operations
business management services which may in reinsurance facilities. include UNUM America's
include marketing, underwriting, participation in reinsurance
administration, claims payment facilities managed by D&H and
and actuarial services. direct reinsurance arrangements
primarily for accident and health,
long term care and other special
risk business. As a member
company in special risk
reinsurance facilities managed by
D&H, UNUM America assumes a
share of the insurance risk of
those facilities.
A leading accident and health
reinsurance underwriting manager
which has offices throughout the
United States and in London,
Toronto, Bermuda and Singapore.
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
D&H and its subsidiaries, with the exception of Duncanson & Holt
Underwriters Ltd. ("DHU"), a wholly-owned subsidiary of Duncanson and Holt
Europe Ltd. ("D&H Europe"), do not bear any insurance risk. DHU participates in
various Lloyd's of London ("Lloyd's") syndicates as a corporate name bearing
insurance risk. D&H Europe owns three Lloyd's Managing Agents which manage
syndicates that underwrite primarily personal accident and other classes of
business at Lloyd's.
Refer to Item 7 under the caption "Special Risk Insurance Segment" and
Item 8 Note 16 "Segment Information" for more information.
4
<PAGE>
D. Colonial Products Segment
The Colonial Products segment, which includes Colonial and its affiliates,
in 1998 accounted for 14% and 21% of UNUM's revenues and income before income
taxes, respectively. Colonial markets a broad line of payroll-deducted,
voluntary employee benefit products.
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<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------------
Product Description Customer Focus Other Information
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<S> <C> <C> <C>
Accident and Benefit payments for disability Colonial products are marketed
sickness policies income, death, dismemberment or primarily through a 3,500 member
major injury. Designed to career sales force and 7,700
supplement Social Security, brokers, and through collaborative
workers' compensation and other sales with UNUM America. All
insurance plans. products are purchased solely with
employee funds.
Employees at their worksites. Policies are issued on a
guaranteed renewable basis. This
right to change premiums is, or
may be, subject to various state
insurance department rules,
regulations and approvals.
- - ---------------------------------------------------------
Life insurance Universal life; whole life.
- - ---------------------------------------------------------
Cancer policies Designed to provide payments for
hospitalization and scheduled
medical benefits.
- - --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Colonial markets its accident and health products as qualified fringe
benefits that can be purchased with pretax employee dollars as part of a
flexible benefits program pursuant to Section 125 of the Internal Revenue Code,
accounting for approximately 47% of its total premiums in 1998. Flexible
benefits programs assist employers in managing benefit and compensation
packages and provide policyholders the ability to choose benefits that best
meet their needs. Congress could change the laws to limit or eliminate fringe
benefits available on a pretax basis, eliminating Colonial's ability to
continue marketing its products this way. However, Colonial believes its
products provide value to its policyholders, which will remain even if the tax
advantages offered by flexible benefit programs are eliminated.
Refer to Item 7 under the caption "Colonial Products Segment" and Item 8
Note 16 "Segment Information" for more information.
E. Retirement Products Segment
The Retirement Products segment in 1998 accounted for 1% and less than 1%
of UNUM's revenues and income before income taxes, respectively. This segment
includes products no longer actively marketed by UNUM including: TSAs,
guaranteed investment contracts, deposit administration accounts, 401(k) plans,
individual life and group medical insurance. On October 1, 1996, UNUM America
and First UNUM closed the sale of their respective TSA businesses to Lincoln,
as discussed in Item 1 A "Description of Business."
Refer to Item 7 under the caption "Retirement Products Segment" and Item 8
Note 16 "Segment Information" for more information.
F. Investments
UNUM management believes its mortgage loan portfolio is well diversified
geographically and by property type at year end 1998, with less than 20% in any
one region; 33% was in industrial properties, 28% in office buildings, 22% in
retail properties, and 17% in other property types. Mortgage loans that were 60
days or more delinquent on a contract basis, impaired loans and restructured
loans were immaterial at December 31, 1998.
Refer to Item 7 under the caption "Investments" and Item 8 Note 2
"Investments" for more information.
G. Risk Management and Reinsurance
Risk management, including product design, pricing, underwriting,
reserving and benefits management, involves a determination of the type and
amount of risk an insurer is willing to accept, administration and evaluation
of business inforce and determination of claim liability. UNUM's underwriters,
organized by product and sales region, evaluate policy applications based on
information provided by the applicant and other sources. Underwriting
5
<PAGE>
UNUM Corporation and Subsidiaries
rules and procedures are established to produce mortality and morbidity results
consistent with assumptions used in pricing the product, while also providing
for competitive risk selection.
Consistent with industry practice, UNUM reinsures with other unaffiliated
companies portions of the insurance risk it has underwritten. Reinsurance
allows UNUM to sell policies with higher benefits than the entire risk UNUM is
willing to assume. UNUM remains contingently liable to the insured for payment
of policy benefits if the reinsurers cannot meet their obligations under the
agreements. UNUM does not generally reinsure risk on a product-specific basis
for group LTD, group STD or association group disability. For other insurance
products, UNUM reinsures benefits over various amounts, depending on the type
of coverage. In addition to product-specific reinsurance arrangements, UNUM's
insurance companies are covered by reinsurance for certain catastrophic losses.
UNUM periodically monitors the financial condition, and in some cases
holds substantial collateral as security in the form of funds, securities
and/or letters of credit to mitigate credit risk from its reinsurers. At
December 31, 1998, approximately 85% of the reinsurance receivable balance was
due from five reinsurers. These reinsurers had a rating of A or better (Strong)
from Standard & Poor's--a recognized insurance rating agency. Additionally,
UNUM holds collateral in the form of securities comprising 53% of the balance.
During 1996, UNUM America entered into an agreement for reinsurance
coverage of the active life reserves of its existing United States
non-cancellable individual disability block of business. This agreement does
not reinsure any claims incurred prior to January 1, 1996. For more information
on this reinsurance agreement refer to Item 8 Note 6 "Reinsurance."
Total reinsurance premiums assumed and ceded for the year ended December
31, 1998, were $320.8 million and $414.3 million, respectively. Current or
planned reinsurance activity is not expected to have a significant impact on
UNUM's ability to underwrite additional insurance.
H. Reserves
The unpaid claims reserves reported in the consolidated financial
statements are liabilities for unpaid losses, with respect to insured events
which have occurred, including events not yet reported to UNUM, in accordance
with generally accepted accounting principles ("GAAP"). These reserve balances
generally differ from those in statutory financial statements, which are
subject to minimum reserves established by state laws. The differences between
GAAP and statutory reserves arise from the use of different morbidity,
mortality, interest, expense and lapse assumptions.
Future policy benefits reserves are based on UNUM's insurance
subsidiaries' experience as adjusted to provide for possible adverse
deviations. These estimates are periodically reviewed and compared with actual
experience. The assumptions may be revised when it is determined that future
expected experience differs from the assumed estimates.
I. Employees
At December 31, 1998, UNUM had approximately 8,200 full-time employees.
Some employees in Argentina, comprising less than 1% of UNUM's total workforce,
are members of a union.
J. Competition
The principal competitive factors affecting all of UNUM's business are
reputation, financial strength, quality of service, risk management expertise,
distribution, product design and price. There is competition among insurance
companies for the types of group and individual insurance products sold by
UNUM. At the end of 1998, there were more than 1,600 legal reserve life
insurance companies in the United States and Canada, more than 240 life
assurance offices in the United Kingdom, approximately 106 life and non-life
insurance companies in Japan, and more than 250 insurance companies in
Argentina. These companies may offer insurance products similar to those
marketed by UNUM.
K. Regulation
In common with other insurance companies, UNUM's insurance subsidiaries
are subject to regulation and supervision in jurisdictions in which they do
business, primarily for the protection of policyholders. Although the extent of
such regulation varies, insurance laws generally establish supervisory agencies
with broad administrative powers including: granting and revocation of licenses
to transact business; establishing reserve requirements; setting the form,
content and frequency of required financial statements; the licensing of
agents; the approval of policy
6
<PAGE>
forms; prescribing the type and amount of investments permitted; and, in
general, the conduct of all insurance activities. UNUM's insurance operations
and subsidiaries must meet the standards and tests for its investments
promulgated by insurance laws and regulations of the jurisdictions in which
they are domiciled. Insurance subsidiaries operate under insurance laws which
require they establish and carry, as liabilities, statutory reserves to meet
obligations on their disability, life, accident and health policies and
annuities. These reserves are verified periodically by various regulators.
UNUM's domestic insurance subsidiaries are examined periodically by examiners
from their states of domicile and by other states in which they are licensed to
conduct business.
Certain states require periodic registration and reporting by insurance
companies domiciled in them that control or are controlled by other
corporations or persons. UNUM's domestic insurance subsidiaries are registered
as members of the UNUM holding company system in the states of Maine, New York,
South Carolina and Delaware. 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.
The risk-based capital ("RBC") standards for life insurance companies, as
prescribed by the National Association of Insurance Commissioners, establish an
RBC ratio comparing adjusted surplus to required surplus for United States
domiciled insurance companies. If the RBC ratio falls within certain ranges,
regulatory action may be taken ranging from increased information requirements
to mandatory control by the domiciliary insurance department. The RBC ratios
for UNUM's insurance subsidiaries, measured at December 31, 1998, were
significantly above the ranges that would require regulatory action.
L. Participation Fund Account
Participating policies issued by the former Union Mutual Life Insurance
Company ("Union Mutual") prior to its demutualization will remain participating
as long as they remain in force. A Participation Fund Account ("PFA") was
established for the benefit of all Union Mutual's individual participating life
and annuity policies and contracts. At December 31, 1998, the PFA had
approximately $371 million in assets, held by UNUM America, Union Mutual's
successor.
PFA assets, investment earnings, and income from operations are not
available to UNUM America during the operation or upon the termination of the
PFA. In the unlikely event 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
would reduce earnings of UNUM America and UNUM. All operating data of the PFA
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 seven office buildings and
three service buildings located throughout the Portland, Maine area. UNUM also
owns office buildings in the United Kingdom, South Carolina and Argentina,
which serve as the home offices of UNUM Limited, the Colonial Companies and
Boston Seguros, respectively. In addition, UNUM leases office space, on periods
principally from five to ten years, for use by its home office, affiliates and
sales forces.
Item 3. LEGAL PROCEEDINGS
Refer to Item 8 Note 15 "Litigation" for information on legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of shareholders, through solicitation of
proxies or otherwise, during the fourth quarter of 1998.
7
<PAGE>
UNUM Corporation and Subsidiaries
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The principal markets in which UNUM Corporation common stock is traded are
the New York Stock Exchange and the Pacific Exchange. UNUM's ticker symbol is
"UNM." As of December 31, 1998, there were 21,756 shareholders of record of
common stock. Information concerning restrictions on the ability of UNUM's
affiliates to transfer funds to UNUM in the form of cash dividends is described
in Item 8 Note 11 "Dividend Restrictions."
The market price (as quoted by the New York Stock Exchange) and cash
dividends paid, per share of UNUM's common stock, by calendar quarter for the
past two years were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------- ---------------------------------------------------
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High .................. $ 60.063 $ 59.375 $ 59.625 $ 55.563 $ 54.438 $ 48.250 $ 46.500 $ 39.813
Low ................... $ 42.000 $ 44.000 $ 51.500 $ 48.000 $ 45.125 $ 40.688 $ 33.625 $ 35.313
Close ................. $ 58.375 $ 49.688 $ 55.500 $ 55.188 $ 54.375 $ 45.625 $ 42.250 $ 36.500
Dividend Paid ......... $ 0.1475 $ 0.1475 $ 0.1475 $ 0.1425 $ 0.1425 $ 0.1425 $ 0.1425 $ 0.1375
</TABLE>
8
<PAGE>
UNUM Corporation and Subsidiaries
Item 6. SELECTED FINANCIAL DATA
The following should be read in conjunction with UNUM's Consolidated
Financial Statements and related notes reported in Item 8.
UNUM Corporation and Subsidiaries
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1997
(Dollars in millions, except per common share data) --------------- ---------------
<S> <C> <C>
Income Statement Data
Revenues:
Premiums and fees and other income: (b)
Disability Insurance Segment ....................... $ 2,167.5 $ 1,882.6
Special Risk Insurance Segment ..................... 1,208.4 947.2
Colonial Products Segment .......................... 556.5 530.8
Retirement Products Segment ........................ 26.6 130.3
Corporate .......................................... -- 0.1
------------ ----------
Total premiums and fees and other income ............ 3,959.0 3,491.0
------------ ----------
Net investment income: (a)
Disability Insurance Segment ....................... 491.4 468.0
Special Risk Insurance Segment ..................... 80.6 71.5
Colonial Products Segment .......................... 67.7 57.6
Retirement Products Segment ........................ 38.6 54.4
Corporate .......................................... 4.1 5.9
------------ ----------
Total net investment income ......................... 682.4 657.4
------------ ----------
Total revenues ...................................... 4,641.4 4,148.4
------------ ----------
Benefits and expenses: (b)
Disability Insurance Segment ....................... 2,352.4 2,037.9
Special Risk Insurance Segment ..................... 1,127.7 917.4
Colonial Products Segment .......................... 517.2 489.6
Retirement Products Segment ........................ 64.6 108.5
Corporate .......................................... 62.1 58.6
------------ ----------
Total benefits and expenses ......................... 4,124.0 3,612.0
------------ ----------
Income (loss) before income taxes: (b)
Disability Insurance Segment ....................... 306.5 312.7
Special Risk Insurance Segment ..................... 161.3 101.3
Colonial Products Segment .......................... 107.0 98.8
Retirement Products Segment ........................ 0.6 76.2
Corporate .......................................... (58.0) (52.6)
------------ ------------
Total income before income taxes .................... 517.4 536.4
------------ ------------
Income taxes ........................................ 154.0 166.1
------------ ------------
Net income .......................................... $ 363.4 $ 370.3
============ ============
Per common share:
Net income--basic .................................. $ 2.63 $ 2.65
Net income--diluted ................................ $ 2.57 $ 2.59
Dividends paid ..................................... $ 0.5850 $ 0.5650
============= =============
Balance Sheet Data
Assets .............................................. $ 15,182.9 $ 13,440.1
Long-term debt ...................................... $ 598.3 $ 509.2
Stockholders' equity ................................ $ 2,737.7 $ 2,434.8
Shares outstanding .................................. 138.7 138.3
Weighted-average shares outstanding during the year:
Basic .............................................. 138.3 139.9
Diluted ............................................ 141.4 142.9
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1996 1995 1994
(Dollars in millions, except per common share data) --------------- --------------- ---------------
<S> <C> <C> <C>
Income Statement Data
Revenues:
Premiums and fees and other income: (b)
Disability Insurance Segment ....................... $ 1,917.7 $ 1,879.9 $ 1,716.2
Special Risk Insurance Segment ..................... 783.3 702.3 607.1
Colonial Products Segment .......................... 498.2 475.1 441.3
Retirement Products Segment ........................ 65.8 34.1 31.4
Corporate .......................................... -- 0.1 0.8
------------ ---------- ----------
Total premiums and fees and other income ............ 3,265.0 3,091.5 2,796.8
------------ ---------- ----------
Net investment income: (a)
Disability Insurance Segment ....................... 468.5 592.9 400.3
Special Risk Insurance Segment ..................... 57.6 48.4 40.7
Colonial Products Segment .......................... 47.3 52.2 32.6
Retirement Products Segment ........................ 217.2 323.7 338.0
Corporate .......................................... 16.1 14.2 4.2
------------ ---------- ----------
Total net investment income ......................... 806.7 1,031.4 815.8
------------ ---------- ----------
Total revenues ...................................... 4,071.7 4,122.9 3,612.6
------------ ---------- ----------
Benefits and expenses: (b)
Disability Insurance Segment ....................... 2,170.9 2,255.8 2,060.3
Special Risk Insurance Segment ..................... 761.7 690.4 581.9
Colonial Products Segment .......................... 453.1 439.6 411.2
Retirement Products Segment ........................ 281.6 312.3 327.4
Corporate .......................................... 62.8 42.9 33.2
------------ ---------- ----------
Total benefits and expenses ......................... 3,730.1 3,741.0 3,414.0
------------ ---------- ----------
Income (loss) before income taxes: (b)
Disability Insurance Segment ....................... 215.3 217.0 56.2
Special Risk Insurance Segment ..................... 79.2 60.3 65.9
Colonial Products Segment .......................... 92.4 87.7 62.7
Retirement Products Segment ........................ 1.4 45.5 42.0
Corporate .......................................... (46.7) (28.6) (28.2)
------------ ------------ ------------
Total income before income taxes .................... 341.6 381.9 198.6
------------ ------------ ------------
Income taxes ........................................ 103.6 100.8 43.9
------------ ------------ ------------
Net income .......................................... $ 238.0 $ 281.1 $ 154.7
============ ============ ============
Per common share:
Net income--basic .................................. $ 1.63 $ 1.93 $ 1.04
Net income--diluted ................................ $ 1.61 $ 1.92 $ 1.04
Dividends paid ..................................... $ 0.5450 $ 0.5175 $ 0.4600
============= ============= =============
Balance Sheet Data
Assets .............................................. $ 15,580.4 $ 14,787.8 $ 13,127.2
Long-term debt ...................................... $ 409.2 $ 457.3 $ 182.1
Stockholders' equity ................................ $ 2,263.1 $ 2,302.9 $ 1,915.4
Shares outstanding .................................. 143.6 146.0 144.8
Weighted-average shares outstanding during the year:
Basic .............................................. 145.9 145.4 148.3
Diluted ............................................ 148.0 146.6 149.5
</TABLE>
- - --------
(a) Includes investment income and net realized investment gains (losses).
(b) Refer to the discussion of special items in Item 7 "Management's Discussion
and Analysis of Financial Condition and Results of Operations," as these
items may affect the comparability of the information presented in certain
segments.
9
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis reviews the consolidated financial
condition of UNUM at December 31, 1998, and 1997, the consolidated results of
operations for the past three years and, where appropriate, factors that may
affect future financial performance.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 ("the Act") provides
a "safe harbor" for forward-looking statements which are identified as such and
are accompanied by the identification of important factors which could cause a
material difference from the forward-looking statements. UNUM claims the
protection afforded by the safe harbor in the Act. Certain information
contained in this discussion, or in any other written or oral statements made
by UNUM, is or may be considered as forward-looking; for example, disclosures
regarding "Quantitative and Qualitative Information About Market Risk," the
"Year 2000 Date Conversion" and reserves discussed in the Disability Insurance
segment contain such information. Forward-looking statements are those not
based on historical information, but rather, relate to future operations,
strategies, financial results or other developments, and contain terms such as
"may," "expects," "should," "believes," "anticipates," "intends," "estimates,"
"projects," "goals," "objectives" or similar expressions. Although UNUM has
used appropriate care in developing forward-looking statements, such statements
are based upon estimates and assumptions that are subject to significant risks,
business, economic and competitive uncertainties, and other factors, many of
which are beyond UNUM's control or, with respect to future business decisions,
are subject to change.
Certain risks and uncertainties are inherent in UNUM's business.
Therefore, UNUM cautions the reader that revenues and income could differ
materially from those expected to occur depending on factors which may be
global or national in scope, related to the insurance industry generally, or
applicable to UNUM specifically. Such factors are general economic conditions
including changes in interest rates and the performance of financial markets,
changes in domestic and foreign laws, regulations and taxes, competition,
industry consolidation, competitor demutualization, credit risks and other
factors. Insurance reserve liabilities can fluctuate as a result of changes in
numerous factors, and such fluctuations can have material positive or negative
effects on earnings. These factors include, but are not limited to, interest
rates, incidence rates and recovery rates. Incidence and recovery rates may be
influenced by many factors, including but not limited to, the emergence of new
diseases, new trends and developments in medical treatments, general economic
and societal conditions of the markets where UNUM has operations, and the
effectiveness of risk management programs. UNUM disclaims any obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future developments or otherwise.
PROPOSED MERGER WITH PROVIDENT
On November 22, 1998, UNUM entered into an agreement with Provident
Companies Inc. ("Provident"), pursuant to which UNUM and Provident will merge
under the name UNUMProvident Corporation ("UNUMProvident"). Under the merger
agreement, each outstanding share of Provident common stock will be
reclassified and converted into 0.73 of a share of UNUMProvident common stock
and each outstanding share of UNUM common stock will be converted into one
share of UNUMProvident common stock. The merger will be accounted for as a
pooling of interests.
Certain information contained in this discussion about the merger, or in
any other written or oral statements made by UNUM, regarding the impact of the
merger on future operations, is considered as forward-looking, and should be
read as such (see previous section on "Forward-Looking Information"). In
connection with the proposed merger, UNUM is evaluating its processes and
assumptions used to calculate the discount rate for claim reserves of certain
disability businesses so that they may be more consistent with those used by
Provident. Upon completion of the merger, UNUM will reduce the rates used to
discount unpaid claims reserves for group long term disability, individual
disability and the disability businesses of UNUM Limited. The preliminary
estimates of discount rate reductions will result in an estimated increase to
UNUM's unpaid claims reserves upon consummation of the merger of approximately
$230 million on a pretax basis. Additionally, it is expected that upon
completion of the merger the combined entity, UNUMProvident, will record an
expense for merger related costs of approximately $210 million on a pretax
basis. These costs include amounts for severance and related costs, early
retirement, exit costs for duplicate facilities and asset impairments, and
merger related costs such as investment banker, legal and accountant fees. The
estimated merger related expenses represent management's best estimates based
on available information at this time. Actual charges may differ from these
estimated amounts when these items are finalized.
10
<PAGE>
UNUM Corporation and Subsidiaries
CONSOLIDATED OVERVIEW
<TABLE>
<CAPTION>
(Dollars and shares in millions,
except per common share data) 1998 % Change 1997 % Change 1996
- - ------------------------------------------------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Income Data
Revenues
Premiums ....................................... $ 3,841.7 17.7% $ 3,263.7 3.6% $3,151.5
Investment income .............................. 661.4 nm 661.0 (17.7) 803.3
Net realized investment gains (losses) ......... 21.0 nm (3.6) nm 3.4
Fees and other income .......................... 117.3 (48.4) 227.3 nm 113.5
--------- ----- ---------- ----- ---------
Total revenues ................................ 4,641.4 11.9 4,148.4 1.9 4,071.7
Benefits and expenses ........................... 4,124.0 14.2 3,612.0 (3.2) 3,730.1
--------- ----- ---------- ----- ---------
Income before income taxes ...................... 517.4 (3.5) 536.4 57.0 341.6
Income taxes .................................... 154.0 (7.3) 166.1 60.3 103.6
--------- ----- ---------- ----- ---------
Net income .................................... $ 363.4 (1.9)% $ 370.3 55.6% $ 238.0
========= ===== ========== ===== =========
Net income per common share:
Diluted ........................................ $ 2.57 (0.8)% $ 2.59 60.9% $ 1.61
Basic .......................................... $ 2.63 (0.8)% $ 2.65 62.6% $ 1.63
========== ===== ========== ===== ==========
Summary of income (loss) before
income taxes
Disability Insurance Segment ................... $ 306.5 (2.0)% $ 312.7 45.2% $ 215.3
Special Risk Insurance Segment ................. 161.3 59.2 101.3 27.9 79.2
Colonial Products Segment ...................... 107.0 8.3 98.8 6.9 92.4
Retirement Products Segment .................... 0.6 (99.2) 76.2 nm 1.4
Corporate ...................................... (58.0) 10.3 (52.6) 12.6 (46.7)
---------- ----- ---------- ----- ----------
Total income before income taxes .............. $ 517.4 (3.5)% $ 536.4 57.0% $ 341.6
========== ===== ========== ===== ==========
</TABLE>
- - --------
nm = not meaningful or in excess of 100%
<TABLE>
<CAPTION>
(Dollars and shares in millions) 1998 1997 1996
- - ------------------------------------------------------ -------------- -------------- --------------
<S> <C> <C> <C>
Balance Sheet Data
Assets ............................................... $ 15,182.9 $ 13,440.1 $ 15,580.4
Notes Payable ........................................ $ 881.8 $ 635.8 $ 526.9
Stockholders' equity ................................. $ 2,737.7 $ 2,434.8 $ 2,263.1
Shares outstanding ................................... 138.7 138.3 143.6
Weighted-average shares outstanding--diluted ......... 141.4 142.9 148.0
Weighted-average shares outstanding--basic ........... 138.3 139.9 145.9
</TABLE>
During 1998, to better reflect the business of Duncanson & Holt
Underwriters Ltd., as reported in the Special Risk Insurance segment, the
results have been reflected on separate lines in UNUM's consolidated statements
of income and balance sheets. Previously, the operating results and financial
position were reported as a net amount in fees and other income and other
assets, respectively. The 1997 and 1996 amounts have been reclassified for
comparative purposes.
Effective tax rates, which reflect income tax expense as a percentage of
income before income taxes, were 29.8%, 31.0% and 30.3% for 1998, 1997 and
1996, respectively. Reported income tax expense was below the federal statutory
tax rate of 35% primarily due to tax savings from investments in tax-exempt
bonds and mortgages. The change in the effective tax rate over the three year
period was primarily due to changes in tax-exempt income as a percentage of
income before income taxes.
11
<PAGE>
A comparison of net income is impacted by the inclusion of realized
investment gains (losses), and special items, that occurred in 1998, 1997 and
1996. Operating income in 1998, 1997 and 1996, which is presented on an after
tax basis and excludes realized investment gains (losses) and the special items
discussed below, was as follows:
<TABLE>
<CAPTION>
(Dollars in millions,
except per common share amounts) 1998 % Change 1997 % Change 1996
- - ---------------------------------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Operating income ................. $ 388.2 13.6% $ 341.7 13.3% $ 301.7
Operating income per common share:
Diluted ......................... $ 2.75 15.1% $ 2.39 17.2% $ 2.04
Basic ........................... $ 2.81 15.2% $ 2.44 17.9% $ 2.07
</TABLE>
This management's discussion and analysis focuses on results on a pretax
operating income basis, which is defined as income (loss) before income taxes
exclusive of realized investment gains (losses) and special items. Realized
investment gains (losses) are excluded from this discussion as management
believes the volatility in gains and losses associated with the selling of
invested assets in the financial markets is not representative of ongoing
operations. Special items are excluded from this discussion as management
considers them as being not representative of our ongoing operations and
believes a discussion of the results on a pretax operating income basis
provides a better understanding of the results of ongoing operations. While
management believes that pretax operating income provides relevant and useful
information, it does not replace income before income taxes and net income
calculated in accordance with generally accepted accounting principles as a
measure of UNUM's profitability. Therefore, this discussion should be read in
conjunction with the Consolidated Financial Statements, Notes to Consolidated
Financial Statements and Selected Consolidated Financial Data included
elsewhere in the Form 10-K. The following table summarizes pretax operating
income (loss) for the four business segments and Corporate for the years ended
December 31, 1998, 1997 and 1996, and is followed by a discussion of the
special items for those periods and a reconciliation of income (loss) before
income taxes to pretax operating income (loss).
<TABLE>
<CAPTION>
(Dollars in millions) 1998 % Change 1997 % Change 1996
- - ----------------------------------------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Summary of pretax operating income (loss)
Disability Insurance Segment ........... $ 348.3 10.3% $ 315.8 13.4% $ 278.4
Special Risk Insurance Segment ......... 159.4 27.7 124.8 38.4 90.2
Colonial Products Segment .............. 105.1 6.4 98.8 6.6 92.7
Retirement Products Segment ............ 1.0 (78.7) 4.7 (65.4) 13.6
Corporate .............................. (58.0) 12.0 (51.8) 38.1 (37.5)
-------- ----- -------- ----- --------
Total pretax operating income ......... $ 555.8 12.9% $ 492.3 12.6% $ 437.4
======== ===== ======== ===== ========
</TABLE>
UNUM reported increased pretax operating income for the year ended
December 31, 1998, as compared with the same period in 1997. The increase was
primarily attributable to improvements in pretax operating income for the
Special Risk Insurance and Disability Insurance segments, primarily resulting
from solid premium growth in each segment. See the segment discussions that
follow for a more detailed analysis of operating results.
For the year ended December 31, 1997, as compared with the same period in
1996, UNUM reported increased pretax operating income, driven by improved
results in the Disability Insurance and Special Risk Insurance segments,
resulting primarily from strong premium growth in both segments during 1997.
Special Item in 1998
Disability Claims Reserve Increase
In connection with entering into the merger agreement with Provident in
fourth quarter 1998, UNUM anticipates that as a result of integrating its claim
operations with Provident, there will be a temporary increase in claim costs.
UNUM expects that fewer claims will be resolved or closed during the period when
the two companies are planning and implementing the integration of their claims
organizations. The average length of duration for claims will increase,
resulting in more benefit payments being paid for a relatively short time until
the consolidation of operations is complete. During the fourth quarter of 1998,
UNUM increased its unpaid claims reserve by $59.4 million related to the
expected increase in disability claim duration on existing claims. This reserve
increase was reflected as a $49.0 million increase in benefits to policyholders
and a $10.4 million reduction in fee income in the Disability Insurance segment.
The reduction
12
<PAGE>
UNUM Corporation and Subsidiaries
in fee income represents increased reserves for the United States
non-cancellable individual disability business that is reinsured with Centre
Life Reinsurance Limited ("Centre Re"). See Item 8 Note 6 under the caption
"Reinsurance" for further information on the reinsurance transaction.
Management will continue to evaluate the impacts of the merger on disability
claims experience and the assumptions around expected disability claims
duration that were used in the determination of the claims reserve increase.
Special Items in 1997
TSA Deferred Gain Recognition
UNUM Life Insurance Company of America ("UNUM America") and First UNUM
Life Insurance Company ("First UNUM") closed the sale of their respective
tax-sheltered annuity ("TSA") businesses to The Lincoln National Life Insurance
Company and Lincoln Life & Annuity Company of New York, both subsidiaries of
Lincoln National Corporation, on October 1, 1996. The sale resulted in a
deferred pretax gain, of which $72.6 million was recognized in income during
1997, as fees and other income in the Retirement Products segment.
Reorganization Costs
During fourth quarter 1997, UNUM recognized $6.5 million of operating
expenses related to a management and field office reorganization within its
North American reinsurance operations, reducing income before income taxes in
the Special Risk Insurance segment. Included in the $6.5 million of costs was a
$6.0 million restructuring charge and $0.5 million of direct costs, primarily
relocation expenses. The restructuring charge of $6.0 million was comprised of
$4.0 million of lease exit costs, $1.4 million of severance related costs and
$0.6 million of abandoned assets.
Reinsurance Pool Results
During fourth quarter 1997, certain reinsurance pools managed by UNUM's
wholly-owned subsidiary, Duncanson & Holt Inc. ("D&H"), received new claim
information from ceding insurance enterprises about certain older pool years
and completed an analysis of recent claims experience deterioration. As a
result of these factors, certain pools have strengthened claim reserves. The
impact to UNUM in fourth quarter 1997 from these pool claim reserve increases
was an $11.7 million reduction in fee income and a $6.7 million increase in
benefits to policyholders in the Special Risk Insurance segment, reducing
income before income taxes by $18.4 million. The $11.7 million reduction in fee
income reflects lower profit commission levels in certain older pool years
after the pool claim reserve strengthening. The $6.7 million increase in
benefits to policyholders represents the amount of additional claim reserves
UNUM recognized as a result of its participation in the pools that strengthened
claim reserves.
Special Items in 1996
Individual Disability Reinsurance Fees
During the fourth quarter of 1996, UNUM executed a definitive reinsurance
agreement between UNUM America and Centre Re, a Bermuda-based reinsurance
specialist, for reinsurance coverage of the active life reserves of UNUM
America's existing United States non-cancellable individual disability block of
business. As a result, UNUM recognized a pretax charge of $49.7 million,
reflected as operating expenses in the Disability Insurance segment, which
represents the present value of the anticipated minimum amount of fees to be
paid to Centre Re under the agreement. For additional information regarding the
reinsurance agreement see Item 8 Note 6 under the caption "Reinsurance."
Intangible Asset Write-offs and Future Loss Reserves
In connection with the merger of Commercial Life Insurance Company
("Commercial Life") into UNUM America, the sale of UNUM America's TSA business,
as well as UNUM's continued efforts to strengthen its focus on its core
products, the company initiated a review of certain products, which resulted in
the recognition of pretax charges totaling $39.4 million during third quarter
1996. The charges included the write-off of certain intangible assets and the
establishment of a reserve for the present value of expected future losses on
certain discontinued products.
13
<PAGE>
For the year ended December 31, 1996, these charges reduced income before
income taxes by $13.1 million in the Disability Insurance segment, reflected as
$0.5 million of benefits to policyholders, $0.9 million of operating expenses,
and $11.7 million as a change in deferred policy acquisition costs; $11.3
million in the Special Risk Insurance segment, reflected as $6.9 million of
benefits to policyholders and $4.4 million of operating expenses; and $15.0
million in the Retirement Products segment, reflected as benefits to
policyholders.
Commercial Life Merger and Integration Costs
During the third quarter of 1996, actions related to the merger of
Commercial Life into UNUM America resulted in a $10.1 million increase in
operating expenses for Corporate. The $10.1 million charge consisted of $2.9
million of direct costs incurred and the recording of a $7.2 million
restructuring charge to recognize $2.8 million of severance costs and $4.4
million of lease exit costs, primarily related to the merger.
Reconciliation of Income (Loss) Before Income Taxes to Pretax Operating Income
(Loss)
The following table reconciles income (loss) before income taxes to pretax
operating income (loss) for the four business segments and Corporate for the
years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Disability Special Risk Colonial Retirement Consolidated
(Dollars in millions) Insurance Insurance Products Products Corporate UNUM
- - ------------------------------------------ ------------ -------------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1998:
Income (loss) before income taxes ........ $ 306.5 $ 161.3 $ 107.0 $ 0.6 $ (58.0) $ 517.4
Exclude realized investment (gains)
losses .................................. (17.6) (1.9) (1.9) 0.4 -- (21.0)
-------- -------- -------- ------- ------- --------
288.9 159.4 105.1 1.0 (58.0) 496.4
Special item:
Disability claims reserve increase ...... 59.4 -- -- -- -- 59.4
-------- -------- -------- ------- ------- --------
Pretax operating income (loss) ........... $ 348.3 $ 159.4 $ 105.1 $ 1.0 $ (58.0) $ 555.8
======== ======== ======== ======= ======= ========
Year Ended December 31, 1997:
Income (loss) before income taxes ........ $ 312.7 $ 101.3 $ 98.8 $ 76.2 $ (52.6) $ 536.4
Exclude realized investment (gains)
losses .................................. 3.1 (1.4) -- 1.1 0.8 3.6
-------- -------- -------- ------- ------- --------
315.8 99.9 98.8 77.3 (51.8) 540.0
Special items:
TSA deferred gain recognition ........... -- -- -- (72.6) -- (72.6)
Reorganization costs .................... -- 6.5 -- -- -- 6.5
Reinsurance pool results ................ -- 18.4 -- -- -- 18.4
-------- -------- -------- ------- ------- --------
Pretax operating income (loss) ........... $ 315.8 $ 124.8 $ 98.8 $ 4.7 $ (51.8) $ 492.3
======== ======== ======== ======= ======= ========
Year Ended December 31, 1996:
Income (loss) before income taxes ........ $ 215.3 $ 79.2 $ 92.4 $ 1.4 $ (46.7) $ 341.6
Exclude realized investment (gains)
losses .................................. 0.3 (0.3) 0.3 (2.8) (0.9) (3.4)
-------- -------- -------- ------- ------- --------
215.6 78.9 92.7 (1.4) (47.6) 338.2
Special items:
ID reinsurance fees ..................... 49.7 -- -- -- -- 49.7
Write-offs and future loss reserves ..... 13.1 11.3 -- 15.0 -- 39.4
Merger and integration costs ............ -- -- -- -- 10.1 10.1
-------- -------- -------- ------- ------- --------
Pretax operating income (loss) ........... $ 278.4 $ 90.2 $ 92.7 $ 13.6 $ (37.5) $ 437.4
======== ======== ======== ======= ======= ========
</TABLE>
14
<PAGE>
UNUM Corporation and Subsidiaries
Pretax Operating Income (Loss) by Segment
The following sections discuss the results of the four business segments
and Corporate for the years ended December 31, 1998, 1997 and 1996. These
discussions are based on pretax operating income (loss), which excludes
realized investment gains (losses) and the special items previously described.
The summary financial information provided prior to each segment discussion has
been adjusted to exclude the impact of special items from all income statement
line items, consistent with the discussion of results on a pretax operating
income basis.
DISABILITY INSURANCE SEGMENT
<TABLE>
<CAPTION>
(Dollars in millions) 1998 % Change 1997 % Change 1996
- - ----------------------------------------- ------------- ---------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Revenues
Premiums
Group LTD .............................. $ 1,385.1 13.6% $ 1,219.1 11.4% $ 1,094.6
Group STD .............................. 274.4 33.7 205.3 29.9 158.1
UNUM Limited ........................... 166.8 13.5 147.0 10.8 132.7
Individual Products .................... 131.0 34.6 97.3 17.8 82.6
Other Disability Insurance ............. 168.6 14.1 147.8 (65.0) 421.9
--------- ----- --------- ----- ----------
Total premiums ......................... 2,125.9 17.0 1,816.5 (3.9) 1,889.9
Investment income ....................... 473.8 0.6 471.1 0.5 468.8
Fees and other income ................... 52.0 (21.3) 66.1 nm 27.8
--------- ----- --------- ----- ----------
Total operating revenues ............... 2,651.7 12.7 2,353.7 (1.4) 2,386.5
Benefits and expenses
Benefits to policyholders ............... 1,745.7 16.1 1,503.9 (0.7) 1,514.4
Operating expenses ...................... 486.7 7.7 452.0 (1.8) 460.4
Commissions ............................. 196.8 17.2 167.9 (8.8) 184.2
Increase in deferred policy acquisition
costs .................................. (125.8) 46.4 (85.9) 68.8 (50.9)
---------- ----- ---------- ----- -----------
Total benefits and expenses ............ 2,303.4 13.0 2,037.9 (3.3) 2,108.1
---------- ----- ---------- ----- -----------
Pretax operating income (a) ............. $ 348.3 10.3% $ 315.8 13.4% $ 278.4
========== ===== ========== ===== ===========
Supplemental information (b):
Sales (annualized new premiums) .........
Group LTD .............................. $ 325.2 $ 294.4 $ 218.7
Group STD .............................. $ 130.1 $ 94.8 $ 74.0
UNUM Limited ........................... $ 30.6 $ 20.0 $ 14.3
Long Term Care ......................... $ 43.0 $ 24.5 $ 17.4
Lifelong Disability Protection ......... $ 17.0 $ 10.6 $ 5.5
Persistency (premiums) ..................
Group LTD .............................. 89.4% 87.7% 83.6%
Group STD .............................. 89.6% 86.7% 84.5%
UNUM Limited ........................... 91.2% 91.3% 85.6%
Benefit ratio (% of premiums) ........... 82.1% 82.8% 80.1%
Operating expense ratio (% of
premiums) .............................. 22.9% 24.9% 24.4%
</TABLE>
- - --------
nm = not meaningful or in excess of 100%
(a) For the definition of pretax operating income see the Consolidated
Overview.
(b) Information relating to sales and persistency is presented as an indicator
of premium growth in the segment. Persistency data also indicates
experience in maintaining customers over time. Benefit ratios and
operating expense ratios show the relative relationships among data to
earned premiums in the segment's income statement.
The Disability Insurance segment includes disability products offered
through: UNUM America and First UNUM in North America; UNUM Limited in the
United Kingdom; and UNUM Japan Accident Insurance Company Limited ("UNUM
Japan"). The products included in this segment are group long term disability
("group LTD"), group short term disability ("group STD"), long term care,
individual disability and disability reinsurance operations.
15
<PAGE>
Overview
A new product grouping, Individual Products, shown in the previous table,
was reported in the Disability Insurance segment effective June 30, 1998, and
prior year amounts have been reclassified for comparative purposes. Those
products reported as Individual Products include long term care, guaranteed
renewable individual disability (Lifelong Disability Protection) and certain
other individual disability products. The traditional, fixed price, non-
cancellable individual disability ("non-cancellable ID") business is now
reported in the Other Disability Insurance line. Additionally, effective
January 1, 1997, the individual components of the operating results for the
reinsured non-cancellable ID business are not reflected on separate lines in
UNUM's statements of income; instead, components of the operating results are
combined and reflected as a net amount in fees and other income.
The Disability Insurance segment's pretax operating income increased in
1998, as compared with 1997, primarily as a result of strong premium growth and
favorable expense growth for the segment. Unfavorable claims experience in the
major product lines and reduced fees and other income for the segment partially
offset these favorable factors.
The following discussion of 1997 results, as compared with 1996 results,
includes the underlying trends of both the reinsured and non-reinsured portions
of the non-cancellable ID business in order for the analysis of operating
results to be comparable. Refer to Item 8 Note 6 under the caption
"Reinsurance" for further information. The increase in the Disability Insurance
segment's pretax operating earnings in 1997, as compared with 1996, was
primarily attributable to improved premium growth, increased investment income
and favorable operating expense ratios across most lines of business. These
favorable factors were partially offset by higher benefit ratios in certain
disability businesses.
After adjusting for the effect of claim block acquisitions, the Disability
Insurance segment reported premium growth of 15.5% in 1998 compared with prior
year's growth of 9.4%, which was also adjusted for $255.4 million of premium
ceded during 1997 under the non-cancellable ID reinsurance agreement. The
improvement in premium growth was driven by strong sales results and
persistency improvements, primarily in group LTD and group STD.
One-time premiums, which are generated by claim block acquisitions, are
summarized in the table below. Management intends to pursue additional claim
block acquisitions in the future.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
(Dollars in millions) 1998 1997 1996
- - ------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Group LTD ................................. $ 23.7 $ 18.9 $ 10.0
UNUM Limited .............................. 0.3 2.6 8.4
Long Term Care ............................ -- 0.5 --
Disability Reinsurance Operations ......... 31.0 2.1 --
------- ------- -------
Total .................................... $ 55.0 $ 24.1 $ 18.4
======= ======= =======
</TABLE>
During 1998, market interest rates fell to historically low levels.
Management expects the reserve discount rate for certain disability lines will
likewise decline as current cash flows are invested in assets at current
yields, which are below the composite yield of existing assets purchased in
prior years, resulting in higher claim liabilities. Management expects to price
new business and reprice existing business, at contract renewal dates, to
mitigate the effect on new claim liabilities from this decline in interest
rates. However, given the competitive market conditions for UNUM's disability
products in the United States and the United Kingdom, it is uncertain whether
pricing actions can mitigate the entire effect of interest rate declines.
Additionally, in connection with the proposed merger with Provident, UNUM is
evaluating its processes and assumptions used to calculate the discount rate
for claim reserves for group LTD, individual disability and the disability
businesses of UMUM Limited (see "Proposed Merger with Provident" for further
information).
Group Long Term Disability
During 1998, group LTD experienced increased pretax operating income that
was driven primarily by strong premium growth of 13.6% and an improved
operating expense ratio. Premium growth in 1998 resulted from the impact of
solid sales growth and stronger persistency, which is a reflection of
continuing customer service actions.
16
<PAGE>
UNUM Corporation and Subsidiaries
Group LTD was unfavorably affected by a higher benefit ratio in 1998,
largely the result of increased levels of claims incidence, an increase in the
average size of claims and a longer duration of claims as compared with 1997.
As discussed in the section titled Forward-Looking Information, certain risks
and uncertainties are inherent in UNUM's business. Components of claims
experience, including but not limited to, incidence levels and claims duration,
may continue for some period of time at or above the higher levels experienced
in 1998. Therefore, management continues to monitor claims experience in group
LTD and responds to changes by periodically adjusting prices, refining
underwriting guidelines, changing product features and strengthening risk
management policies and procedures. In addition, management will continue to
evaluate the impacts of the merger on disability claims experience and the
assumptions around expected disability claims duration that were used in the
determination of the fourth quarter 1998 claims reserve increase.
Group Short Term Disability
Pretax operating income for group STD increased in 1998, as compared with
1997. Key drivers of the increase were premium growth from record sales and
improved persistency, and a favorable operating expense ratio. The strong sales
levels reflect UNUM's continuing efforts to cross-sell group STD products with
other UNUM group products, as well as increasing large case sales. An
unfavorable change in the benefit ratio, primarily from increased claims
incidence levels and larger size cases, partially offset these favorable
factors.
UNUM Limited
UNUM Limited's pretax operating income declined for the year ended
December 31, 1998, as compared with 1997. The decline was primarily due to an
increased benefit ratio generally resulting from a longer duration of claims
and increased levels of claims incidence and average size of claims. Favorable
expense growth partially offset this decline.
In general, UNUM Limited's earnings expressed in U.S. dollars are affected
by fluctuations in the exchange rates used in the translation of earnings from
British pounds sterling. The weighted-average exchange rate was approximately
$1.66, $1.64 and $1.56 for the years ended December 31, 1998, 1997 and 1996,
respectively. At December 31, 1998, the spot rate was approximately $1.66.
Individual Products
During 1998, the long term care ("LTC") and Lifelong Disability Protection
("LDP") blocks of business, while still relatively small, continued to
contribute favorably to pretax operating income. LTC and LDP experienced
significant premium growth in 1998, as compared with 1997, reflecting the
strong sales momentum for these businesses.
Other Disability Insurance
The non-cancellable ID business contributed favorably to the segment's
pretax operating earnings for 1998, largely driven by a lower benefit ratio, as
compared with 1997, during which the non-cancellable ID block incurred higher
levels of claims incidence. Partially offsetting these positive results was a
decline in the operating results of the reinsured block of non-cancellable ID
business reported in fees and other income. This decline was primarily due to
unfavorable claims experience generally resulting from an increase in the
average size of claims and a higher level of claims incidence in the reinsured
block. See Item 8 Note 6 under the caption "Reinsurance" for a discussion of
the reinsurance transaction.
17
<PAGE>
SPECIAL RISK INSURANCE SEGMENT
<TABLE>
<CAPTION>
(Dollars in millions) 1998 % Change 1997 % Change 1996
- - ------------------------------------------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues
Premiums
Group Life ............................... $ 645.9 22.3% $ 528.1 20.1% $ 439.6
Other Special Risk Products .............. 513.2 32.5 387.4 25.5 308.6
-------- ----- -------- ---- --------
Total premiums .......................... 1,159.1 26.6 915.5 22.4 748.2
Investment income ......................... 78.7 12.3 70.1 22.3 57.3
Fees and other income ..................... 49.3 13.6 43.4 23.6 35.1
-------- ----- -------- ---- --------
Total revenues .......................... 1,287.1 25.1 1,029.0 22.4 840.6
Benefits and expenses
Benefits to policyholders ................. 803.3 26.1 637.2 23.2 517.1
Operating expenses ........................ 226.8 17.5 193.1 3.4 186.8
Commissions ............................... 176.1 38.1 127.5 42.1 89.7
Increase in deferred policy acquisition
costs .................................... (78.5) 46.5 (53.6) 24.1 (43.2)
--------- ----- --------- ---- ---------
Total benefits and expenses ............. 1,127.7 24.7 904.2 20.5 750.4
--------- ----- --------- ---- ---------
Pretax operating income (a) ............... $ 159.4 27.7% $ 124.8 38.4% $ 90.2
========= ===== ========= ==== =========
Supplemental information (b):
Group life sales (annualized new
premiums) ................................ $ 208.7 $ 175.8 $ 150.0
Group life persistency (premiums) ......... 86.4% 86.5% 85.6%
Benefit ratio (% of premiums) ............. 69.3% 69.6% 69.1%
Operating expense ratio (% of
premiums) ................................ 19.6% 21.1% 25.0%
</TABLE>
- - --------
(a) For the definition of pretax operating income see the Consolidated
Overview.
(b) Information relating to sales and persistency is presented as an indicator
of premium growth in the segment. Persistency data also indicates
experience in maintaining customers over time. Benefit ratios and
operating expense ratios show the relative relationships among data to
earned premiums in the segment's income statement.
The Special Risk Insurance segment includes group life, accidental death
and dismemberment, travel and voluntary accident insurance, special risk
reinsurance operations, and other special risk insurance products.
Pretax operating income for the Special Risk Insurance segment increased
for the year ended December 31, 1998, as compared with 1997, primarily driven by
strong premium growth and a lower operating expense ratio across the segment.
Additionally, increased fees and other income, largely from reinsurance
underwriting management operations, and increased investment income positively
affected pretax operating income for this period. Higher benefit ratios in
certain product lines partially offset these increases. UNUM's participation in
Lloyd's of London syndicates experienced a higher benefit ratio, especially in
the fourth quarter, as new information was received about the profitability of
open syndicate years. The profitability of the Lloyd's of London market and the
syndicates in which UNUM participates may continue to deteriorate and impact
future pretax operating income. UNUM is conducting a strategic review of its
reinsurance businesses, including the Lloyd's of London syndicates, to
determine the appropriateness of their fit within the context of the
UNUMProvident merged entity. The review could result in the sale of some or all
of the reinsurance businesses. Due to the nature of the risks underwritten and
the relative size of the blocks of businesses, several of the products in the
Special Risk Insurance segment can exhibit claims variability.
Solid sales results and stable persistency continued during the year and
were the primary drivers of group life premium growth of 22.3% in 1998. Claim
block acquisitions generated one-time premiums for group life of $0.2 million
and $3.6 million, respectively, for 1997 and 1996, and for reinsurance
operations of $5.1 million and $16.3 million, respectively, for 1998 and 1996.
Management intends to pursue additional claim block acquisitions in the future.
The segment's operating expense ratio improved in 1998, primarily driven
by continued expense management combined with the strong premium growth. In
1998, the segment's benefit ratio declined slightly, primarily due to favorable
claims experience in most lines of business offset by unfavorable experience in
certain reinsurance pools.
18
<PAGE>
UNUM Corporation and Subsidiaries
The increase in pretax operating income for 1997, as compared with 1996,
was primarily due to strong premium growth in the group life business, lower
expense ratio across most lines, increased investment income and additional
fees and other income predominately from reinsurance underwriting management
operations. These favorable factors were partially offset by higher benefit
ratios in certain lines of business.
COLONIAL PRODUCTS SEGMENT
<TABLE>
<CAPTION>
(Dollars in millions) 1998 % Change 1997 % Change 1996
- - --------------------------------------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues
Premiums .............................. $ 552.7 5.2% $ 525.4 6.4% $ 493.7
Investment income ..................... 65.8 14.2 57.6 21.0 47.6
Fees and other income ................. 3.8 (29.6) 5.4 20.0 4.5
-------- ----- -------- ---- --------
Total operating revenues ............ 622.3 5.8 588.4 7.8 545.8
Benefits and expenses
Benefits to policyholders ............. 268.7 3.5 259.7 8.5 239.3
Interest credited ..................... 16.6 37.2 12.1 61.3 7.5
Operating expenses .................... 139.4 7.1 130.2 6.2 122.6
Commissions ........................... 123.3 7.1 115.1 6.8 107.8
Increase in deferred policy acquisition
costs ................................ (30.8) 12.0 (27.5) 14.1 (24.1)
--------- ----- --------- ---- ---------
Total benefits and expenses ......... 517.2 5.6 489.6 8.1 453.1
--------- ----- --------- ---- ---------
Pretax operating income (a) ........... $ 105.1 6.4% $ 98.8 6.6% $ 92.7
========= ===== ========= ==== =========
Supplemental information (b):
Sales (annualized first month's
premiums) ............................ $ 203.9 $ 224.7 $ 213.6
Benefit ratio (% of premiums) ......... 48.6% 49.4% 48.5%
Operating expense ratio (% of
premiums) ............................ 25.2% 24.8% 24.8%
</TABLE>
- - --------
(a) For the definition of pretax operating income see the Consolidated
Overview.
(b) Information relating to sales is presented as an indicator of premium
growth in the segment. Benefit ratios and operating expense ratios show
the relative relationships among data to earned premiums in the segment's
income statement.
The Colonial Products segment includes Colonial Life & Accident Insurance
Company ("Colonial") and affiliates. Colonial offers payroll-deducted,
voluntary employee benefit products, including accident and sickness,
disability, cancer and life insurance. These products are offered to employees
at their worksites and are marketed by Colonial primarily through independent
sales representatives.
Pretax operating income for the Colonial Products segment increased for
the year ended December 31, 1998, as compared with 1997. The increase was
primarily attributable to additional investment income and a reduced benefit
ratio in the accident, sickness and disability product line, partially offset
by an increase in interest credited and a higher benefit ratio in the cancer
product line. The increase in investment income and interest credited, is
largely due to the assumption of worksite-marketed universal life insurance
under reinsurance agreements Colonial entered into in 1998 and 1997. During
1998, management continued to implement organizational changes to focus on
specific distribution channels to market Colonial products.
Colonial's pretax operating income increased in 1997, as compared with
1996, primarily due to additional investment income, premium growth and reduced
operating expense ratios across most lines of business.
19
<PAGE>
RETIREMENT PRODUCTS SEGMENT
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
- - -------------------------------------- --------- --------- ----------
<S> <C> <C> <C>
Pretax operating income (a) .......... $ 1.0 $ 4.7 $ 13.6
===== ===== ======
</TABLE>
- - --------
(a) For the definition of pretax operating income see the Consolidated
Overview.
The Retirement Products segment includes products no longer actively
marketed by UNUM including: TSAs, guaranteed investment contracts ("GICs"),
deposit administration accounts ("DAs"), 401(k) plans, individual life and
group medical insurance. For the years ended December 31, 1998, and 1997, the
segment reported decreased pretax operating income as compared with the
respective prior year. The decline in operating income in both periods was
primarily the result of the sale of UNUM's TSA business in October 1996, as
discussed in Item 8 Note 5 "Sale of Tax-Sheltered Annuity Business." For 1997,
the decrease in TSA results was partially offset by favorable volatility in the
run-off of certain other discontinued products. UNUM expects these blocks of
business to continue to decline in size over several years and experience
earnings volatility, reflecting their run-off nature.
CORPORATE
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
- - ------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Pretax operating loss (a) .......... $ (58.0) $ (51.8) $ (37.5)
======= ======= =======
</TABLE>
- - --------
(a) For the definition of pretax operating loss see the Consolidated Overview.
Corporate includes transactions that are generally non-insurance related.
For the year ended December 31, 1998, as compared with the same period in 1997,
the increased pretax operating loss in Corporate was due to higher interest
expense and decreased investment income, partially offset by lower operating
expenses. The increased pretax operating loss for 1997, compared with 1996, was
primarily due to decreased investment income, principally from the Company's
increased use of capital to repurchase shares of its common stock, and higher
operating expenses.
INVESTMENTS
Overview
UNUM's investment objective is to optimize total asset return within
appropriate risk criteria established for each product line. UNUM seeks to meet
this objective through its asset/liability management process and active asset
management of the portfolios. Asset/liability management requires a balance
between investment risk and business risk and is a key element for managing
certain market risks (see Item 7A "Quantitative and Qualitative Information
about Market Risk" for further discussion). Product line investment strategies
are developed to complement business risks by meeting the liquidity and
solvency requirements of each product. UNUM purchases assets with maturities,
expected cash flows and prepayment conditions that are consistent with these
strategies.
In connection with the merger as described in the "Proposed Merger with
Provident" section, UNUM is in the process of evaluating its investment
strategy and overall asset allocation by investment type in anticipation of a
combined entity.
UNUM's investments are reported in the consolidated financial statements
at net realizable value or net of applicable allowances for probable losses.
Allowances for real estate held for sale and mortgages are established based on
a review of specific assets as well as on an overall portfolio basis,
considering the value of the underlying assets and collateral. If a decline in
fair value is considered to be other than temporary or if a long-lived asset is
deemed permanently impaired, the investment is reduced to estimated net
realizable value and the reduction is recorded as a realized investment loss.
UNUM discontinues the accrual of investment income on invested assets when it
is determined that collectability is doubtful. Management monitors the risk
associated with the invested asset portfolio and regularly reviews and adjusts
the allowance for probable losses.
UNUM's invested assets were $9,837.7 million and $8,958.9 million at
December 31, 1998, and 1997, respectively. The composition of UNUM's invested
assets at December 31, 1998, was 80.3% fixed maturities, 13.2% mortgage loans,
2.6% real estate and 3.9% other invested assets.
20
<PAGE>
UNUM Corporation and Subsidiaries
Gross realized investment gains were $29.1 million, $24.4 million and
$40.2 million, and gross realized investment losses were $8.1 million, $28.0
million and $36.8 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Fixed Maturities
Fixed maturities at fair value were $7,896.9 million and $7,310.9 million
at December 31, 1998, and 1997, respectively. Management believes UNUM's fixed
maturity portfolio is well diversified by company and industry sector. The
fixed maturity portfolio is primarily comprised of taxable corporate bonds.
At December 31, 1998, and 1997, the fixed maturity portfolio included
$89.1 million and $83.7 million, respectively, of below investment grade bonds
(below "BAA") recorded at fair value. These bonds had an associated amortized
cost of $86.2 million and $80.2 million, respectively. Fixed maturity ratings
are obtained from external rating agencies or are determined internally by UNUM
using similar methods if external ratings are not available. Below investment
grade bonds are inherently more risky than investment grade bonds since the
risk of default by the issuer, by definition and as exhibited by bond rating,
is higher. 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. There were no fixed
maturities delinquent 60 days or more at December 31, 1998, and 1997.
Mortgages
At December 31, 1998, and 1997, UNUM's mortgage loans were $1,303.4
million and $1,131.0 million, respectively. Management uses a comprehensive
rating system to evaluate the investment and credit risk of each mortgage loan
and to identify specific properties for inspection and reevaluation. Management
establishes allowances for mortgage loans based on a review of individual loans
and the overall loan portfolio, considering the value of the underlying
collateral.
Management believes that its mortgage loan portfolio is well diversified
geographically and among property types. UNUM's incidence of new problem
mortgage loans and foreclosure activity has continued to remain very low in
1998, reflecting improvements in overall economic activity and improving real
estate markets in the geographic areas where UNUM has mortgage loans.
Management expects a modest level of delinquencies and problem loans in the
future. There were no delinquent mortgage loans at December 31, 1998, and at
December 31, 1997, the amount was 0.7% of the portfolio.
At December 31, 1998, and 1997, impaired loans totaled $20.7 million and
$43.4 million, respectively. Included in the $20.7 million of impaired loans at
December 31, 1998, were $9.0 million of loans which had a related allowance for
probable losses of $2.4 million, and $11.7 million of loans which had no
related allowance for probable losses. Interest lost on impaired loans in 1998,
1997 and 1996 was not material.
Realized investment losses related to impaired mortgage loans amounted to
$2.3 million, $3.3 million and $1.0 million for 1998, 1997 and 1996,
respectively. Impaired mortgage loans as of December 31, 1998, are not expected
to have a significant impact on UNUM's results of operations, liquidity or
capital resources.
Restructured mortgage loans are those whose terms have been modified to
interest rates less than market at the time of restructure and are currently
expected to perform pursuant to such modified terms. UNUM modifies loans to
protect its investment and only when it is anticipated that the borrower will
be able to meet the modified terms. As of December 31, 1998, restructured
mortgage loans totaled $14.5 million, as compared with $39.3 million at
December 31, 1997. Interest lost on restructured loans was not material in
1998, 1997 or 1996.
Real Estate
At December 31, 1998, investment real estate amounted to $250.6 million,
compared with $231.5 million at December 31, 1997. Investment real estate is
carried at cost less accumulated depreciation. Real estate acquired through
foreclosure is valued at fair value at the date of foreclosure and may be
classified as investment real estate if it meets UNUM's investment criteria. If
investment real estate is determined to be permanently impaired, the carrying
amount of the asset is reduced to fair value. Occasionally, investment real
estate is reclassified and revalued as real estate held for sale when it no
longer meets UNUM's investment criteria. Real estate acquired through
foreclosure is not expected to have a significant effect on UNUM's results of
operations, liquidity or capital resources.
21
<PAGE>
At December 31, 1998, and 1997, real estate held for sale amounted to
$15.6 million and $23.3 million, respectively. Real estate held for sale is
included in other assets in the Consolidated Balance Sheets and is valued net
of a valuation allowance that reduces the carrying value to the lower of fair
value less estimated costs to sell or cost. This valuation allowance is
periodically adjusted based on subsequent changes in UNUM's estimate of fair
value less costs to sell.
LIQUIDITY AND CAPITAL RESOURCES
UNUM's businesses produce positive cash flows which are invested primarily
in intermediate term, fixed maturity investments intended to reflect the
anticipated cash obligations of insurance benefit payments and insurance
contract maturities and to optimize investment returns at appropriate risk
levels. Unexpected cash requirements and liquidity needs can be met through
UNUM's investment portfolio of fixed maturities classified as available for
sale, equity securities, cash and short-term investments.
From time to time, dividend payments, which may be subject to approval by
insurance regulatory authorities, are made from UNUM's affiliates to UNUM
Corporation. These dividends, along with other funds, are used to service the
needs of UNUM Corporation including: debt service, common stock dividends,
corporate development, stock repurchase and administrative costs. Net statutory
operating income, which excludes realized investment gains and losses net of
tax, is one of the determinants of an insurance company's dividend capacity to
its parent. Statutory accounting rules and practices, which differ in certain
respects from generally accepted accounting principles, are mandated by
regulators in an insurance company's state of domicile. In addition to the
level of net statutory operating income, UNUM's determination of amounts to be
dividended by affiliates to UNUM Corporation depends on other factors such as
risk-based capital ratios, funding growth objectives at an affiliate level and
maintaining appropriate capital adequacy ratios as defined by certain rating
agencies (see "Ratings" section).
The states of domicile for UNUM's subsidiaries generally limit dividend
payments to the greater of the prior year's net statutory operating income or
10% of the prior year's statutory surplus. The amount available under current
law for payment of dividends during 1999 to UNUM Corporation from all U.S.
domiciled insurance subsidiaries without state insurance regulatory approval is
approximately $150 million. UNUM Corporation also has the ability to draw a
dividend from its United Kingdom-based affiliate, UNUM Limited. Such dividends
are limited in amount, based on insurance company legislation in the United
Kingdom which requires a minimum solvency margin. The amount available under
current law for payment of dividends to UNUM Corporation from UNUM Limited
during 1999 is approximately $20 million. It is not uncommon for an insurance
entity to request regulatory approval for dividends in excess of amounts
available without such approval.
The risk-based capital ("RBC") standards for life insurance companies, as
prescribed by the National Association of Insurance Commissioners, establish an
RBC ratio comparing adjusted surplus to required surplus for each of UNUM's
United States domiciled insurance subsidiaries. If the RBC ratio falls within
certain ranges, regulatory action may be taken ranging from increased
information requirements to mandatory control by the domiciliary insurance
department. The RBC ratios for UNUM's insurance subsidiaries, measured at
December 31, 1998, were significantly above the ranges that would require
regulatory action.
Cash flow requirements are also supported by a committed revolving credit
facility totaling $500 million, which expires October 1, 2001. UNUM's
commercial paper program is supported by the revolving credit facility and is
available for general liquidity needs, capital expansion, acquisitions and
stock repurchase. The committed revolving credit facility contains certain
covenants that, among other provisions, require maintenance of certain levels
of stockholders' equity and limits on debt levels.
On December 15, 1998, UNUM Corporation issued $250 million of senior
notes, which mature in 2028, under an omnibus shelf registration with the
Securities and Exchange Commission, which became effective August 2, 1996. UNUM
used the proceeds to repay short-term debt and for general corporate purposes.
The shelf registration relates to $500 million of securities (including debt
securities, preferred stock, common stock and other securities). On August 15,
1996, UNUM established a $250 million medium-term note ("MTN") program under
the shelf registration.
On December 4, 1997, UNUM borrowed [British pound]100 million ($168.3
million) through a private placement with an investor in the United Kingdom (see
Item 8 Note 8 "Notes Payable"). The borrowing has an expected term of ten years.
Upon issuance of the [British pound]100 million borrowing, UNUM entered into
currency and interest rate swap agreements
22
<PAGE>
UNUM Corporation and Subsidiaries
that converted the principal amount to U.S. dollars and the interest obligation
on the debt from a pound sterling based fixed rate to a U.S. dollar fixed rate.
The borrowing is callable by either party over the life of the agreement, under
certain circumstances. UNUM anticipates the debt will be called in 1999.
Therefore, UNUM is currently evaluating various financing alternatives and
intends to substitute a debt instrument to match the maturity and terms of the
interest rate swap agreement.
At December 31, 1998, UNUM had short-term and long-term debt totaling
$283.5 million and $598.3 million, respectively. At December 31, 1998,
approximately $414 million was available for additional financing under the
existing revolving credit facility and $200 million of investment grade debt
instruments was available for issuance under the shelf registration. In the
normal course of business, UNUM enters into letters of credit, primarily to
satisfy capital requirements related to certain subsidiary transactions. UNUM
had outstanding letters of credit of $149.7 million and $84.6 million at
December 31, 1998, and 1997, respectively.
Effective November 23, 1998, UNUM's Board of Directors rescinded the
company's stock repurchase program as a result of the pending merger agreement
with Provident. During 1998, 1997 and 1996, UNUM acquired approximately 1.3
million, 7.1 million and 3.8 million shares, respectively, of its common stock
in the open market at an aggregate cost of $65.0 million, $285.2 million and
$119.1 million, respectively.
UNUM was committed at December 31, 1998, to purchase invested assets in
the amount of $45.7 million. Independent of the cash flows of UNUM Corporation,
management anticipates that the operating cash flows of the subsidiaries of
UNUM Corporation will be sufficient to meet benefit obligations, planned
investment commitments and operational needs of those companies.
RATINGS
Standard & Poor's Corporation ("Standard & Poor's"), Moody's Investors
Service ("Moody's") and A.M. Best Company ("A.M. Best") are among the third
parties that provide UNUM independent assessments of its overall financial
position. Ratings from these agencies for financial strength are available for
the individual United States domiciled insurance company subsidiaries.
Financial strength ratings are based primarily on U.S. statutory financial
information for the individual U.S. domiciled insurance companies. Debt ratings
for UNUM Corporation are based primarily on consolidated financial information
prepared using generally accepted accounting principles. Both financial
strength ratings and debt ratings incorporate qualitative analyses of UNUM
companies done by rating agencies on an ongoing basis.
23
<PAGE>
As a result of UNUM's announced plan to merge with Provident, on November
23, 1998, the aforementioned credit agencies put UNUM's credit ratings under
review. The table below reflects the debt ratings for UNUM Corporation and the
financial strength ratings for UNUM's United States domiciled insurance company
subsidiaries at February 26, 1999:
<TABLE>
<CAPTION>
Standard
& Poor's Moody's A.M. Best
--------------------------- ------------------------------------- --------------------------
<S> <C> <C> <C>
UNUM Corporation Ratings:
Senior Notes due A+ A1
December, 2028 (Strong) (Upper Medium Grade)
CreditWatch with negative On review for possible
implications downgrade
Senior Debt A+ A1
(MTN program) (Strong) (Upper Medium Grade)
CreditWatch with negative On review for possible
implications downgrade
Subordinated Debt A- A2
(Monthly Income (Strong) (Upper Medium Grade)
Debt Securities) CreditWatch with negative On review for possible
implications downgrade
Commercial Paper A-1 P-1
(Strong) (Superior Ability)
Rating affirmed, 11/23/98 Rating confirmed, 11/23/98
United States Subsidiaries' Ratings:
UNUM America AA Aa2 A++
(Very Strong) (Excellent) (Superior)
CreditWatch with negative On review for possible Under review with
implications downgrade developing implications
First UNUM AA Aa2 A+
(Very Strong) (Excellent) (Superior)
CreditWatch with negative On review for possible Under review with
implications downgrade developing implications
Colonial AA Aa3 A+
(Very Strong) (Excellent) (Superior)
CreditWatch with negative On review for possible Under review with
implications upgrade developing implications
</TABLE>
At February 26, 1999, the unsold portion of the shelf registration related
to preferred stock carried a rating of "a1/a2" (Upper-Medium Quality) from
Moody's.
DERIVATIVES
Refer to Item 8 Note 14 "Derivative Financial Instruments" for
information.
LITIGATION
Refer to Item 8 Note 15 "Litigation" for information.
EFFECT OF INFLATION
Changing interest rates, which are traditionally linked to changes in
inflation, affect UNUM's level of discounted reserves. While rising interest
rates are beneficial when the company is investing current cash flows, they can
also reduce the fair value of existing fixed rate long-term investments. In
addition, lower interest rates can lead to early payoffs and refinancing of
some of UNUM's fixed rate investments. Management generally invests in fixed
rate instruments that are structured to limit the exposure to such reinvestment
risk.
24
<PAGE>
UNUM Corporation and Subsidiaries
YEAR 2000 DATE CONVERSION
The following discussion regarding the Year 2000 Date Conversion contains
forward-looking statements, and should be read in conjunction with the
Forward-Looking Information disclosure made at the beginning of the
Management's Discussion and Analysis.
The year 2000 date conversion relates to whether computer systems will
properly recognize date-sensitive information when the year changes to 2000.
This inability to recognize the year 2000 may cause systems to process critical
financial and operational information incorrectly. This, in turn, could cause
disruptions of normal business operations, including the inability to process
claims, bill and collect premium, and manage investment activities. UNUM has a
corporate-wide program underway to address the year 2000 date conversion
relating to its internal computer systems and critical dependencies of its
business including suppliers, business partners, customers, facilities and
telecommunications.
UNUM has determined that it is required to modify or replace significant
portions of its software so its computer systems will properly function using
dates beyond December 31, 1999. Management is utilizing both internal and
external resources to reprogram, or replace, and test the software for year
2000 compliance. UNUM's program for the year 2000 is organized into a number of
phases for rectifying its internal computer systems, including assessment, code
remediation, testing, and deployment.
As of December 31, 1998, UNUM has completed the assessment phase for all
its critical systems and for more than 90% of its non-critical systems. Coding
remediation of UNUM's critical systems is virtually complete with approximately
95% of those remediated completing the testing phase. Greater than 85% of the
non-critical systems have been remediated and tested. Deployment is underway
for most critical systems and the majority of non-critical systems. Management
has substantially completed all phases for its critical and non-critical
systems as of December 31, 1998, and expects to complete all phases by the end
of 1999.
In addition, UNUM continues to assess critical external dependencies,
including suppliers, business partners and customers, and non-systems aspects
of the business such as facilities and telecommunication. As part of this due
diligence program, UNUM has sent year 2000 compliance questionnaires to its
critical third party suppliers, is reviewing responses received, performing
cross-checks against other publicly available information and conducting due
diligence meetings. UNUM is performing site visits to certain third party
businesses, determining the frequency and timing of follow-up site visits, and
planning to test specific systems for compliance. To date, no significant
issues from critical external dependencies have been identified; however, there
can be no guarantee that the computer systems of these third parties will be
year 2000 compliant. UNUM is developing contingency plans to alleviate the
potential business impact of third parties not being year 2000 compliant.
Management expects all of these plans to be finalized and ready for
implementation in third quarter 1999.
UNUM estimates that total internal (opportunity costs) and external
(out-of-pocket) costs for addressing the year 2000 date conversion will range
from $70 million to $80 million, which are expensed as incurred. As of December
31, 1998, UNUM has incurred approximately $59 million in connection with its
year 2000 program. The costs of the project and the date on which UNUM plans to
complete year 2000 modifications are based on management's best estimates,
derived using numerous assumptions about future events. However, there can be
no guarantee that these estimates will be achieved and actual results could
differ materially from those plans.
Failure by UNUM to make the required modifications to existing systems and
conversions to new systems in a timely manner, or failure by third parties to
successfully address year 2000 issues could have a material adverse effect on
UNUM's results of operations, liquidity or capital resources; however, the
potential impact and related costs, if any, are not known at this time. While
management does not anticipate a material adverse effect, UNUM is developing
contingency plans that would allow UNUM to devote its financial and personnel
resources to correct the problem as soon as possible if UNUM's systems were to
be non-compliant. With regard to non-compliance resulting from third party
failure, contingency plans are being developed, as previously discussed, to
attempt to mitigate the extent of this potential impact.
25
<PAGE>
ACCOUNTING PRONOUNCEMENTS ADOPTED
Refer to Item 8 Note 1 under the caption "Accounting Pronouncements
Adopted" for information.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Item 8 Note 1 under the caption "New Accounting Pronouncements"
for information.
ITEM 7A. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Market-Sensitive Instruments and Risk Management
The following discussion about UNUM's risk-management activities includes
"forward-looking statements" that involve risk and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements (see "Forward-Looking Information" in Item 7). UNUM's financial
instruments are exposed to market risk, which is the risk of market volatility
and potential disruptions in the market that may result in certain financial
instruments becoming less valuable. UNUM's primary market risk is interest rate
risk, which is the sensitivity of earnings, cash flows and the fair value of
financial instruments to changes in the level of interest rates. In accordance
with the Securities and Exchange Commission's Financial Reporting Release No.
48, the following quantitative analysis provides the estimated loss in fair
value of certain market sensitive financial assets and liabilities held at
December 31, 1998, and 1997, given a hypothetical 10-percent adverse change in
interest rates and related qualitative information on how UNUM manages interest
rate risk. All of UNUM's financial instruments are held for purposes other than
trading.
Interest-Rate Risk
UNUM's asset/liability duration management activities represent a key
element for managing interest rate risk to the overall business. The objective
of asset/liability duration management is to support the achievement of
business strategies while minimizing levels of investment risk, which includes
interest rate risk. As part of the Company's asset/liability duration
management strategy, detailed actuarial models of the cash flows associated
with each type of insurance liability are generated under various interest rate
scenarios allowing the calculation of an estimated duration for each insurance
product line. This duration measure can then be used to compare the price
sensitivities of the insurance liabilities versus the price sensitivities of
the financial assets held to provide the required liability cash flows. When
the durations of assets and liabilities are equal, interest rate exposure is
effectively neutralized on an economic basis as the change in value of
financial assets should be largely offset by the change in the value of the
liabilities.
The model used in the following analysis included UNUM's fixed maturities,
mortgage loans and deposit assets held at December 31, 1998, and 1997, and
incorporated assumptions regarding the impact of changing interest rates on
expected cash flows for certain financial assets with prepayment features, such
as callable bonds, mortgage-backed securities and mortgage loans. The model
used also assumed an immediate change in interest rates without any management
of the investment portfolio in reaction to such change. The hypothetical
reduction in the fair value of UNUM's financial assets included in the model
resulting from a hypothetical 10-percent adverse change in interest rates
prevalent at December 31, 1998, and 1997, was estimated to be $290 million and
$323 million, respectively. In consideration of UNUM's ongoing strategy of
asset/liability duration alignment, this hypothetical reduction in fair value
would be largely offset by the corresponding decrease in the fair value of
insurance reserves.
UNUM has established policies and procedures governing its issuance of
debt. UNUM manages its debt composition and related interest rate risk by
considering such factors as the debt to equity ratio, fixed rate to variable
rate debt ratio, future debt requirements, interest rate environment and market
conditions. The sensitivity analysis of notes payable considered the impact of
an immediate hypothetical interest rate change as of December 31, 1998, and
1997, and the effects of the interest rate swap agreement described in Item 8
Note 14 "Derivative Financial Instruments." Based upon the interest rate
exposure relating to UNUM's notes payable at December 31, 1998, and 1997, a
hypothetical 10-percent adverse change in interest rates in the near term would
not materially affect the fair value of UNUM's notes payable.
Additionally, UNUM periodically uses options, futures and interest rate
swaps, which are common derivative financial instruments, to hedge interest
rate risk associated with anticipated purchases and sales of investments and
debt issuance (see Item 8 Note 14 "Derivative Financial Instruments" for
further information on derivatives).
26
<PAGE>
UNUM Corporation and Subsidiaries
Foreign Currency Exchange Risk
UNUM generally conducts its international businesses through foreign
operating entities that maintain assets and liabilities in local currencies,
substantially limiting foreign currency exchange rate risk to net assets
denominated in foreign currencies. The unrealized foreign currency translation
gains and losses are reported in other comprehensive income in stockholders'
equity. After assessing UNUM's foreign currency exchange risk at December 31,
1998, and 1997, a hypothetical 10-percent adverse change in exchange rates in
the near term would not materially affect UNUM's consolidated stockholders'
equity at December 31, 1998, and 1997. Foreign exchange exposure was calculated
by translating the local reporting currency into U.S. dollars using foreign
currency exchange rates at December 31, 1998, and 1997, and applying a
hypothetical 10-percent adverse change in foreign exchange rates to the
translated amount.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX Page
- - ------------------------------------------------------------------------------------------ -----
<S> <C>
Report of Independent Accountants ........................................................ 28
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 .. 29
Consolidated Balance Sheets as of December 31, 1998, and 1997 ........................... 30
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998,
1997 and 1996 ......................................................................... 31
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996 .................................................................................. 32
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1998,
1997 and 1996 ......................................................................... 34
Notes to Consolidated Financial Statements ............................................... 35
</TABLE>
27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders
UNUM Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 8 on page 27 present fairly, in all material respects, the
financial position of UNUM Corporation and its subsidiaries at December 31,
1998, and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules listed in the index appearing under Item 14(a) on
page 71 present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedules are
the responsibility of UNUM's management; our responsibility is to express an
opinion on these financial statements and financial statement schedules based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Portland, Maine
February 2, 1999
28
<PAGE>
UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
(Dollars in millions, except per common share data) 1998 1997 1996
- - ------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Revenues
Premiums .............................................. $ 3,841.7 $ 3,263.7 $ 3,151.5
Investment income ..................................... 661.4 661.0 803.3
Net realized investment gains (losses) ................ 21.0 (3.6) 3.4
Fees and other income ................................. 117.3 227.3 113.5
--------- ---------- ---------
Total revenues ...................................... 4,641.4 4,148.4 4,071.7
Benefits and expenses
Benefits to policyholders ............................. 2,886.2 2,438.8 2,342.2
Interest credited ..................................... 46.4 83.5 200.6
Salaries and related expenses ......................... 479.3 433.4 424.0
Other operating expenses .............................. 401.1 370.3 445.0
Commissions ........................................... 496.2 410.5 386.9
Increase in deferred policy acquisition costs ......... (235.1) (166.9) (109.3)
Interest expense ...................................... 49.9 42.4 40.7
---------- ---------- ----------
Total benefits and expenses ......................... 4,124.0 3,612.0 3,730.1
---------- ---------- ----------
Income before income taxes ............................ 517.4 536.4 341.6
Income taxes
Current ............................................... 27.9 68.3 122.3
Deferred .............................................. 126.1 97.8 (18.7)
---------- ---------- ----------
Total income taxes .................................. 154.0 166.1 103.6
---------- ---------- ----------
Net income ............................................ $ 363.4 $ 370.3 $ 238.0
========== ========== ==========
Net income per common share:
Basic ................................................ $ 2.63 $ 2.65 $ 1.63
Diluted .............................................. $ 2.57 $ 2.59 $ 1.61
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------
(Dollars in millions) 1998 1997
- - -------------------------------------------------------------- ------------- --------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities available for sale--at fair value
(amortized cost: 1998--$7,350.0; 1997--$6,893.0) ........... $ 7,896.9 $ 7,310.9
Equity securities available for sale--at fair value
(cost:1998--$21.3; 1997--$21.1)............................. 31.0 30.7
Mortgage loans .............................................. 1,303.4 1,131.0
Real estate, net ............................................ 250.6 231.5
Policy loans ................................................ 137.6 128.5
Other long-term investments ................................. 2.0 1.8
Short-term investments ...................................... 216.2 124.5
---------- -----------
Total investments ......................................... 9,837.7 8,958.9
Cash ......................................................... 80.5 56.8
Accrued investment income .................................... 167.4 160.3
Premiums due ................................................. 518.1 390.9
Deferred policy acquisition costs ............................ 1,266.0 1,031.7
Property and equipment, net .................................. 237.9 196.2
Reinsurance receivables ...................................... 1,770.0 1,441.2
Deposit assets ............................................... 729.7 688.3
Other assets ................................................. 540.3 486.2
Separate account assets ...................................... 35.3 29.6
---------- -----------
Total assets .............................................. $ 15,182.9 $ 13,440.1
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits ...................................... $ 2,360.2 $ 2,108.4
Unpaid claims and claim expenses ............................ 6,841.2 5,944.4
Other policyholder funds .................................... 875.4 1,004.9
Income taxes
Current .................................................... 47.3 20.7
Deferred ................................................... 625.8 496.2
Notes payable ............................................... 881.8 635.8
Other liabilities ........................................... 778.2 765.3
Separate account liabilities ................................ 35.3 29.6
---------- -----------
Total liabilities ......................................... 12,445.2 11,005.3
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
240,000,000 shares, issued 199,975,916 shares .............. 20.0 20.0
Additional paid-in capital .................................. 1,151.2 1,123.0
Retained earnings ........................................... 2,444.9 2,162.5
Accumulated other comprehensive income:
Unrealized gains, net ...................................... 248.4 211.4
Unrealized foreign currency translation adjustment ......... (19.4) (16.0)
---------- -----------
Total accumulated other comprehensive income .............. 229.0 195.4
---------- -----------
3,845.1 3,500.9
Less:
Treasury stock, at cost (1998--61,266,501 shares;
1997--61,703,924 shares) .................................. 1,085.9 1,050.3
Restricted stock deferred compensation ...................... 21.5 15.8
---------- -----------
Total stockholders' equity .................................. 2,737.7 2,434.8
---------- -----------
Total liabilities and stockholders' equity ................ $ 15,182.9 $ 13,440.1
========== ===========
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Accumulated
Stock Additional Other
(Dollars in millions, $0.10 Par Paid-in Comprehensive
except per common share data) Value Capital Income
- - ------------------------------------- ----------- ------------ ---------------
<S> <C> <C> <C>
Balance at January 1, 1996 .......... $ 10.0 $ 1,088.2 $ 190.0
1996 Transactions:
Net income .........................
Other comprehensive income ......... (108.9)
Dividends to stockholders
($0.545 per common share)..........
Treasury stock acquired ............
Employee stock option and
other transactions ................ 15.2
------- ---------- --------
Balance at December 31, 1996 ........ 10.0 1,103.4 81.1
1997 Transactions:
Net income .........................
Other comprehensive income ......... 114.3
Two-for-one common stock split ..... 10.0 (10.0)
Dividends to stockholders
($0.565 per common share)..........
Treasury stock acquired ............
Employee stock option and
other transactions ................ 29.6
------- ---------- --------
Balance at December 31, 1997 ........ 20.0 1,123.0 195.4
1998 Transactions:
Net income .........................
Other comprehensive income ......... 33.6
Dividends to stockholders ..........
($0.585 per common share)
Treasury stock acquired ............
Employee stock option and
other transactions ................ 28.2
------- ---------- --------
Balance at December 31, 1998 ........ $ 20.0 $ 1,151.2 $ 229.0
======= ========== ========
<CAPTION>
Restricted
Stock
(Dollars in millions, Retained Treasury Deferred
except per common share data) Earnings Stock Compensation Total
- - ------------------------------------- ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 .......... $ 1,713.2 $ (691.6) $ (6.9) $ 2,302.9
1996 Transactions:
Net income ......................... 238.0 238.0
Other comprehensive income ......... (108.9)
Dividends to stockholders
($0.545 per common share).......... (79.8) (79.8)
Treasury stock acquired ............ (119.1) (119.1)
Employee stock option and
other transactions ................ 18.5 (3.7) 30.0
---------- ---------- -------- ----------
Balance at December 31, 1996 ........ 1,871.4 (792.2) (10.6) 2,263.1
1997 Transactions:
Net income ......................... 370.3 370.3
Other comprehensive income ......... 114.3
Two-for-one common stock split ..... --
Dividends to stockholders
($0.565 per common share).......... (79.2) (79.2)
Treasury stock acquired ............ (285.2) (285.2)
Employee stock option and
other transactions ................ 27.1 (5.2) 51.5
---------- ---------- -------- ----------
Balance at December 31, 1997 ........ 2,162.5 (1,050.3) (15.8) 2,434.8
1998 Transactions:
Net income ......................... 363.4 363.4
Other comprehensive income ......... 33.6
Dividends to stockholders ..........
($0.585 per common share) (81.0) (81.0)
Treasury stock acquired ............ (65.0) (65.0)
Employee stock option and
other transactions ................ 29.4 (5.7) 51.9
---------- ---------- -------- ----------
Balance at December 31, 1998 ........ $ 2,444.9 $ (1,085.9) $ (21.5) $ 2,737.7
========== ========== ======== ==========
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
(Dollars in millions) 1998 1997 1996
- - ------------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Operating activities:
Net income ........................................................ $ 363.4 $ 370.3 $ 238.0
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in future policy benefits and unpaid claims and
claim expenses .................................................. 980.1 726.6 743.0
Increase in reinsurance receivables .............................. (327.8) (277.5) (721.2)
Increase in premiums due ......................................... (127.1) (94.8) (72.6)
Increase in income tax liability ................................. 140.5 52.8 20.4
(Increase) decrease in deferred policy acquisition costs ......... (234.2) (163.3) 274.3
(Increase) decrease in deposit assets ............................ 12.3 (55.9) (432.1)
Deferral (recognition) of gain on sale of tax-sheltered
annuities ....................................................... (3.3) (72.6) 80.8
Charge for individual disability reinsurance fees ................ -- -- 49.7
Other ............................................................ 6.8 6.4 112.4
---------- ---------- ----------
Net cash provided by operating activities ...................... 810.7 492.0 292.7
---------- ---------- ----------
Investing activities:
Maturities of fixed maturities available for sale ................. 405.4 457.7 775.2
Sales of fixed maturities available for sale ...................... 715.0 652.1 2,514.4
Sales and maturities of other investments ......................... 144.5 234.9 269.5
Purchases of fixed maturities available for sale .................. (1,557.0) (1,360.6) (1,890.9)
Purchases of other investments .................................... (374.4) (216.3) (263.0)
Net (increase) decrease in short-term investments ................. (91.7) 10.7 (1,063.9)
Net additions to property and equipment ........................... (41.1) (26.1) (54.3)
---------- ---------- ----------
Net cash provided by (used in) investing activities ............... (799.3) (247.6) 287.0
---------- ---------- ----------
Financing activities:
Deposits and interest credited to investment contracts ............ 100.7 285.1 597.1
Maturities and withdrawals from investment contracts .............. (217.2) (327.2) (903.8)
Dividends to stockholders ......................................... (81.0) (79.2) (79.8)
Treasury stock acquired ........................................... (65.0) (285.2) (119.1)
Proceeds from notes payable ....................................... 278.1 168.3 --
Repayment of notes payable ........................................ (68.1) (48.5) (15.0)
Net increase (decrease) in short-term debt ........................ 36.0 (10.6) (42.3)
Other ............................................................. 27.3 32.8 18.9
---------- ---------- ----------
Net cash provided by (used in) financing activities ............ 10.8 (264.5) (544.0)
---------- ---------- ----------
Effect of exchange rate changes on cash ........................... 1.5 (1.0) (0.3)
---------- ---------- ----------
Net increase (decrease) in cash ................................... 23.7 (21.1) 35.4
Cash at beginning of year ......................................... 56.8 77.9 42.5
---------- ---------- ----------
Cash at end of year ............................................... $ 80.5 $ 56.8 $ 77.9
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes ..................................................... $ 31.4 $ 76.1 $ 76.4
Interest ......................................................... $ 50.9 $ 43.3 $ 40.8
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental disclosure of noncash operating and investing activities:
For the year ended December 31, 1997, in connection with contractholder
and participant consents for assumption reinsurance related to the
tax-sheltered annuity business UNUM sold in 1996, UNUM reduced its deposit
assets by $2,317.8 million, policy loan assets by $104.8 million, other
policyholder fund liabilities by $2,486.5 million and separate account assets
and liabilities by $526.5 million. Also, during 1996, fixed maturities
available for sale of $588.6 million and short-term investments of $1,825.9
million were transferred to the buyer on October 1, 1996. Upon transfer, there
was a corresponding increase in UNUM's deposit assets.
See notes to consolidated financial statements.
33
<PAGE>
UNUM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
(Dollars in millions) 1998 1997 1996
- - ---------------------------------------------------------------- ----------- ----------- ------------
<S> <C> <C> <C>
Net income ..................................................... $ 363.4 $ 370.3 $ 238.0
Other comprehensive income:
Unrealized holding gains (losses) arising
during the period, net ....................................... 47.4 131.2 (135.5)
Reclassification adjustment for realized (gains) losses
included in net income, net .................................. (10.4) (2.1) 4.7
-------- -------- ---------
Changes in unrealized gains (losses), net .................... 37.0 129.1 (130.8)
Foreign currency translation adjustments ...................... (3.4) (14.8) 21.9
-------- -------- ---------
Total other comprehensive income ............................. 33.6 114.3 (108.9)
-------- -------- ---------
Comprehensive income ........................................... $ 397.0 $ 484.6 $ 129.1
======== ======== =========
Supplemental disclosures of comprehensive income information:
Tax (expense) benefit related to unrealized holding (gains)
losses ........................................................ $ (20.8) $ (65.5) $ 41.8
Tax (expense) benefit related to reclassification adjustment for
realized (gains) losses ....................................... $ (5.6) $ (1.1) $ 2.5
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
34
<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 ("GAAP"). The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of UNUM
Corporation and subsidiaries. Significant intercompany accounts and
transactions have been eliminated.
Reclassification
To better reflect the business of Duncanson & Holt Underwriters Ltd., as
reported in the Special Risk Insurance segment, the results have been reflected
on separate lines in UNUM's statements of income, balance sheets and statements
of cash flows. Previously the operating results, financial position and cash
flows were reported as net amounts in fees and other income and other assets.
Prior year amounts have been reclassified for comparative purposes. Certain
other 1997 and 1996 amounts have been reclassified in 1998 for comparative
purposes.
Investments
Investments are reported as follows:
o Fixed maturities available for sale (certain bonds and redeemable
preferred stocks)--at fair value.
o Equity securities available for sale (common stocks and non-redeemable
preferred stocks)--at fair value.
o Mortgage loans--at amortized cost less an allowance for probable
losses.
o Real estate--at cost less accumulated depreciation.
o Policy loans--at unpaid principal balance.
o Other long-term investments--at cost plus UNUM's equity in
undistributed net earnings since acquisition.
o Short-term investments--are considered available for sale and are
carried at cost which approximates fair value.
Fixed maturities and equity securities are classified as available for
sale as they may be sold in response to changes in interest rates, resultant
prepayment risk, liquidity and capital needs or other similar economic factors.
Unrealized gains and losses related to securities classified as available for
sale are excluded from net income and reported in a separate component of
stockholders' equity, net of applicable deferred taxes and related adjustments
to unpaid claims and claim expenses. The unrealized gains and losses are
determined based on estimated market values at the balance sheet date and are
not necessarily the amounts which would be realized upon sale of the securities
or representative of future market values. Changing interest rates affect the
level of unrealized gains and losses related to securities classified as
available for sale. While rising interest rates are beneficial when investing
current cash flows, they can also reduce the fair value of existing fixed rate
long-term investments. In addition, lower interest rates can lead to early
payoffs and refinancing of some of UNUM's fixed rate investments. Management
generally invests in fixed rate instruments that are structured to limit the
exposure to such reinvestment risk.
Realized investment gains and losses, which are determined on the basis of
specific identification and include adjustments for allowances for probable
losses, are reported separately in the Consolidated Statements of Income.
If a decline in fair value of an invested asset is considered to be other
than temporary or if a long-lived asset is deemed to be permanently impaired,
the investment is reduced to its net realizable value and the reduction is
accounted for as a realized investment loss.
35
<PAGE>
UNUM discontinues the accrual of investment income on invested assets when
it is determined that collectability is doubtful. UNUM recognizes investment
income on impaired loans when the income is received.
Real estate held for sale is included in other assets in the Consolidated
Balance Sheets and is valued net of a valuation allowance that reduces the
carrying value to the lower of fair value less estimated costs to sell or cost.
This valuation allowance is periodically adjusted based on subsequent changes
in UNUM's estimate of fair value less costs to sell.
Purchases and sales of short-term financial instruments are part of
investing activities and not necessarily a part of the cash management program.
Therefore, short-term financial instruments are classified as investments in
the Consolidated Balance Sheets and are included as investing activities in the
Consolidated Statements of Cash Flows.
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 group disability, individual disability, and group life and health
business, the costs are amortized in proportion to expected future premiums.
For universal life products, the costs are amortized in proportion to estimated
gross profits from interest margins, mortality and other elements of
performance under the contracts. Amortization may be adjusted periodically to
reflect differences between actual experience and original assumptions, with
any resulting changes reflected in current operating results. The amounts
deferred and amortized were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
(Dollars in millions) 1998 1997 1996
- - ----------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Deferred ............................................... $ 532.7 $ 393.8 $ 334.7
Less amortized ......................................... (297.6) (226.9) (225.4)
-------- -------- --------
Increase in deferred policy acquisition costs ......... $ 235.1 $ 166.9 $ 109.3
======== ======== ========
</TABLE>
Separate Accounts
Certain assets from tax-sheltered annuity ("TSA") contracts are in
separate accounts that are pooled investment funds of securities. Investment
income and realized gains and losses on these accounts accrue directly to the
contractholders. Assets, carried at market value, and liabilities of the
separate accounts are shown separately in the Consolidated Balance Sheets. The
assets of the separate accounts are legally segregated and are not subject to
claims that arise out of any other business of UNUM.
Accounting for Participating Individual Life Insurance
Participating policies issued by the former Union Mutual Life Insurance
Company ("Union Mutual") prior to its conversion to a stock life insurance
company on November 14, 1986, will remain participating as long as they remain
in force. A Participation Fund Account ("PFA") was established for the benefit
of all Union Mutual's individual participating life and annuity policies and
contracts.
The assets of the PFA provide for the benefit, dividend and certain
expense obligations of the participating individual life insurance policies and
annuity contracts. This line of business participates in the experience of the
PFA and its operations have been excluded from the Consolidated Statements of
Income. The PFA represented approximately 2.4% and 2.7% of consolidated assets
and 2.9% and 3.3% of consolidated liabilities at December 31, 1998, and 1997,
respectively.
Other Policyholder Funds
Other policyholder funds are liabilities for investment-type contracts and
represent customer deposits plus interest credited to those deposits at various
rates.
Liabilities for Restructuring Activities
Liabilities for restructuring activities are recorded when management,
prior to the balance sheet date, commits to execute an exit plan that will
result in the incurral of costs that have no future economic benefit or
approves
36
<PAGE>
UNUM Corporation and Subsidiaries
a plan of termination and communicates sufficient detail of the plan to
employees. Liabilities for restructuring activities are included in other
liabilities in the Consolidated Balance Sheets.
Income Taxes
The provision for income taxes includes amounts currently payable and
deferred income taxes, which result from differences between financial
reporting and tax bases of assets and liabilities and are measured using
enacted tax rates and laws. A valuation allowance is established for deferred
tax assets when it is more likely than not that an amount will not be realized.
Foreign Currency Translation
Foreign subsidiaries' balance sheet and income statement accounts
expressed in local functional currencies are translated into U.S. dollars using
ending and quarterly average exchange rates, respectively. The resulting
translation adjustments are reported in a separate component of stockholders'
equity.
Recognition of Premium Revenues and Related Expenses
Group insurance and individual disability premiums are recognized as
income when due. Benefits and expenses are matched with earned premiums to
result in recognition of profits over the life of the contracts. This
association is accomplished by recording a provision for future policy benefits
and unpaid claims and claim expenses and by amortizing deferred policy
acquisition costs.
For retirement and universal life products, premium and other policy fee
revenue consist of charges for the cost of insurance, policy administration and
surrenders assessed during the period. Charges related to services to be
performed in the future are deferred until earned. The amounts received in
excess of premium and fees are recorded as deposits and included in other
policyholder funds in the Consolidated Balance Sheets. Benefits and expenses
include benefit claims in excess of related account balances, interest credited
at various rates and amortization of deferred policy acquisition costs.
Premium for UNUM's Lloyd's of London ("Lloyd's") business is based on
participation in the individual syndicate underwriting years that generate
premiums over a three-year period of time. UNUM has participated in the Lloyd's
market for a number of years and uses its historical experience plus information
obtained from its managing agents to estimate revenues, losses, expenses, and
the related assets and liabilities. Additionally, an independent acturial review
of the syndicates' open reserves is performed annually and management
periodically reviews its estimates as information is received from the Lloyd's
syndicates. Any resulting adjustment to the estimates is reflected in the
current results.
Reinsurance
UNUM, through its life insurance subsidiaries, is involved in both the
cession and assumption of reinsurance with other companies. Risks are reinsured
with other companies to reduce UNUM's exposure to large losses and permit
recovery of a portion of direct losses. UNUM remains liable to the insured for
the payment of policy benefits if the reinsurers cannot meet their obligations
under the reinsurance agreements. Deferred policy acquisition costs, premiums,
benefits and expenses are stated net of reinsurance ceded to other companies.
UNUM evaluates the financial condition of its reinsurers and monitors
concentrations of credit risk to minimize exposure to significant losses from
reinsurer insolvencies.
Changes in Accounting Estimates
During fourth quarter 1997, certain reinsurance pools managed by UNUM's
wholly-owned subsidiary, Duncanson & Holt Inc. ("D&H"), received new claim
information from ceding insurance enterprises about certain older pool years
and completed an analysis of recent claims experience deterioration. As a
result of these factors, certain pools have strengthened claim reserves. The
impact to UNUM in fourth quarter 1997 from these pool claim reserve increases
was an $11.7 million reduction in fee income and a $6.7 million increase in
benefits to policyholders reported in the Special Risk Insurance segment,
reducing net income by $12.0 million in the Consolidated Statement of Income.
Accounting Pronouncements Adopted
Effective January 1, 1998, UNUM adopted Financial Accounting Standards
("FAS") No. 130, "Reporting Comprehensive Income," which established standards
for reporting and display of comprehensive income and its components in a
financial statement with the same prominence as other financial statements.
Comprehensive income is defined as net income adjusted for changes in
stockholders' equity resulting from events other than net income
37
<PAGE>
or transactions related to an entity's capital instruments. UNUM has
reclassified financial statements for earlier years as required by FAS 130.
Effective January 1, 1998, UNUM adopted FAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which established standards
for reporting information about operating segments. Generally, FAS 131 requires
that financial information about operating segments be reported on the basis
that is used internally for evaluating performance. UNUM has determined that
its current segment reporting structure meets the requirements of FAS 131 and
no restatement of financial information is needed. Additional segment
information has been disclosed as required under FAS 131.
Effective January 1, 1998, UNUM adopted FAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which revised
disclosure requirements for employers' pension and other retiree benefits. FAS
132 did not change the measurement or recognition of pension or other
postretirement benefit plans. UNUM has restated disclosures for earlier years
presented, as required under FAS 132.
Effective January 1, 1998, UNUM implemented Statement of Position ("SOP")
98-1, "Accounting for Costs of Computer Software Developed or Obtained for
Internal Use," which provided guidance on accounting for the costs of
developing or obtaining computer software for internal use. The adoption of SOP
98-1 did not have a material effect on UNUM's results of operations or
financial position.
Effective December 31, 1997, UNUM adopted FAS No. 128, "Earnings Per
Share," ("EPS") which changed the computation of EPS and requires dual
presentation of "basic" and "diluted" EPS. FAS 128 superseded Accounting
Principles Board ("APB") Opinion No. 15, "Earnings Per Share."
Effective December 31, 1997, UNUM adopted FAS No. 129, "Disclosures of
Information About Capital Structure," which consolidated disclosure
requirements related to the type and nature of securities contained in an
entity's capital structure. FAS 129 did not add to or change any of UNUM's
disclosures.
Effective January 1, 1997, UNUM adopted FAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which established accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
The statement provides guidance for recognition or derecognition of assets and
liabilities, focusing on the concepts of control and extinguishment. The
adoption of FAS 125 did not have a material effect on UNUM's results of
operations or financial position.
New Accounting Pronouncements
In October 1998, the Accounting Standards Executive Committee ("AcSEC")
issued SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance
Contracts That Do Not Transfer Insurance Risk," which provides guidance on
applying the deposit method of accounting to insurance and reinsurance
contracts that do not transfer insurance risk. UNUM is required to adopt SOP
98-7 effective January 1, 2000. Previously issued financial statements should
not be restated unless the SOP is adopted prior to the effective date and
during an interim period. The adoption of SOP 98-7 is not expected to have a
material impact on UNUM's results of operations, liquidity or financial
position.
In June 1998, the Financial Accounting Standards Board ("FASB") issued FAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivatives embedded in other contracts, and for hedging
activities. FAS 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative under FAS 133 depends on the intended use of the derivative and its
hedging designation. UNUM is required to adopt FAS 133 effective January 1,
2000. UNUM has not yet determined the impact FAS 133 will have on its results
of operations, liquidity or financial position.
In December 1997, the AcSEC issued SOP 97-3, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments," which provides guidance
on accounting for the recognition and measurement of liabilities for guaranty
funds and other insurance-related assessments. UNUM is required to adopt SOP
97-3 effective January 1, 1999. Previously issued financial statements should
not be restated unless the SOP is adopted prior to the effective date and
during an interim period. The adoption of SOP 97-3 is not expected to have a
material impact on UNUM's results of operations, liquidity or financial
position.
38
<PAGE>
UNUM Corporation and Subsidiaries
NOTE 2. INVESTMENTS
The following tables summarize the components of investment income, net
realized investment gains (losses) and changes in unrealized gains (losses),
net:
Investment Income
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
(Dollars in millions) 1998 1997 1996
- - ----------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Fixed maturities available for sale $ 541.8 $ 539.1 $ 642.2
Mortgage loans ......................................... 105.0 110.6 112.1
Real estate ............................................ 24.9 23.1 20.0
Policy loans ........................................... 8.3 6.7 10.2
Other long-term investments ............................ 0.1 2.8 7.3
Short-term investments ................................. 19.7 17.6 52.3
-------- -------- --------
Gross investment income ............................... 699.8 699.9 844.1
Less investment expenses ............................... (14.3) (14.5) (16.3)
Less investment income on participating individual
life insurance policies and annuity contracts ......... (24.1) (24.4) (24.5)
-------- -------- --------
Investment income ..................................... $ 661.4 $ 661.0 $ 803.3
======== ======== ========
</TABLE>
Net Realized Investment Gains (Losses)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
(Dollars in millions) 1998 1997 1996
- - ----------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Gross realized investment gains:
Fixed maturities available for sale .............. $ 18.6 $ 17.1 $ 22.0
Equity securities available for sale ............. 0.1 0.7 --
Mortgage loans, real estate and other ............ 10.4 6.6 18.2
------- ------- -------
Gross realized investment gains ................. 29.1 24.4 40.2
------- ------- -------
Gross realized investment losses:
Fixed maturities available for sale .............. (2.8) (14.6) (29.2)
Mortgage loans, real estate and other ............ (5.3) (13.4) (7.6)
------- ------- -------
Gross realized investment losses ................ (8.1) (28.0) (36.8)
------- ------- -------
Net realized investment gains (losses) ......... $ 21.0 $ (3.6) $ 3.4
======= ======== =======
</TABLE>
Change in Unrealized Gains (Losses), Net
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
(Dollars in millions) 1998 1997 1996
- - ------------------------------------------------------ ----------- ----------- ------------
<S> <C> <C> <C>
Fixed maturities available for sale ............... $ 129.0 $ 131.9 $ (265.9)
Equity securities available for sale .............. -- 2.1 3.4
Marketable securities held in trust ............... 83.9 127.8 --
Unpaid claims adjustment .......................... (160.7) (68.4) 92.5
Deferred taxes .................................... (15.2) (64.3) 39.2
-------- -------- --------
Total change in unrealized gains (losses), net, as
included in stockholders' equity ................ $ 37.0 $ 129.1 $ (130.8)
======== ======== ========
</TABLE>
UNUM's fixed maturities are reported at fair value as a result of being
classified as available for sale. Accordingly, the related liability for unpaid
claims and claims expenses is adjusted to reflect the changes that would have
been necessary if the related fixed maturities were sold at their fair value
and the proceeds were reinvested at current yields. At December 31, 1998, 1997
and 1996, the net unrealized gain on available for sale fixed maturities was
$546.9 million, $417.9 million and $286.0 million, respectively, and the
related unpaid claims adjustment was $397.8 million, $237.1 million and $168.7
million, respectively.
39
<PAGE>
The marketable securities held in trust relate to the individual
disability reinsurance agreement (see Note 6 "Reinsurance"). Changes in fair
value of the assets and the related adjustment to unpaid claims are reflected
in the equity section of UNUM's Consolidated Balance Sheets.
Fixed Maturities
The amortized cost and fair value of fixed maturities available for sale
at December 31, 1998, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in millions) Cost Gains Losses Value
- - ------------------------------------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government ........................ $ 21.6 $ 3.0 $ -- $ 24.6
U.S. States and municipalities ......... 1,189.4 56.1 -- 1,245.5
Foreign governments .................... 341.9 53.4 -- 395.3
Public utilities ....................... 1,408.8 121.6 (7.8) 1,522.6
Corporate bonds ........................ 4,280.5 334.3 (16.3) 4,598.5
Redeemable preferred stocks ............ 0.2 -- -- 0.2
Mortgage-backed securities ............. 107.6 2.6 -- 110.2
--------- ------- ------- ---------
Total ................................ $ 7,350.0 $ 571.0 $ (24.1) $ 7,896.9
========= ======= ======= =========
</TABLE>
The amortized cost and fair value of fixed maturities available for sale
at December 31, 1997, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in millions) Cost Gains Losses Value
- - ------------------------------------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government ........................ $ 48.8 $ 2.5 $ -- $ 51.3
U.S. States and municipalities ......... 942.5 36.6 (0.2) 978.9
Foreign governments .................... 359.6 40.3 -- 399.9
Public utilities ....................... 1,369.0 89.0 (0.1) 1,457.9
Corporate bonds ........................ 3,964.6 248.7 (1.1) 4,212.2
Redeemable preferred stocks ............ 3.5 -- (0.2) 3.3
Mortgage-backed securities ............. 205.0 2.4 -- 207.4
--------- ------- ------- ---------
Total ................................ $ 6,893.0 $ 419.5 $ (1.6) $ 7,310.9
========= ======= ======== =========
</TABLE>
The amortized cost and fair value of fixed maturities available for sale
at December 31, 1998, 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.
<TABLE>
<CAPTION>
Amortized Fair
(Dollars in millions) Cost Value
- - --------------------------------------------------- ----------- -------------
<S> <C> <C>
Due in one year or less ........................ $ 384.7 $ 390.2
Due after one year through five years .......... 2,623.4 2,811.4
Due after five years through ten years ......... 3,690.8 3,982.1
Due after ten years ............................ 543.5 603.0
--------- ----------
7,242.4 7,786.7
Mortgage-backed securities .................... 107.6 110.2
--------- ----------
Total ........................................ $ 7,350.0 $ 7,896.9
========= ==========
</TABLE>
Equity Securities
The fair values, which also represent carrying amounts, and the cost of
equity securities available for sale were as follows at December 31, 1998:
<TABLE>
<CAPTION>
Fair
(Dollars in millions) Cost Value
- - ----------------------------------------------------- ---------- ----------
<S> <C> <C>
Common stocks:
Industrial, miscellaneous and all other ......... $ 21.3 $ 31.0
====== ======
</TABLE>
40
<PAGE>
UNUM Corporation and Subsidiaries
Gross unrealized investment gains on equity securities available for sale
totaled $10.5 million, $9.6 million, and $7.5 million at December 31, 1998,
1997 and 1996, respectively. Gross unrealized investment losses were not
material at December 31, 1998, 1997 and 1996.
Mortgages
At December 31, 1998, and 1997, impaired loans totaled $20.7 million and
$43.4 million, respectively. Included in the $20.7 million were $9.0 million of
loans which had a related allowance for probable losses of $2.4 million, and
loans of $11.7 million which had no related allowance for probable losses.
Included in the $43.4 million of impaired loans at December 31, 1997, were
$20.8 million of loans which had a related allowance for probable losses of
$3.5 million, and loans of $22.6 million which had no related allowance for
probable losses.
Restructured mortgage loans amounted to $14.5 million and $39.3 million at
December 31, 1998, and 1997, respectively. Troubled debt restructurings
represent loans that are refinanced with terms more favorable to the borrower.
Interest lost on restructured loans was not material for the years ended
December 31, 1998, 1997, or 1996.
Real Estate and Other
Real estate acquired in satisfaction of debt cumulatively amounted to
$62.4 million at December 31, 1998. Real estate held for sale amounted to $15.6
million at December 31, 1998, and $23.3 million at December 31, 1997.
Real estate with a depreciated cost of $5.2 million and no bonds or
mortgages were non-income producing for the twelve months ended December 31,
1998. Interest lost on these investments was not material in 1998, 1997, or
1996.
UNUM was committed at December 31, 1998, to purchase fixed maturities and
other invested assets in the amount of $45.7 million.
NOTE 3. ALLOWANCE FOR PROBABLE LOSSES ON INVESTED ASSETS AND REAL ESTATE
HELD FOR SALE
Changes in the allowance for probable losses on mortgage loans and real
estate held for sale were as follows:
<TABLE>
<CAPTION>
Balance at Balance
beginning at end
(Dollars in millions) of year Additions Deductions of year
- - --------------------------------------- ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998
Mortgage loans .................... $ 33.9 $ 2.3 $ (3.4) $ 32.8
Real estate held for sale ......... 17.8 (1.0) -- 16.8
------- ------ ------ -------
Total ............................ $ 51.7 $ 1.3 $ (3.4) $ 49.6
======= ====== ====== =======
Year Ended December 31, 1997
Mortgage loans .................... $ 37.7 $ 3.3 $ (7.1) $ 33.9
Real estate held for sale ......... 14.8 3.0 -- 17.8
------- ------ ------ -------
Total ............................ $ 52.5 $ 6.3 $ (7.1) $ 51.7
======= ====== ====== =======
Year Ended December 31, 1996
Mortgage loans .................... $ 39.2 $ 1.0 $ (2.5) $ 37.7
Real estate held for sale ......... 19.1 (0.4) (3.9) 14.8
------- ------ ------ -------
Total ............................ $ 58.3 $ 0.6 $ (6.4) $ 52.5
======= ====== ====== =======
</TABLE>
Additions represent charges to net realized investment gains (losses) less
recoveries, and deductions represent reserves released upon disposal or
restructuring of the related asset.
NOTE 4. RESERVES
Reserves for Future Policy Benefits
Reserves for future policy benefits are calculated by the net-level
premium method and are based on UNUM's expected morbidity, mortality and
interest rate assumptions at the time a policy is issued. These reserves
represent the portion of premiums received, accumulated with interest and held
to provide for claims that have not yet been incurred. The reserve assumptions
are periodically reviewed and compared with actual experience and may be
41
<PAGE>
revised if it is determined that future expected experience is worse than the
reserve assumptions. Reserves for group insurance policies consist primarily of
prepaid premiums. The interest rates used in the calculation of reserves for
future policy benefits at December 31, 1998, and 1997, principally ranged from
4.5% to 9.5% and from 5.0% to 9.5%, respectively. Certain reserve calculations
are based on variable interest rates within these ranges.
Reserves for Unpaid Claims and Claim Expenses
Unpaid claims and claim expense reserves represent the amount estimated to
fund claims that have been reported but not settled and claims incurred but not
reported. Reserves for unpaid claims are estimated based on UNUM's historical
experience and other actuarial assumptions that consider the effects of current
developments, anticipated trends, risk management programs and renewal actions.
Many factors affect actuarial calculations of claim reserves, including but not
limited to, interest rates and current and anticipated incidence rates,
recovery rates, and economic and societal conditions. Management periodically
performs a review of reserve estimates and assumptions. If management
determines reserve assumptions need to be updated, any resulting adjustment to
reserves is reflected in current operations. Given that insurance products
contain inherent risks and uncertainties, the ultimate liability may be more or
less than such estimates indicate.
The interest rates used in the calculation of disability claims reserves
at December 31, 1998, and 1997, were principally as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- -------------
<S> <C> <C>
Group long term disability (North America) ........... 7.76% 7.84%
Group long term disability (United Kingdom) .......... 8.95% 9.27%
Individual disability ................................ 5.5% to 8.95% 7.0% to 9.5%
</TABLE>
The interest rate used to discount the disability reserves is a composite
of the yields on assets specifically identified with each block of business.
The discount rate may decline further depending on the interest rate
environment. UNUM periodically adjusts prices on both existing and new business
in an effort to mitigate the impact of the current interest rate environment.
See Note 17 "Proposed Merger with Provident and Combined Condensed Pro Forma
Financial Statements (Unaudited)," for a discussion of potential impacts to
reserve discount rates subsequent to the proposed merger.
For other accident and health business, reserves are based on projections
of historical claims run-out patterns.
Activity in the liability for unpaid claims and claim expenses is
summarized as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
- - ---------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Balance at January 1 ................ $ 5,944.4 $ 5,334.7 $ 4,871.8
Reinsurance receivables ............. (636.6) (381.3) (125.6)
Effect of unrealized gains .......... (236.9) (170.1) (261.2)
---------- ---------- ----------
Net balance at January 1 ............ 5,070.9 4,783.3 4,485.0
Incurred related to:
Current year ....................... 2,356.7 1,897.6 1,692.0
Prior years ........................ 399.6 373.1 365.4
---------- ---------- ----------
Total incurred ...................... 2,756.3 2,270.7 2,057.4
Paid related to:
Current year ....................... 747.2 622.2 535.8
Prior years ........................ 1,481.9 1,360.9 1,223.3
---------- ---------- ----------
Total paid .......................... 2,229.1 1,983.1 1,759.1
Net balance at December 31 .......... 5,598.1 5,070.9 4,783.3
Reinsurance receivables ............. 846.0 636.6 381.3
Effect of unrealized gains .......... 397.1 236.9 170.1
---------- ---------- ----------
Balance at December 31 .............. $ 6,841.2 $ 5,944.4 $ 5,334.7
========== ========== ==========
</TABLE>
42
<PAGE>
UNUM Corporation and Subsidiaries
The components of the unpaid claims and claims expenses incurred and
related to prior years were as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
- - ---------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Interest accrued on reserves .......................... $ 309.3 $ 300.5 $ 292.9
Changes in reserve estimates and assumptions .......... 90.5 89.8 35.6
Changes in foreign exchange rates ..................... (0.2) (17.2) 36.9
-------- -------- --------
Incurred related to prior years ....................... $ 399.6 $ 373.1 $ 365.4
======== ======== ========
</TABLE>
The additional reserves for amounts incurred related to prior years were
primarily the result of interest accrued on reserves, changes in reserve
estimates and assumptions of interest rates, morbidity, mortality and expense
costs, and changes in foreign exchange rates, primarily related to the
disability reserves of UNUM's United Kingdom-based affiliate, UNUM Limited. Due
to the long term claims payment pattern of some of UNUM's businesses, certain
reserves, particularly disability, are discounted for interest.
In connection with entering into the merger agreement with Provident in
fourth quarter 1998 (see Note 17 "Proposed Merger with Provident and Combined
Condensed Pro Forma Financial Statements (Unaudited),") UNUM anticipates that as
a result of integrating its claim operations with Provident, there will be a
temporary increase in claim costs. UNUM expects that fewer claims will be
resolved or closed during the period when the two companies are planning and
implementing the integration of their claims organizations. The average length
of duration for claims will increase, resulting in more benefit payments being
paid for a relatively short time until the consolidation of operations is
complete. During the fourth quarter of 1998, UNUM increased its unpaid claims
reserve by $59.4 million related to the expected increase in disability claim
duration on existing claims. This reserve increase was reflected as a $49.0
million increase in benefits to policyholders and a $10.4 million reduction in
fee income in the Disability Insurance segment. The reduction in fee income
represents increased reserves for the United States non-cancellable individual
disability business that is reinsured with Centre Life Reinsurance Limited
("Centre Re"). See Note 6 "Reinsurance" for further information on the
reinsurance transaction. Management will continue to evaluate the impacts of the
merger on disability claims experience and the assumptions around expected
disability claims duration that were used in the determination of the claims
reserve increase.
NOTE 5. SALE OF TAX-SHELTERED ANNUITY BUSINESS
On October 1, 1996, UNUM America and First UNUM closed the sale of their
respective TSA businesses to The Lincoln National Life Insurance Company and
Lincoln Life & Annuity Company of New York ("Lincoln"), both subsidiaries of
Lincoln National Corporation. The sale involved approximately 1,700 group
contractholders and assets under management of approximately $3.3 billion. The
contracts were initially reinsured on an indemnity basis. Upon consent of the
TSA contractholders and participants, the contracts are considered reinsured on
an assumption basis, legally releasing UNUM America and First UNUM from future
contractual obligation to the respective contractholders and participants.
To effect the sale of the TSA business, UNUM transferred into a trust
account held for the benefit of Lincoln approximately $2,690 million of assets.
UNUM has recorded a deposit asset in its Consolidated Balance Sheet
representing the assets which support the TSA contracts of those
contractholders and participants that have not given consent for assumption
reinsurance. At December 31, 1998, the deposit asset related to the TSA
transaction was approximately $257 million.
The sale resulted in a deferred pretax gain of $80.8 million, of which
$72.6 million was recognized in income during 1997, reported as fees and other
income, in proportion to contractholder and participant consents for assumption
reinsurance. Additionally, the results for the year ended December 31, 1997,
included $47.0 million of net income and basic and diluted net income per
common share of $0.34 and $0.33, respectively, related to the recognition of
the deferred pretax gain. Through December 31, 1998, consent for assumption
reinsurance has been provided by TSA contractholders and participants owning
substantially all assets under management.
43
<PAGE>
NOTE 6. REINSURANCE
UNUM, through its life insurance subsidiaries, is involved in both the
cession and assumption of reinsurance with other companies.
UNUM periodically monitors the financial condition, and in some cases
holds substantial collateral as security in the form of funds, securities
and/or letters of credit to mitigate credit risk from its reinsurers. At
December 31, 1998, approximately 85% of the reinsurance receivable balance was
due from five reinsurers. These reinsurers had a rating of A or better (Strong)
from Standard & Poor's--a recognized insurance rating agency. Additionally,
UNUM holds collateral in the form of securities comprising 53% of the balance.
On October 23, 1996, UNUM announced the execution of a definitive
reinsurance agreement between UNUM America and Centre Re, a Bermuda-based
reinsurance specialist, for reinsurance coverage of the active life reserves of
UNUM America's existing United States non-cancellable individual disability
("non-cancellable ID") block of business. This agreement reinsures all claims
incurred on or after January 1, 1996. The agreement follows UNUM's announcement
in late 1994 that it would no longer market the non-cancellable form of ID
coverage in the United States.
The agreement is a finite reinsurance arrangement. Under the agreement,
Centre Re has an obligation to absorb losses within a defined risk layer. UNUM
retains the risk for all experience up to Centre Re's defined risk layer, or
attachment point. Once the attachment point is reached, Centre Re assumes the
risk for all experience up to a contractually defined risk limit. Any
experience above Centre Re's defined risk limit reverts back to UNUM. As of
December 31, 1998, the attachment point had not been reached.
The following discloses the various layers in the agreement at December
31, 1998:
<TABLE>
<CAPTION>
(Dollars in millions)
- - -------------------------------------------
<S> <C>
Net GAAP reserves ...................... $486
UNUM's experience layer ................ 249
----
Attachment point ...................... 735
Centre Re's defined risk layer ......... 235
----
Defined risk limit .................... $970
====
</TABLE>
Under the agreement, UNUM funds a trust account equal to the amount of
UNUM's exposure (i.e., up to the attachment point). These trust assets provide
security (i.e., collateral) to Centre Re for amounts due by UNUM prior to
reaching the attachment point. UNUM acts as the investment manager for 80% of
the assets in the trust with Centre Re managing the remaining 20%.
The actual operating results of the non-cancellable ID block of business
are accounted for under FAS No. 113 "Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts." This reinsurance agreement
transfers risk and is accounted for as reinsurance in accordance with the
requirements of FAS 113 for reinsurance of long-duration contracts. The
underlying operating results of the reinsured block are reflected in fees and
other income and realized gains and losses from sales of assets are reflected
as realized investment gains (losses) in UNUM's Consolidated Statements of
Income.
UNUM has a deposit asset at December 31, 1998, of approximately $419
million reflected in the Consolidated Balance Sheet. The deposit asset is
comprised of UNUM's experience layer and unrealized gains or losses on the
marketable securities held in the trust. Unrealized gains or losses on
marketable securities held in the trust and the related effects on claim
reserves are reflected as unrealized gains or losses in the equity section of
UNUM's Consolidated Balance Sheets.
UNUM controls the management of the business, including premium collection
and claims management, under this agreement. All premiums, less amounts for
management expenses and claim payments, are transferred to the trust account on
a quarterly basis.
In 1994 UNUM recorded a premium deficiency reserve strengthening related
to the non-cancellable ID block of business in conjunction with its
announcement to exit the non-cancellable form of ID coverage in the United
44
<PAGE>
UNUM Corporation and Subsidiaries
States. The reinsurance fees due Centre Re are expenses that were not
contemplated when reserves were strengthened in 1994. Since these fees would
have caused the non-cancellable ID block of business to be in a loss situation,
UNUM recognized a pretax charge of $49.7 million in the fourth quarter of 1996.
The charge represented the present value of the anticipated minimum amount of
fees to be paid to Centre Re under the agreement for a period of six years.
UNUM has the right, but no obligation, to recapture the business after six
years without penalty. UNUM paid $9.4 million in fees to Centre Re during 1998
and 1997.
The effect of all reinsurance on premiums earned and written for the years
ended December 31, 1998, 1997 and 1996, was as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
- - ------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Premiums earned:
Direct .................... $ 3,935.2 $ 3,384.9 $ 3,005.0
Assumed ................... 320.8 281.6 252.9
Ceded ..................... (414.3) (402.8) (106.4)
---------- ---------- ----------
Premiums earned .......... $ 3,841.7 $ 3,263.7 $ 3,151.5
========== ========== ==========
Premiums written:
Direct .................... $ 3,918.9 $ 3,390.2 $ 3,039.2
Assumed ................... 380.4 330.3 289.3
Ceded ..................... (431.0) (436.3) (131.0)
---------- ---------- ----------
Premiums written ......... $ 3,868.3 $ 3,284.2 $ 3,197.5
========== ========== ==========
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, recoveries
recognized under reinsurance agreements offset benefits to policyholders by
$376.3 million, $309.7 million and $90.8 million, respectively.
NOTE 7. BUSINESS RESTRUCTURING AND OTHER CHARGES
Business Restructuring
Charges of $6.0 million and $7.2 million were recorded in 1997 and 1996,
respectively. The charge in 1997 was related to a management and field office
reorganization within the North American reinsurance operations, and consisted
of $4.0 million of lease exit costs, $1.4 million of severance related costs,
and $0.6 million of abandoned assets. The charge in 1996 was related to the
merger of Commercial Life Insurance Company ("Commercial Life") into UNUM
America. As of December 31, 1998, a liability was no longer being carried in
the Consolidated Balance Sheet for these charges.
Intangible Asset Write-offs and Future Loss Reserves
In connection with the merger of Commercial Life into UNUM America, the
sale of the tax-sheltered annuity business (see Note 5 "Sale of Tax-Sheltered
Annuity Business"), as well as UNUM's continued efforts to strengthen its focus
on its core products, the company initiated a review of certain products, which
resulted in the recognition of pretax charges totaling $39.4 million during
1996. The charges included the write-off of certain intangible assets and the
establishment of a reserve for the present value of expected future losses on
certain discontinued products. These charges reduced income before income taxes
by $13.1 million in the Disability Insurance segment, $11.3 million in the
Special Risk Insurance segment, and $15.0 million in the Retirement Products
segment. On an after tax basis the charges reduced net income by $26.3 million.
45
<PAGE>
NOTE 8. NOTES PAYABLE
Notes payable consisted of the following at December 31:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997
- - ------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Short-term debt:
Commercial paper, with weighted-average interest rates of
5.5% and 6.3% in 1998 and 1997, respectively ................. $ 85.7 $ 50.9
Other notes payable, with weighted-average interest rates of
1.1% and 1.0% in 1998 and 1997, respectively ................. 8.9 7.7
Medium-term notes payable, due 1999, with interest
rates of 7.0% ................................................ 21.4 68.0
Other borrowing with an effective interest rate of
5.8%, $168.3 million issued net of unamortized offering
costs of $0.8 million and $0.6 million in 1998 and 1997,
respectively ................................................. 167.5 --
-------- --------
Total short-term debt ....................................... 283.5 126.6
-------- --------
Long-term debt:
Long-term notes payable, due 2028, with an interest rate of
6.75%, $250.0 million issued, net of unamortized hedging
costs and issuance fees of $21.9 million..................... 228.1 --
Medium-term notes payable, due 2000 to 2028, with interest
rates ranging from 5.9% to 7.5% .............................. 202.7 174.2
Monthly income debt securities, due 2025, with an interest rate
of 8.8%, $172.5 million issued net of unamortized offering
costs of $5.0 million and $5.2 million in 1998 and 1997,
respectively ................................................. 167.5 167.3
Other borrowing, due 2007, with an effective interest rate of
5.8%, $168.3 million issued net of unamortized offering costs
of $0.8 million and $0.6 million in 1998 and 1997,
respectively ................................................. -- 167.7
-------- --------
Total long-term debt ........................................ 598.3 509.2
-------- --------
Total notes payable ......................................... $ 881.8 $ 635.8
======== ========
</TABLE>
At December 31, 1998, UNUM Corporation had a $500 million committed
revolving credit facility that expires on October 1, 2001. UNUM's commercial
paper program is supported by the revolving credit facility and is available
for general liquidity needs, capital expansion, acquisitions 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.
On December 15, 1998, UNUM issued $250 million notes due December 15,
2028, with interest payable semi-annually. The notes are redeemable, in whole
or in part, at the option of UNUM at any time at or above par. UNUM used the
net proceeds to repay short term-debt and for general corporate purposes.
On December 4, 1997, UNUM borrowed [British pound]100 million ($168.3
million) through a private placement with an investor in the United Kingdom. The
borrowing has an expected term of 10 years. Upon issuance of the [British
pound]100 million borrowing, UNUM entered into currency and interest rate swap
agreements that converted the principal amount to U.S. dollars and the interest
obligation on the debt from a pound sterling based fixed rate to a U.S. dollar
fixed rate. The borrowing is callable by either party over the life of the
agreement, under certain circumstances. UNUM anticipates the debt will be called
in 1999. Therefore, UNUM is currently evaluating various financing alternatives
and intends to substitute a debt instrument to match the maturity and terms of
the interest rate swap agreement.
Aggregate maturities of notes payable are as follows: 1999--$283.5 million;
2000--$60.0 million; 2001--none; 2002--$35.0 million, 2003 and
thereafter--$503.3 million.
46
<PAGE>
UNUM Corporation and Subsidiaries
In the normal course of business, UNUM enters into letters of credit,
primarily to satisfy capital requirements related to certain subsidiary
transactions. UNUM had outstanding letters of credit of $149.7 million and
$84.6 million at December 31, 1998, and 1997, respectively, which are not
reflected in the Consolidated Balance Sheets.
NOTE 9. EMPLOYEE BENEFIT AND INCENTIVE PLANS
Pension Plans
In 1997, UNUM changed the measurement date for the valuation of its
pension plan and postretirement benefit plan assets and actuarially determined
obligations from December 31, to September 30. The change in measurement date
had no effect on 1997 or prior years' net pension and periodic postretirement
benefit costs.
Changes in the projected benefit obligation and plan assets, as determined
by the plan's actuaries were as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997
- - ---------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Benefit obligation at beginning of period ................... $ 230.4 $ 203.2
Service cost--benefits earned during the period ............. 14.0 9.0
Interest cost ............................................... 16.7 11.4
Actuarial loss .............................................. 12.1 7.6
Benefits paid ............................................... (2.0) (0.8)
-------- --------
Benefit obligation at end of period ........................ 271.2 230.4
-------- --------
Fair value of plan assets at beginning of period ............ 324.2 267.7
Actual return on plan assets ................................ 26.9 61.4
Employer contributions ...................................... 11.2 --
Benefits paid ............................................... (2.0) (0.8)
Other transfers ............................................. -- (4.1)
-------- --------
Fair value of plan assets at end of period ................. 360.3 324.2
-------- --------
Projected benefit obligation less than plan assets .......... 89.1 93.8
Unrecognized net actuarial gain ............................. (66.8) (86.8)
Unrecognized prior service cost ............................. (23.1) (25.8)
Unamortized net obligation .................................. 1.1 1.5
-------- --------
Prepaid (accrued) pension cost ............................. $ 0.3 $ (17.3)
======== =========
</TABLE>
At December 31, 1998, the plan assets included 448,784 shares of UNUM
Corporation common stock with a fair value of $26.2 million. The amount of
dividends paid on these shares during 1998 was not material.
Net pension cost included the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
(Dollars in millions) 1998 1997 1996
- - ------------------------------------------------------------ ---------- ----------- ----------
<S> <C> <C> <C>
Service cost--benefits earned during the period ......... $ 14.0 $ 12.9 $ 13.5
Interest cost ........................................... 16.7 15.2 15.1
Expected return on assets ............................... (30.3) (24.0) (19.5)
Recognized prior service cost ........................... (2.7) (2.6) (1.0)
Recognized net actuarial gain ........................... (4.5) (1.4) --
Amortization of net obligation .......................... 0.4 0.4 0.3
------- -------- -------
Net pension cost (benefit) ............................. $ (6.4) $ 0.5 $ 8.4
======== ======== =======
</TABLE>
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 6.75% and 4.25%, respectively, at September
30, 1998, and 7.25% and 4.75%, respectively, at September 30, 1997. The
expected long-term rate of return on plan assets was 9.25% in 1998 and 9.0% in
1997 and 1996. Prior year service costs are being amortized on a straight-line
basis over expected employment periods for active employees.
47
<PAGE>
Postretirement Health Care and Life Insurance Benefits
UNUM provides certain health care and life insurance benefits for retired
employees and covered dependents. The underlying plans are not currently
funded. The cost of these plans was $4.5 million, $4.3 million and $10.3
million for the years ended December 31, 1998, 1997 and 1996, respectively. At
December 31, 1998, and 1997, the liability associated with these plans was
$85.8 million and $83.2 million, respectively.
Retirement Savings Plans
Effective January 1, 1997, UNUM introduced a single retirement savings
plan for all domestic employees. Dependent upon the employee's annual earnings,
eligible employees may contribute up to 15% of their annual compensation,
including incentive payouts. UNUM matches 100% of the employee's contribution
up to 3% of the employee's compensation, plus 50% of the employee's
contribution on the next 2% of the employee's compensation, to a maximum of 4%
after eligibility requirements of one year of service is met. Employees become
100% vested immediately upon becoming eligible. Expense for the retirement
savings plans amounted to $10.3 million, $9.6 million and $8.4 million in 1998,
1997 and 1996, respectively.
Annual Incentive Plans
UNUM has several annual incentive plans for certain employees and
executive officers that provide additional compensation based on achievement of
predetermined annual corporate and affiliate financial and non-financial goals.
In 1998, 1997 and 1996, expense for these plans was $33.8 million, $37.2
million and $41.7 million, respectively.
NOTE 10. STOCKHOLDERS' EQUITY
Common Stock
Effective November 23, 1998, UNUM's Board of Directors rescinded the
Company's stock repurchase program, related to the announced merger with
Provident Companies, Inc.
On March 14, 1997, UNUM's Board of Directors authorized a two-for-one
common stock split, subject to shareholder approval of a proposal to increase
the number of authorized shares of common stock. On May 9, 1997, UNUM's
shareholders approved an increase in the number of authorized shares of common
stock to 240 million from 120 million. The stock split was completed on June 2,
1997, through the distribution of one additional share for each share of stock
already issued, to holders of record on May 19, 1997. Accordingly, all numbers
of common shares and per common share data were restated to reflect the stock
split. Par value of $10.0 million was transferred to common stock from
additional paid-in capital in second quarter 1997.
Changes in the number of common shares outstanding were as follows:
<TABLE>
<CAPTION>
(Shares in millions) 1998 1997 1996
- - --------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Shares outstanding, beginning of year .......... 138.3 143.6 146.0
Shares issued under stock plans ................ 1.7 1.8 1.4
Shares reacquired .............................. (1.3) (7.1) (3.8)
------ ------ ------
Shares outstanding, end of year ................ 138.7 138.3 143.6
====== ====== ======
</TABLE>
Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income
available to common stockholders by the weighted-average number of common
shares outstanding. Diluted EPS is computed by dividing net income available to
common stockholders by the weighted-average number of common shares outstanding
while giving effect to all dilutive potential common shares outstanding.
The approximate number of shares used to calculate EPS was as follows:
<TABLE>
<CAPTION>
(Shares in millions) 1998 1997 1996
- - ---------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Weighted-average number of shares outstanding for
basic EPS ...................................... 138.3 139.9 145.9
Effect of dilutive securities ................... 3.1 3.0 2.1
----- ----- -----
Weighted-average number of shares outstanding for
diluted EPS .................................... 141.4 142.9 148.0
===== ===== =====
</TABLE>
48
<PAGE>
UNUM Corporation and Subsidiaries
The following number of outstanding options to purchase shares were
excluded from the diluted weighted-average calculation as the options' exercise
prices were greater than the average market prices.
<TABLE>
<CAPTION>
(Options in millions) 1998 1997 1996
- - ---------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Antidilutive options outstanding .......... 1.7 0.2 0.1
=== === ===
</TABLE>
Stock Options
At December 31, 1998, UNUM had four stock-based compensation plans, which
are described below. Had compensation cost for options issued under UNUM's four
stock-based compensation plans been determined based on the fair value at the
grant dates, UNUM's net income and earnings per share would have been reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(Dollars in millions except per common share data) 1998 1997 1996
- - ---------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Net income:
As reported ..................................... $ 363.4 $ 370.3 $ 238.0
Pro forma ....................................... $ 360.8 $ 361.4 $ 231.9
Earnings per common share:
Basic
As reported .................................... $ 2.63 $ 2.65 $ 1.63
Pro forma ...................................... $ 2.61 $ 2.58 $ 1.59
Diluted
As reported .................................... $ 2.57 $ 2.59 $ 1.61
Pro forma ...................................... $ 2.55 $ 2.53 $ 1.57
</TABLE>
The fair value of each option granted is estimated on the date of grant
using a modified Black-Scholes option-pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ---------------
<S> <C> <C> <C>
Dividend yield ........................... 1.0% 1.0% 1.5%
Expected stock price volatility .......... 23.8% to 26.4% 22.7% to 24.2% 23.1% to 24.8%
Risk-free interest rate .................. 4.2% to 5.3% 5.7% to 6.8% 5.2% to 6.5%
Expected option lives .................... 4 to 8 years 4 to 8 years 4 to 8 years
</TABLE>
Forfeiture rates are updated based on actual experience, and the
cumulative adjustments made to the current year's pro forma amounts. Because
some options vest over several years and additional awards generally are made
each year, the pro forma amounts above may not be representative of the effects
on net income for future years.
The 1987 Executive Stock Option Plan ("Option Plan") provided for granting
to officers and key employees options to purchase UNUM Corporation common stock
over ten years. Options were granted at the discretion of the Compensation
Committee of the Board of Directors ("the Committee") and had vesting schedules
of one to four years. The number of shares subject to options under the Option
Plan could not exceed 5.0 million. Grants are no longer made under this plan.
The 1990 Long-Term Stock Incentive Plan ("Incentive Plan") provides for
granting of options to officers, non-employee directors of UNUM Corporation and
key employees, to purchase UNUM Corporation common stock over ten years.
Options may be granted annually at the discretion of the Committee and vest in
one to five years.
The Incentive Plan also provides for granting to key officers restricted
stock awards whose vesting is contingent upon UNUM achieving prescribed
financial performance objectives, with the exception of 11,600 shares granted
in 1996 and 10,000 shares granted in 1995, which will vest upon the grantee
remaining in UNUM's employ for a specified period of time or a defined change
in control. Plan participants are entitled to voting rights on their respective
shares at grant. The compensation cost related to restricted stock grants was
not material in 1998, 1997 and 1996.
The unamortized 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.
49
<PAGE>
The number of shares subject to issuance under the Incentive Plan cannot
exceed 13.6 million, including both options and shares of restricted stock. At
December 31, 1998, 1997 and 1996, 1,617,701 shares, 1,603,580 shares, and
1,385,036 shares, respectively, were available for grant under the Incentive
Plan.
The 1996 Long-Term Stock Incentive Plan ("1996 Incentive Plan") provides
for granting of options to officers, non-employee directors of UNUM
Corporation, and key employees to purchase UNUM Corporation common stock over
ten years. The 1996 Incentive Plan also provides for granting to key officers
restricted stock awards whose vesting is contingent upon achieving prescribed
financial performance objectives or upon the grantee remaining in UNUM's employ
for a specified period of time. Options and restricted stock may be granted
annually at the discretion of the Committee. The number of shares subject to
issuance cannot exceed 7.0 million. At December 31, 1998, 1997 and 1996,
3,389,860 shares, 5,003,480 shares and 6,990,000 shares, respectively, were
available for grant under the 1996 Incentive Plan.
The 1998 Goals Stock Option Plan ("1998 Option Plan") provides for
granting to all eligible employees up to 300 options to purchase UNUM
Corporation common stock. The options will vest to the employee nine years from
the date of grant. Vesting may be accelerated to an earlier date at the
discretion of the plan administrator. Grants of 166,200 shares and 205,000
shares were made in 1997 and 1996 , respectively. No 1998 Option Plan grants
were made in 1998, and no further grants can be made under this plan.
For all of UNUM's stock-based compensation plans, the exercise price of
each option is not less than 100% of the fair market value of UNUM's stock on
the date of grant.
In connection with the pending merger (see Note 17 "Proposed Merger with
Provident and Combined Condensed Pro Forma Financial Statements (Unaudited),")
outstanding options which have otherwise not vested will do so as a result of a
change in control as defined by the plans. For outstanding options related to
the Option Plan, Incentive Plan and the 1998 Option Plan, a change in control
will occur at the time shareholders vote in favor of the merger. Outstanding
options related to the 1996 Incentive Plan will vest upon the consummation of
the merger.
A summary of the status of UNUM's four stock-based compensation plans as
of December 31, 1998, 1997 and 1996, and changes during the years then ended
are presented below:
<TABLE>
<CAPTION>
Restricted
(Per share amounts are weighted-average) Options Stock
- - ------------------------------------------------------------ --------------- -------------
<S> <C> <C>
Outstanding at January 1, 1996 .......................... 10,395,268 284,400
1996 Activity:
Granted at $30.38 per share.............................. 2,161,380 --
Granted for restricted stock at $29.68 per share......... -- 186,600
Exercised at $18.86 per share............................ (1,274,522) --
Forfeited at $23.39 per share for options................ (543,482) (65,200)
---------- -------
Outstanding at December 31, 1996 ........................ 10,738,644 405,800
---------- -------
1997 Activity:
Granted at $39.18 per share.............................. 2,064,820 --
Granted for restricted stock at $37.75 per share......... -- 224,700
Exercised at $20.59 per share............................ (1,617,469) --
Forfeited at $26.88 per share for options................ (734,850) (128,800)
---------- --------
Outstanding at December 31, 1997 ........................ 10,451,145 501,700
---------- --------
1998 Activity:
Granted at $52.75 per share.............................. 1,659,455 --
Granted for restricted stock at $52.68 per share......... -- 124,660
Lapse of restrictions on restricted stock ............... -- (41,450)
Exercised at $22.88 per share............................ (1,642,846) --
Forfeited at $31.84 per share for options................ (363,916) (68,950)
---------- --------
Outstanding at December 31, 1998 ........................ 10,103,838 515,960
========== ========
</TABLE>
The weighted-average exercise price of options outstanding at December 31,
1998, 1997 and 1996, was $31.07, $26.32 and $22.93 per share, respectively.
50
<PAGE>
UNUM Corporation and Subsidiaries
The number and weighted-average exercise price of exercisable shares as of
December 31, 1998, 1997 and 1996, was 4,802,071 shares at $25.50 per share,
4,686,562 shares at $22.71 per share and 4,763,184 shares at $20.73 per share,
respectively.
The weighted-average fair value of options granted during the years ended
December 31, 1998, 1997 and 1996, was $12.88, $8.56 and $6.92, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- - ------------------------------------------------------------------------ ---------------------------------
Range of Number Weighted-Average Number
Exercise Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
- - -------------- ------------- ------------------ ------------------ ------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 10 to 15 412,222 1.83 $ 12.22 412,222 $ 12.22
16 to 24 2,976,487 5.59 19.78 1,367,806 20.20
25 to 37 3,323,867 6.03 28.62 2,483,938 27.85
38 to 58 3,391,262 8.50 45.68 538,105 38.27
- - ------------ --------- ---- -------- --------- --------
$ 10 to 58 10,103,838 6.63 $ 31.07 4,802,071 $ 25.50
========== =========
</TABLE>
Between 1991 and 1994, certain officers were granted limited stock
appreciation rights ("LSARs") in conjunction with their options for those
years. If a change in control of UNUM Corporation, as defined in the plans,
should occur, the option holder can exercise the LSAR. The LSARs were amended
such that the proposed merger with Provident would not be a change in control
of UNUM Corporation. An LSAR is meant to compensate an officer if the
associated options lose value due to a change in control by allowing the
officer to receive payment for the difference between the option exercise price
and the higher of (a) highest price paid per share in connection with the
change in control or (b) the highest fair market value per share as reported in
the Wall Street Journal at any time during the sixty day period preceding the
change of control. As an underlying stock option is exercised, the LSARs are
automatically canceled. At December 31, 1998, 1997 and 1996, there were 495,750
LSARs, 557,800 LSARs and 796,600 LSARs outstanding, respectively.
Preferred Stock Purchase Rights
UNUM adopted a Shareholder Rights Plan on March 13, 1992. Under the Plan,
each Right, under 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 Corporation common stock or
(2) a tender or exchange offer for 10% or more of UNUM Corporation common stock.
The Shareholder Rights Plan was amended in 1998 such that Provident, as a result
of the merger and related transactions contemplated by the merger, will not be
deemed to be an Acquiring Person as defined in the Rights Agreement. The Rights
expire at the close of business on March 13, 2002, unless earlier redeemed by
the Company under certain circumstances at a price of $0.01 per Right.
NOTE 11. DIVIDEND RESTRICTIONS
UNUM is subject to various state insurance regulatory restrictions that
limit the maximum amount of dividends available from its United States
domiciled insurance subsidiaries without prior approval. The amount available
under current law for payment of dividends during 1999 to UNUM Corporation from
all U.S. domiciled insurance subsidiaries without state insurance regulatory
approval is approximately $150 million. Dividends in excess of this amount may
only be paid with state insurance regulatory approval. The aggregate statutory
capital and surplus of the United States domiciled insurance subsidiaries of
UNUM Corporation was approximately $1,330 million and $1,186 million, at
December 31, 1998, and 1997, respectively. The aggregate statutory net
operating income, which excludes realized investment gains and losses net of
tax, of UNUM Corporation's United States domiciled insurance subsidiaries was
approximately $55 million, $227 million and $167 million for 1998, 1997 and
1996, respectively. State insurance regulatory authorities prescribe statutory
accounting practices that differ in certain respects from generally accepted
accounting principles. The significant differences relate to deferred
acquisition costs, deferred income taxes, non-admitted asset balances, required
investment risk reserves and reserve calculation assumptions. UNUM Corporation
also has the ability to draw a dividend from its United Kingdom-based
affiliate, UNUM Limited. Such dividends are limited in amount, based on
insurance company legislation in the United Kingdom, which requires a minimum
solvency margin. The amount available under current law for payment of
dividends to UNUM Corporation from UNUM Limited during 1999 is approximately
$20 million.
51
<PAGE>
NOTE 12. INCOME TAXES
A reconciliation of income taxes computed by applying the federal income
tax rate to income before income taxes and the consolidated income tax expense
charged to operations follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
(Dollars in millions) 1998 1997 1996
- - ---------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Tax at federal statutory rate of 35% ......... $ 181.1 $ 187.7 $ 119.6
Tax-exempt income ............................ (26.9) (20.3) (18.8)
Other ........................................ (0.2) (1.3) 2.8
-------- -------- --------
Income taxes ................................. $ 154.0 $ 166.1 $ 103.6
======== ======== ========
</TABLE>
Deferred income tax liabilities and assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
(Dollars in millions) 1998 1997
- - -------------------------------------------- ----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs ......... $ 292.0 $ 239.4
Policy reserve adjustments ................ 175.7 118.0
Net unrealized gains ...................... 204.1 144.0
Value of business acquired ................ 25.9 23.2
Invested assets ........................... 28.3 12.0
Other ..................................... 48.0 12.2
-------- --------
Gross deferred tax liabilities ........... 774.0 548.8
-------- --------
Deferred tax assets:
Alternative minimum tax credits ........... 35.2 --
Net realized losses ....................... 17.6 6.9
Postretirement benefits ................... 30.4 26.6
Deferred gains ............................ 1.6 2.2
Accrued liabilities ....................... 34.5 13.3
Other ..................................... 37.1 10.6
-------- --------
Gross deferred tax assets ................ 156.4 59.6
Less valuation allowance ................... 8.2 7.0
-------- --------
Net deferred tax assets .................. 148.2 52.6
-------- --------
Net deferred tax liability ................. $ 625.8 $ 496.2
======== ========
</TABLE>
UNUM has not provided for a deferred tax liability of approximately $11
million that arose prior to 1984, which related to the policyholders' surplus
accounts of UNUM's life insurance subsidiaries. Under current law, management
believes the conditions under which such taxes would be paid to be remote.
UNUM's Consolidated Statements of Income for 1998, 1997 and 1996, included
the following amounts of income subject to foreign taxation and the related
foreign income tax expense:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
(Dollars in millions) 1998 1997 1996
- - ------------------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
Pretax income subject to foreign
taxation .......................... $ 46.2 $ 46.7 $ 27.4
======= ======= =======
Foreign income tax expense (credit):
Current ........................... $ 6.7 $ 23.3 $ 10.4
Deferred .......................... 9.8 (7.6) 1.8
------- ------- -------
Total ............................ $ 16.5 $ 15.7 $ 12.2
======= ======= =======
</TABLE>
52
<PAGE>
UNUM Corporation and Subsidiaries
UNUM subsidiaries had operating loss carryforwards totaling $15.3 million
and alternative minimum tax credit carryforwards totaling $35.2 million as of
December 31, 1998. The operating loss carryforwards will expire, if not
utilized, in 1999 through 2004; the alternative minimum tax credits do not
expire.
NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values are based on quoted market prices, when available. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. These valuation
techniques require management to develop a significant number of assumptions,
including discount rates and estimates of future cash flow. Derived fair value
estimates cannot be substantiated by comparison to independent markets or to
disclosures by other companies with similar financial instruments. These fair
value disclosures do not purport to be the amount that could be realized in
immediate settlement of the financial instrument.
The following table summarizes the carrying amounts and fair values of
UNUM's financial instruments at December 31, 1998, and 1997:
<TABLE>
<CAPTION>
1998 1997
----------------------------- -----------------------------
Carrying Fair Carrying Fair
(Dollars in millions) Amount Value Amount Value
- - --------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Fixed maturities available for sale ..... $ 7,896.9 $ 7,896.9 $ 7,310.9 $ 7,310.9
Equity securities available for sale..... 31.0 31.0 30.7 30.7
Mortgage loans .......................... 1,303.4 1,425.2 1,131.0 1,243.7
Policy loans ............................ 137.6 137.6 128.5 128.5
Short-term investments .................. 216.2 216.2 124.5 124.5
Cash .................................... 80.5 80.5 56.8 56.8
Accrued investment income ............... 167.4 167.4 160.3 160.3
Deposit assets .......................... 729.7 729.7 688.3 688.3
Financial liabilities:
Other policyholder funds: ...............
Investment-type insurance contracts: .....
With defined maturities ................. $ 69.3 $ 84.6 $ 141.6 $ 159.3
With no defined maturities .............. 259.5 257.4 332.0 328.0
Individual annuities and
supplementary contracts not
involving life contingencies ............ 63.9 63.9 67.1 67.1
Notes payable ........................... 881.8 944.0 635.8 656.0
Off-balance sheet financial
instruments:
Interest rate futures contracts ......... -- 110.7 -- --
</TABLE>
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
Fixed Maturities Available for Sale: Fair values for fixed maturities are
based on quoted market prices, where available. If quoted market prices are
not available, fair values are estimated using values obtained from
independent pricing services or, in the case of private placements, are
estimated by discounting expected future cash flows using a current market
rate applicable to the yield, credit quality and maturity of the investments.
Equity Securities Available for Sale: Fair values for equity securities
available for sale are based on quoted market prices and are reported in the
Consolidated Balance Sheets at these values.
Mortgage Loans: Fair values for mortgage loans are estimated based on
discounted cash flow analyses using interest rates currently being offered for
similar mortgage loans to borrowers with similar credit ratings and
maturities. Mortgage loans with similar characteristics are aggregated for
purposes of the calculations.
Policy Loans, Short-term Investments, Cash, Accrued Investment Income and
Deposit Assets: Fair values for these instruments approximate the carrying
amounts reported in the Consolidated Balance Sheets.
Investment-type Insurance Contracts: Fair values for liabilities under
investment-type insurance contracts with defined maturities are estimated
using discounted cash flow calculations based on interest rates that would be
53
<PAGE>
offered currently for similar contracts with maturities consistent with those
remaining for the contracts being valued. Fair values for liabilities under
investment-type insurance contracts with no defined maturities are the amounts
payable on demand after surrender charges at the balance sheet date.
The estimated fair values of liabilities under all insurance contracts
(investment-type and other than investment-type) are taken into consideration
in UNUM's overall management of interest rate risk, which minimizes exposure
to changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
Individual Annuities and Supplementary Contracts not Involving Life
Contingencies: Fair values approximate the carrying amounts reported in other
policyholder funds in the Consolidated Balance Sheets.
Notes Payable: Fair values of short-term borrowings approximate the carrying
amount. Fair values of long-term notes are estimated using discounted cash
flow analyses based on UNUM's current incremental borrowing rates for similar
types of borrowing arrangements.
Off-Balance Sheet Financial Instruments: Fair value for off-balance sheet
financial instruments are based on current settlement values.
NOTE 14. DERIVATIVE FINANCIAL INSTRUMENTS
UNUM periodically uses options, futures, forward exchange contracts and
interest rate swaps, which are common derivative financial instruments, to
hedge certain risks associated with anticipated purchases and sales of
investments, anticipated debt issuance and certain payments denominated in
foreign currencies, primarily British pounds sterling, Canadian dollars and
Japanese yen. These derivative financial instruments are used to protect UNUM
from the effect of market fluctuations in interest and exchange rates between
the contract date and the date on which the hedged transaction occurs.
Additionally, UNUM uses swap agreements to convert foreign currency based debt
instruments to U.S. dollars and to convert variable rate debt to a fixed rate.
In using these instruments, UNUM is subject to the off-balance-sheet
credit risk that the counterparties of the transactions will fail to perform as
contracted. UNUM manages this risk by only entering into contracts with highly
rated institutions and listed exchanges. UNUM does not hold or issue derivative
financial instruments for the purpose of trading.
Historically, all positions UNUM has taken in derivative contracts have
qualified for hedge accounting in accordance with the criteria established by
FAS 52, "Foreign Currency Translation," and FAS 80, "Accounting for Futures
Contracts." Upon entering a derivative contract, UNUM uses this criteria to
evaluate the correlation of risk protection provided by a derivative contract
to the risk created by market fluctuations to ensure hedge accounting is
appropriate for the contract. Accordingly, gains or losses related to
qualifying hedges of firm commitments or anticipated transactions involving
investment purchases and debt issuance are deferred and recognized as an
adjustment to the carrying amount of the underlying asset or liability when the
hedged transaction occurs. Gains or losses related to qualifying hedges of
anticipated transactions involving the sale of investments are deferred and
recognized in income when the hedged transaction occurs. No gains or losses
related to qualifying hedges of anticipated transactions involving payments
denominated in foreign currencies are recorded if the hedged transaction is
likely to occur.
The amount of any deferred gains or losses on outstanding interest rate
futures contracts, which require daily cash settlement, are included in fixed
maturities in UNUM's Consolidated Balance Sheets. The fair values of any
outstanding forward exchange rate contracts, options and swap agreements, which
do not require daily cash settlement, are not recognized in UNUM's Consolidated
Balance Sheets.
Any resulting gains or losses from early termination of a derivative
designated as a hedge are deferred and recognized in income or as an adjustment
of the carrying amount of the underlying asset or liability when the hedged
transaction occurs. Any gains or losses that result when the designated item is
extinguished, such as maturity, sale, or termination, or when the hedged
transaction is no longer likely to occur, are included in income in the period
in which the extinguishment takes place or it is known that the hedged
anticipated transaction will not occur.
On December 4, 1997, UNUM borrowed [British pound]100 million ($168.3
million) through a private placement with an investor in the United Kingdom (see
Note 8 "Notes Payable"). Upon issuance of the [British pound]100 million
borrowing, UNUM entered into currency and interest rate swap agreements that
converted the principal amount to U.S. dollars and
54
<PAGE>
UNUM Corporation and Subsidiaries
the interest obligation on the debt from a pound sterling based fixed rate to a
U.S. dollar fixed rate. No gains or losses on the swap agreements, which
qualify for hedge accounting, are recorded while the related debt is
outstanding. These swap agreements expire in December 2007 and have notional
amounts that equal the principal amount of the loan.
In addition to the swap agreements discussed previously, UNUM had open
interest rate futures contracts at December 31, 1998, with notional amounts of
$111.0 million to hedge anticipated cash flows in 1999. These futures contracts
had a related net unrealized loss of $0.3 million at December 31, 1998. Other
than the swap agreements discussed previously, UNUM had no other open
derivative financial instruments at December 31, 1997.
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, 1998. In some instances, these
proceedings include claims for punitive damages and similar types of relief in
unspecified or substantial amounts, in addition to amounts for alleged
contractual liability or other compensatory damages. In the opinion of
management, the ultimate liability, if any, arising from this litigation is not
expected to have a material adverse effect on the consolidated financial
position, operating results or liquidity 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
was based on a claim for a deduction in certain prior tax years for $652
million in cash and stock distributed to policyholders in connection with the
1986 conversion of Union Mutual Life Insurance Company to a stock company. UNUM
fully paid, and provided for in prior years' financial statements, the tax at
issue in this litigation. On May 23, 1996, the District Court issued its
decision that the distribution in question was not a deductible expenditure. On
December 2, 1997, the United States Court of Appeals affirmed the decision of
the District Court denying UNUM's claim for refund. UNUM filed a petition
requesting that the United States Supreme Court review the decision of the
United States Court of Appeals, which was denied October 5, 1998; no further
appeal is available.
NOTE 16. SEGMENT INFORMATION
UNUM's four reportable operating segments include: Disability Insurance,
Special Risk Insurance, Colonial Products and Retirement Products. Each
operating segment represents a product grouping based on the similarity of the
products in such areas as risk-relief, economic characteristics, market
potential and the specific markets being targeted for these products. The
Disability Insurance segment includes disability products offered in North
America, the United Kingdom and Japan including: group long term disability,
group short term disability, long term care, individual disability and
disability reinsurance operations. The Special Risk Insurance segment includes
group life, accidental death and dismemberment, travel and voluntary accident
insurance, special risk reinsurance operations and other special risk insurance
products. The Colonial Products segment includes Colonial Life & Accident
Insurance Company and affiliates, which offer payroll-deducted, voluntary
employee benefit products, including accident and sickness, disability, cancer
and life insurance. The Retirement Products segment includes products no longer
actively marketed by UNUM including: tax-sheltered annuities, guaranteed
investment contracts, deposit administration accounts, 401(k) plans, individual
life and group medical insurance. In addition, UNUM records transactions that
are generally non-insurance related in Corporate. Interest expense is reported
by Corporate and totaled $49.9 million, $42.4 million and $40.7 million in
1998, 1997 and 1996, respectively.
UNUM's markets for its insurance products are the United States, its
principal market, Canada, the United Kingdom, the Pacific Rim and Argentina.
Through its affiliates, UNUM is the leading provider of group long term
disability insurance, its principal product, in the United States and the
United Kingdom. Products are marketed through sales personnel, independent
contractors and brokers, and specialty agents. UNUM targets sales of its
disability products to executive, administrative and management personnel, and
other professionals such as educators, consultants, health care providers,
accountants and engineers.
UNUM evaluates performance and allocates resources based on pretax
operating income, which is defined as income (loss) before income taxes
exclusive of realized investment gains (losses) and special items. Realized
investment gains (losses) are excluded from management's evaluation of segment
performance as management believes the volatility in gains and losses associated
with the selling of invested assets in the financial markets is not
representative of ongoing operations. Special items are excluded from
management's evaluation of segment performance as management considers them as
being not representative of ongoing operations and believes a discussion of the
results on a pretax operating income basis provides a better understanding of
the results of ongoing operations. The accounting polices of the operating
segments are the same as those described in Note 1, "Summary of Significant
Accounting Policies."
55
<PAGE>
Investment income and net realized investment gains and losses are
allocated to the segments based on designation of ownership of assets
identified to the products in each segment. Operating expenses are allocated to
the segments based on direct association with a product whenever possible. If
the expense cannot be readily associated with a particular product, the costs
are allocated based on ratios of the relative time spent, extent of usage or
varying volume of work performed for each segment.
Summarized financial information for the four reportable operating
segments and Corporate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
(Dollars in millions) 1998 1997 1996
- - ------------------------------------------ ------------- ------------- -------------
<S> <C> <C> <C>
Premiums:
Disability Insurance .................... $ 2,125.9 $ 1,816.5 $ 1,889.9
Special Risk Insurance .................. 1,159.1 915.5 748.2
Colonial Products ....................... 552.7 525.4 493.7
Retirement Products ..................... 4.0 6.3 19.7
---------- ---------- ----------
Total premiums ......................... $ 3,841.7 $ 3,263.7 $ 3,151.5
========== ========== ==========
Investment Income:
Disability Insurance .................... $ 473.8 $ 471.1 $ 468.8
Special Risk Insurance .................. 78.7 70.1 57.3
Colonial Products ....................... 65.8 57.6 47.6
Retirement Products ..................... 39.0 55.5 214.4
Corporate ............................... 4.1 6.7 15.2
---------- ---------- ----------
Total investment income ................ $ 661.4 $ 661.0 $ 803.3
========== ========== ==========
Deferred acquisition cost amortization:
Disability Insurance .................... $ 64.8 $ 52.1 $ 87.3
Special Risk Insurance .................. 143.3 94.0 53.9
Colonial Products ....................... 89.5 80.7 72.5
Retirement Products ..................... -- 0.1 --
---------- ---------- ----------
Total amortization ..................... $ 297.6 $ 226.9 $ 213.7
========== ========== ==========
Pretax operating income (loss):
Disability Insurance .................... $ 348.3 $ 315.8 $ 278.4
Special Risk Insurance .................. 159.4 124.8 90.2
Colonial Products ....................... 105.1 98.8 92.7
Retirement Products ..................... 1.0 4.7 13.6
Corporate ............................... (58.0) (51.8) (37.5)
---------- ---------- ----------
Total pretax operating income .......... 555.8 492.3 437.4
Taxes on pretax operating income ......... 167.6 150.6 135.7
---------- ---------- ----------
Operating income ....................... $ 388.2 $ 341.7 $ 301.7
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
(Dollars in millions) 1998 1997 1996
- - ---------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Identifiable Assets:
Disability Insurance ............ $ 9,683.4 $ 8,546.6 $ 7,846.8
Special Risk Insurance .......... 2,268.2 1,821.6 1,410.0
Colonial Products ............... 1,519.4 1,334.7 1,094.1
Retirement Products ............. 966.3 1,115.9 4,478.8
Corporate ....................... 374.5 254.0 396.7
Individual Participating Life and
Annuity ......................... 371.1 367.3 354.0
----------- ----------- -----------
Total assets ................... $ 15,182.9 $ 13,440.1 $ 15,580.4
=========== =========== ===========
</TABLE>
56
<PAGE>
UNUM Corporation and Subsidiaries
Information concerning principal geographic areas is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
(Dollars in millions) 1998 1997 1996
- - ----------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Geographic information on premiums:
United States .................... $ 3,391.7 $ 2,938.1 $ 2,900.4
Foreign countries ................ 450.0 325.6 251.1
---------- ---------- ----------
Total premiums .................. $ 3,841.7 $ 3,263.7 $ 3,151.5
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
(Dollars in millions) 1998 1997 1996
- - ------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Geographic information on income
before income taxes:
United States ...................... $ 473.3 $ 497.5 $ 315.2
Foreign countries .................. 44.1 38.9 26.4
-------- -------- --------
Total income before income taxes .. $ 517.4 $ 536.4 $ 341.6
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
(Dollars in millions) 1998 1997 1996
- - -------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Geographic information on identifiable
assets:
United States ....................... $ 13,703.7 $ 11,941.7 $ 14,239.8
Foreign countries ................... 1,479.2 1,498.4 1,340.6
----------- ----------- -----------
Total assets ....................... $ 15,182.9 $ 13,440.1 $ 15,580.4
=========== =========== ===========
</TABLE>
UNUM's long-lived assets are not material to the total consolidated assets
and are not presented by geographic region.
The following is provided to reconcile certain financial information for
the reportable segment totals to consolidated totals and provide a description
of the reconciling items:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
(Dollars in millions) 1998 1997 1996
- - --------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Deferred acquisition cost amortization:
Total amortization for reportable
segments ................................... $ 297.6 $ 226.9 $ 213.7
Special item -- deferred acquisition
cost write-offs (a) ........................ -- -- 11.7
-------- -------- --------
Total consolidated amortization ........... $ 297.6 $ 226.9 $ 225.4
======== ======== ========
Income before income taxes:
Total pretax operating income for
reportable segments and Corporate .......... $ 555.8 $ 492.3 $ 437.4
Realized investment gains (losses) ......... 21.0 (3.6) 3.4
Special items:
Disability claims reserve
increase (b) ............................ (59.4) -- --
TSA deferred gain recognition (c) ......... -- 72.6 --
Reorganization costs (a) .................. -- (6.5) --
Reinsurance pool results (d) .............. -- (18.4) --
Individual disability reinsurance
fees (e) ................................. -- -- (49.7)
Write-offs and future loss
reserves (a) ............................ -- -- (39.4)
Merger and integration costs (f) .......... -- -- (10.1)
-------- -------- --------
Total consolidated income before
income taxes ............................ $ 517.4 $ 536.4 $ 341.6
======== ======== ========
</TABLE>
57
<PAGE>
As previously discussed, management's evaluation of segment performance
excludes realized investment gains (losses) and special items. The following
describes or references the special items that reconcile total segment amounts
to total consolidated amounts:
(a) See Note 7 "Business Restructuring and Other Charges." The $13.1
million charge in the Disability Insurance segment included an $11.7
million write-off of deferred acquisition costs. Additionally, $0.5
million of direct costs, primarily relocation expenses, were recognized
during fourth quarter 1997.
(b) See Note 4 "Reserves."
(c) See Note 5 "Sale of Tax-Sheltered Annuity Business."
(d) See the Changes in Accounting Estimates section of Note 1 "Summary of
Significant Accounting Policies."
(e) See Note 6 "Reinsurance."
(f) During third quarter 1996, actions related to the merger of Commercial
Life into UNUM America resulted in a $10.1 million increase in operating
expenses for Corporate.
NOTE 17. PROPOSED MERGER WITH PROVIDENT AND COMBINED CONDENSED PRO FORMA
FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited pro forma combined condensed financial statements
and explanatory notes are presented to show the impact on the historical
financial positions and results of operations of UNUM and Provident of the
planned merger under the "pooling of interests" method of accounting. The
unaudited pro forma combined condensed financial statements combine the
historical financial information of UNUM and Provident as of December 31, 1998,
and for the years ended December 31, 1998, 1997 and 1996. The unaudited pro
forma combined condensed statements of income give effect to the merger as if
it had been completed at the beginning of the earliest period presented. The
unaudited pro forma combined condensed balance sheet assumes the merger was
completed on December 31, 1998.
On November 22, 1998, UNUM entered into an agreement with Provident,
pursuant to which UNUM and Provident will merge under the name UNUMProvident.
Under the merger agreement, each outstanding share of Provident common stock
will be reclassified and converted into 0.73 of a share of UNUMProvident common
stock and each outstanding share of UNUM common stock will be converted into one
share of UNUMProvident common stock. The merger will be accounted for as a
pooling of interests. The merger is subject to regulatory and UNUM stockholder
and Provident stockholder approval.
The unaudited combined condensed pro forma financial statements as of
December 31, 1998, and for each of the three years ended December 31, 1998,
1997 and 1996, are based on and derived from, and should be read in conjunction
with the UNUM and Provident historical consolidated financial statements and
related notes.
On the date the merger is completed or on an earlier date if required by
generally accepted accounting principles, UNUMProvident will record an expense
for merger related costs of approximately $210 million ($148 million net of
income taxes). These costs include amounts for severance and related costs,
early retirement, exit costs for duplicate facilities and asset impairments,
and merger related costs such as investment banker, legal and accountant fees.
The estimated merger related expenses represent management's best estimates
based on available information at this time. Actual charges may differ from
these estimates.
The unaudited pro forma financial statements are presented for comparative
purposes only and are not necessarily indicative of the results of operations
that would have been realized had the merger been completed during the periods
or as of the date for which the pro forma financial statements are presented,
nor are they necessarily indicative of the results of operations in future
periods or the future financial position of UNUMProvident.
58
<PAGE>
UNUM Corporation and Subsidiaries
UNUM/Provident Unaudited Combined Condensed Pro Forma Consolidated
Statements of Income (a)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
(Dollars and shares in millions except per common share data) 1998 1997 1996
- - --------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Revenues
Premium income ............................................. $ 6,189.1 $ 5,317.4 $ 4,327.2
Net investment income ...................................... 2,035.4 2,015.7 1,893.4
Net realized investment gains .............................. 55.0 11.5 (5.2)
Other income ............................................... 299.9 357.0 148.2
--------- --------- ----------
Total revenues ............................................ 8,579.4 7,701.6 6,363.6
Benefits and Expenses
Policyholder benefits ...................................... 5,509.8 4,880.4 4,204.0
Commissions ................................................ 826.5 716.2 555.2
Operating expenses ......................................... 1,462.2 1,286.7 1,087.1
Increase in deferred policy acquisition costs .............. (325.8) (236.0) (116.7)
Amortization of value of business acquired and
goodwill .................................................. 66.6 52.7 7.7
Interest and debt expense .................................. 119.9 84.9 58.5
---------- ---------- ----------
Total benefits and expenses ............................... 7,659.2 6,784.9 5,795.8
---------- ---------- ----------
Income before income taxes ................................. 920.2 916.7 567.8
Income taxes ............................................... 302.8 299.1 184.2
---------- ---------- ----------
Net income ................................................ 617.4 617.6 383.6
Preferred stock dividends .................................. 1.9 12.7 12.7
---------- ---------- ----------
Net income available to common shareholders ............... $ 615.5 $ 604.9 $ 370.9
========== ========== ==========
Net income per common share
Basic ..................................................... $ 2.60 $ 2.62 $ 1.75
Diluted ................................................... $ 2.54 $ 2.57 $ 1.72
========== ========== ==========
Average shares outstanding--basic (a) ...................... 237.0 230.7 212.4
Average shares outstanding--diluted (a) .................... 242.3 235.8 215.3
</TABLE>
(a) The above unaudited combined condensed pro forma consolidated statements of
income reflect the combined results of the operations of UNUM and Provident
for the periods presented. No adjustments have been made to arrive at net
income available to common shareholders. The pro forma combined basic and
diluted earnings per share for the respective periods presented are based
on the combined weighted-average number of common and dilutive potential
common shares and adjusted weighted-average shares of UNUM and Provident.
The number of weighted-average common shares and adjusted weighted-average
shares, including all dilutive potential common shares, reflect the
reclassification of Provident common stock on a 0.73 to 1.0 basis and the
conversion of each outstanding share of UNUM common stock into one share of
UNUMProvident common stock in the merger.
59
<PAGE>
UNUM Corporation and Provident Companies, Inc.
Unaudited Combined Condensed Pro Forma Balance Sheet
As of December 31, 1998
<TABLE>
<CAPTION>
Historical
------------------------------- UNUM/Provident
Pro Forma Pro Forma
UNUM Provident Adjustments Combined
-------------- -------------- ----------------- ---------------
(Dollars in millions)
- - -----------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Invested assets ...................... $ 9,837.7 $ 17,332.7 $ -- $ 27,170.4
Reinsurance receivables .............. 1,770.0 3,101.0 -- 4,871.0
All other assets ..................... 3,539.9 2,276.7 -- 5,816.6
Separate account assets .............. 35.3 377.7 -- 413.0
----------- ----------- --------- -----------
Total assets ........................ $ 15,182.9 $ 23,088.1 $ -- $ 38,271.0
=========== =========== ========= ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Policy liabilities, accruals and
unearned premiums ................... $ 9,201.4 $ 14,343.0 $ 230.0(b) $ 23,774.4
Other policyholders' funds ........... 875.4 3,227.3 -- 4,102.7
All other liabilities ................ 2,333.1 1,431.6 (80.0)(b) 3,684.7
Separate account liabilities ......... 35.3 377.7 -- 413.0
----------- ----------- --------- -----------
Total liabilities ................... 12,445.2 19,379.6 150.0 31,974.8
Company Obligated Mandatorily
Redeemable Preferred Securities
of Subsidiary Trust Holding
Soley Junior Subordinated Debt
Securities of the Company ........... -- 300.0 -- 300.0
----------- ----------- --------- -----------
Common stock ......................... 20.0 135.7 (131.9)(c) 23.8
Additional paid-in capital ........... 1,151.2 762.0 (954.0)(c) 959.2
Accumulated other comprehensive
income .............................. 229.0 685.7 -- 914.7
Retained earnings .................... 2,444.9 1,834.3 (150.0)(b) 4,129.2
Treasury stock ....................... (1,085.9) (9.2) 1,085.9 (c) (9.2)
Restricted stock deferred
compensation ........................ (21.5) -- -- (21.5)
----------- ----------- --------- -----------
Total stockholders' equity .......... 2,737.7 3,408.5 ( 150.0) 5,996.2
----------- ----------- --------- -----------
Total liabilities and stockholders'
equity ............................ $ 15,182.9 $ 23,088.1 $ -- $ 38,271.0
=========== =========== ========= ===========
</TABLE>
(b) UNUM and Provident are in the process of reviewing their accounting
policies and financial statement classifications. One aspect of this
preliminary review has indicated that UNUM's process and assumptions used
to calculate the discount rate for claim reserves of certain disability
businesses differs from that used by Provident. It has been determined
that Provident's process and assumptions are more appropriate in the
context of a combined entity. Upon completion of the merger, UNUM will
reduce the rates used to discount unpaid claims reserves for group long
term disability, individual disability and the disability businesses of
UNUM Limited. The preliminary estimates of discount rate reductions will
result in an estimated increase to UNUM's unpaid claims reserves upon
consummation of the merger of approximately $230 million ($150 million
after tax). This estimated merger related adjustment has not been
reflected in the unaudited combined condensed pro forma statements of
income and related per share calculations.
(c) The pro forma adjustments to common stock, additional paid-in capital and
treasury stock reflect the retirement of shares of UNUM common stock held
in treasury, the reduction in par value of Provident common stock from
60
<PAGE>
UNUM Corporation and Subsidiaries
one dollar to ten cents, and the reclassification of Provident common stock
on a 0.73 to 1.0 basis that results in 98.7 million shares issued to replace
the 135.2 million shares of Provident common stock held by Provident
stockholders on December 31, 1998, and the issuance to UNUM stockholders of
138.7 million shares of UNUMProvident common stock pursuant to the merger
(calculated by multiplying the number of shares of UNUM common stock
outstanding at December 31, 1998, of 138.7 million by the exchange ratio of
1.0 to 1.0 representing the number of shares UNUM stockholders will receive
for each share of UNUM common stock they own immediately prior to
consummation of the merger). The number of shares of UNUMProvident common
stock that will be issued after completion of the merger will be based on
the actual number of shares of UNUM common stock, and Provident common stock
(after reclassification on a 0.73 to 1.0 basis) outstanding at the effective
time of the merger.
NOTE 18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations
for 1998 and 1997:
<TABLE>
<CAPTION>
1998
(Dollars in millions, except per common share data) -----------------------------------------------------
4th 3rd 2nd 1st
<S> <C> <C> <C> <C>
Premiums ......................................... $ 983.9 $ 977.2 $ 962.2 $ 918.4
Investment income ................................ 168.0 164.9 165.2 163.3
Net realized investment gains .................... 8.4 7.2 2.3 3.1
Benefits to policyholders ........................ 779.9 717.2 710.0 679.1
Net income ....................................... 66.8 104.4 98.7 93.5
Basic net income per common share ................ 0.48 0.75 0.71 0.68
Diluted net income per common share .............. 0.47 0.74 0.70 0.66
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------------------------
4th 3rd 2nd 1st
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Premiums ....................................... $ 860.5 $ 833.8 $ 786.7 $ 782.7
Investment income .............................. 165.5 164.3 165.7 165.5
Net realized investment gains (losses) ......... (1.1) 2.7 (3.0) (2.2)
Benefits to policyholders ...................... 635.7 629.6 585.0 588.5
Net income ..................................... 76.2 91.5 87.6 115.0
Basic net income per common share .............. 0.55 0.66 0.63 0.81
Diluted net income per common share ............ 0.54 0.64 0.62 0.79
</TABLE>
61
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No disagreements with accountants on any matter of accounting principles
or practices or financial statement disclosure have been reported on a Form 8-K
during the past two years prior to the date of the most recent financial
statements.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. Directors of the Registrant
Set forth below is information about each director, including age,
position(s) held with UNUM, principal occupation, business history for at least
five years and other directorships held.
<TABLE>
<CAPTION>
Age (as of Term
Name March 31, 1999) Director Since Position(s) held Expires
- - -------------------------- ----------------- ---------------- ------------------------- --------
<S> <C> <C> <C> <C>
James F. Orr III 56 1986 Chairman, President and 1999
Chief Executive Officer
Gayle O. Averyt 65 1993 Director 2000
Robert E. Dillon, Jr. 67 1990 Director 1999
Gwain H. Gillespie 67 1991 Director 2000
Ronald E. Goldsberry 56 1993 Director 1999
Donald W. Harward 59 1990 Director 1999
George J. Mitchell 65 1995 Director 2001
Cynthia A. Montgomery 46 1990 Director 2000
James L. Moody, Jr. 67 1988 Director 2000
Lawrence R. Pugh 66 1988 Director 2001
Lois Dickson Rice 66 1993 Director 2001
John W. Rowe 53 1988 Director 2001
</TABLE>
Mr. Orr, Chairman, President and Chief Executive Officer, UNUM, was
elected Chairman of the Board of UNUM in February 1988. Additionally, he has
served as President and Chief Executive Officer since September 1987. Mr. Orr
joined UNUM in 1986. Mr. Orr also serves as a director of Nashua Corporation.
Mr. Averyt retired as Chairman of Colonial Companies, Inc. in December
1993, a post he had held since 1989. Additionally, Mr. Averyt served as
Chairman of Colonial Life & Accident Insurance Company from 1970 to December
1993.
Mr. Dillon retired as Executive Vice President of Sony Electronics Inc., a
New Jersey-based electronics firm, in December 1995, a post he had held since
1981.
Mr. Gillespie retired as Vice Chairman of UNUM in October 1992, a post he
had held since 1991. Mr. Gillespie joined UNUM in September 1988.
Dr. Goldsberry is Vice President of Global Service Business Strategy at
Ford Motor Company, a post he has held since January 1999. Previously, Dr.
Goldsberry served as Global Vice President and General Manager of Global Ford
Customer Service Operations from January 1997 to January 1999 and General
Manager of the Customer Service Division from February 1994 to December 1996. He
is also Chairman of UNC Ventures, Inc., a venture capital firm and serves as
director of Case Corporation.
Dr. Harward is President of Bates College in Maine, a post he has held
since October 1989.
Senator Mitchell associated with the firm of Verner, Liipfert, Bernhard,
McPherson & Hand, Washington, D.C., as special counsel in January 1995 and
associated with the firm of Preti, Flaherty, Beliveau & Pachios, Portland,
Maine, as senior counsel in April 1997. He also serves as an advisor to B.T.
Wolfensohn, an investment banking firm. At the request of the British and Irish
governments, he served as chairman of the peace negotiations in Northern
Ireland. Previously, he served as a United States senator from Maine from 1980
to 1994 and additionally as Senate
62
<PAGE>
UNUM Corporation and Subsidiaries
Majority Leader from 1989 to 1994. Senator Mitchell also serves as a director
or trustee of Federal Express Corporation, KTI, Inc., Staples, Inc., Starwood
Hotels and Resorts, Unilever PLC, The Walt Disney Company and Xerox
Corporation.
Ms. Montgomery is a professor of competition and strategy at Harvard
University Graduate School of Business Administration, a post she has held
since 1989, and was named Timken Professor of Business Administration in 1998.
She also serves as a director of Newell Co. and certain Merrill Lynch
mutual funds.
Mr. Moody retired as Chairman of Hannaford Bros. Co. ("Hannaford"), a
Maine-based food retailing company, in May 1997, a post he had held since 1984.
Mr. Moody joined Hannaford in 1959. He is also a director of Empire Company
Limited, IDEXX Laboratories, Inc., Penobscot Shoe Company, Staples, Inc. and
several funds of the Colonial Group of mutual funds.
Mr. Pugh retired as Chairman of VF Corporation, an apparel company in
Pennsylvania, in October 1998, a post he had held since 1983. Additionally, Mr.
Pugh served as Chief Executive Officer from 1983 to 1995. He is also a director
of Mercantile Stores Company, Inc. and Milliken & Company.
Ms. Dickson Rice is a guest scholar at The Brookings Institution, a post
she has held since October 1991. She also serves as a director of Fleet
Financial Group, Inc., HSB Group, Inc., International Multifoods Corporation
and The McGraw-Hill Companies.
Mr. Rowe is Chairman, President and Chief Executive Officer of Unicom
Corporation and its principal subsidiary, Commonwealth Edison Company, a post
he assumed in March 1998. Previously, Mr. Rowe was President and Chief
Executive Officer of New England Electric System from 1989 to February 1998. He
is also a director of Bank of Boston Corporation, First National Bank of
Boston and Wisconsin Central Transportation Corp.
B. Executive Officers of the Registrant
The executive officers of UNUM are as follows:
<TABLE>
<CAPTION>
Age (as of An Officer
Name March 30, 1999) Position held with UNUM Since
- - ----------------------- ----------------- --------------------------- -----------
<S> <C> <C> <C>
James F. Orr III 56 Chairman, President and 1986
Chief Executive Officer
Robert E. Broatch 50 Senior Vice President and 1996
Chief Financial Officer
Robert W. Crispin 52 Executive Vice President 1995
Peter J. Moynihan 55 Senior Vice President 1979
Kevin P. O'Connell 53 Executive Vice President 1987
Elaine D. Rosen 46 Executive Vice President 1983
Robert E. Staton* 52 President, Colonial 1993
</TABLE>
- - --------
*Denotes an officer of a subsidiary who is not an officer of UNUM but who is
considered an "executive officer" under regulations of the Securities and
Exchange Commission ("SEC").
The officers are elected annually and hold office until their respective
successors have been chosen and qualified, or until death, resignation or
removal. The UNUM Board may also appoint or delegate the appointment of
officers, assistant officers and agents as it may deem necessary for such
periods as the By-Laws, the UNUM Board, or the delegatee may prescribe.
Mr. Orr was elected Chairman of the Board of UNUM in February 1988. In
addition, he has served as President and Chief Executive Officer since
September 1987. Mr. Orr joined UNUM in 1986. He also serves as a director of
Nashua Corporation.
Mr. Broatch was elected Senior Vice President of UNUM in May 1996. In
addition, he was elected as Chief Financial Officer in September 1997. Prior to
joining UNUM in 1996, Mr. Broatch served as Senior Vice President of Finance at
Aetna Life & Casualty Company from 1993 until May 1996.
63
<PAGE>
Mr. Crispin was elected Executive Vice President of UNUM in January 1995.
In addition, he served as Chief Financial Officer from August 1995 until
September 1997. Prior to joining UNUM in 1995, Mr. Crispin served as Vice
Chairman and Chief Investment Officer of The Travelers Insurance Companies from
July 1991 to January 1995.
Mr. Moynihan was elected Senior Vice President of UNUM in September 1993
and Senior Vice President of UNUM America in October 1987. He joined UNUM
America in 1973.
Mr. O'Connell was elected Executive Vice President of UNUM in February
1996 and Executive Vice President of UNUM America in May 1995. Previously, he
served as Senior Vice President of UNUM America from November 1988 to May 1995.
He joined UNUM America in 1968.
Ms. Rosen was elected Executive Vice President of UNUM in May 1998 and
President of UNUM America in January 1997. Previously, she served as Executive
Vice President of UNUM America from May 1995 to December 1996 and as Senior
Vice President of UNUM America from November 1988 to May 1995. She joined UNUM
America in 1975.
Mr. Staton was elected President of Colonial in January 1997. Previously
he served as Chairman of Colonial from December 1993 to December 1996, and
additionally as Chief Executive Officer from July 1995 to December 1996.
Previously, he served as Senior Vice President from February 1990 to December
1993; General Counsel from August 1985 to November 1993; and Corporate
Secretary from February 1992 to August 1993. Colonial's parent company merged
with UNUM in March 1993.
Item 11. EXECUTIVE AND DIRECTOR COMPENSATION
The following Summary Compensation Table shows compensation paid by UNUM
Corporation and by UNUM America, a wholly-owned subsidiary of UNUM Corporation,
to the Chief Executive Officer and the other four most highly compensated
executive officers of UNUM during any of the past three fiscal years during
which such person served as an executive officer.
64
<PAGE>
UNUM Corporation and Subsidiaries
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
----------------------- ---------------------------------
Number of
Securities
Name and Incentive Restricted Underlying All Other
Principal Position Year Salary Payment(1) Stock Award (2) Options Compensation (5)
- - ------------------------------- ------ ----------- ------------ -------------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
James F. Orr III 1998 $860,000 $1,006,200 $ 0 (3) 400,000 (3) $ 20,000
Chairman, President and CEO 1997 $838,461 $1,142,000 $1,642,084 (4) 79,000 $ 20,000
1996 $739,923 $ 740,000 $ 912,600 (4) 82,400 $ 9,000
Robert W. Crispin 1998 $549,999 $ 426,900 $ 651,775 (4) 28,190 $ 20,000
Executive Vice President 1997 $540,384 $ 324,200 $ 687,384 (4) 33,200 $227,673
1996 $500,000 $ 363,000 $ 450,450 (4) 40,600 $266,884
Elaine D. Rosen 1998 $431,666 $ 265,000 $ 462,550 (4) 20,000 $ 20,000
Executive Vice President 1997 $340,000 $ 249,000 $ 565,182 (4) 27,200 $ 12,605
1996 $296,154 $ 184,900 $ 228,150 (4) 20,500 $ 9,000
Robert E. Broatch 1998 $359,999 $ 235,200 $ 344,810 (4) 14,910 $ 95,749
Senior Vice President and CFO 1997 $312,693 $ 172,000 $ 400,974 (4) 19,300 $ 83,872
Kevin P. O'Connell 1998 $308,333 $ 177,600 $ 336,400 (4) 14,550 $ 18,333
Executive Vice President 1997 $300,000 $ 212,000 $ 412,430 (4) 19,800 $ 18,782
1996 $296,154 $ 169,500 $ 228,150 (4) 20,500 $ 9,000
</TABLE>
(1) Cash incentive payments for 1998, 1997 and 1996 performance have been
listed in the year earned, but were actually paid in the following fiscal
year. Such amounts include special cash payments relative to 1997 for Mr.
Orr: $270,000; Ms. Rosen: $62,000; and Mr. O'Connell: $62,000.
(2) The aggregate number and average market value as of December 31, 1998,
($58.97 per share) of shares of restricted stock held by the five named
executive officers were as follows: Mr. Orr: 74,200, $4,375,574; Mr.
Crispin: 45,800, $2,700,826; Ms. Rosen: 31,400, $1,851,658; Mr. Broatch:
36,460, $2,150,046; and Mr. O'Connell: 25,000, $1,474,250.
(3) In 1998, 400,000 options were granted to Mr. Orr in recognition of his
record of leadership. Due to the magnitude of that grant, no restricted
stock was awarded to Mr. Orr in 1998 for the 1998-2000 performance cycle.
(4) The restrictions may lapse on some or all of the shares represented by the
restricted stock awards shown for each named executive, provided that UNUM
attains targeted three-year return-on-equity goals and that the executive
remains in the company's employ as provided in the 1990 and 1996 plans. If
no determination has been made concerning achievement of such
return-on-equity goals at the time of a "change in control" as defined in
the applicable plan (consummation of the merger for grants made in 1998
and 1997, and shareholder approval of the merger for grants made in 1996),
restrictions will lapse on all shares.
(5) Except as noted below, the stated amounts are UNUM's matching contributions
to UNUM's qualified and nonqualified 401(k) plans. In the case of Mr.
Crispin, UNUM made payments of $220,000 in 1997 and 1996 to compensate him
for foregone compensation from his previous employer and provided
relocation assistance of $37,384 relative to 1996. In the
case of Mr. Broatch, UNUM paid $75,000 in 1998 and 1997 to compensate him
for foregone compensation from his previous employer.
65
<PAGE>
OPTION GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
Number of
Securities % of Total
Underlying Options Granted Potential Realized Value
Options to Employees in Exercise Expiration At Expiration(3)
Name Granted Fiscal Year Price Date 0%($) 5%($) 10%($)
- - -------------------- ------------- ----------------- ---------- ----------- ------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
James F. Orr III 400,000 (1) 24.10% $ 52.59 3/13/08 $0 $13,230,383 $33,528,389
Robert W. Crispin 28,190 (2) 1.70% $ 52.59 3/13/08 $0 $ 932,411 $ 2,362,913
Elaine D. Rosen 20,000 (2) 1.21% $ 52.59 3/13/08 $0 $ 661,519 $ 1,676,419
Robert E. Broatch 14,910 (2) 0.90% $ 52.59 3/13/08 $0 $ 493,163 $ 1,249,771
Kevin P. O'Connell 14,550 (2) 0.88% $ 52.59 3/13/08 $0 $ 481,255 $ 1,219,595
</TABLE>
(1) Options were granted under the 1996 Incentive Plan on March 13, 1998, based
on the average market value on that date. Twenty-five percent of the options
became exercisable on March 13, 1999. An additional 25 percent will become
exercisable on each of March 13, 2000, 2001 and 2002, or upon consummation
of the merger, whichever is earlier.
(2) Options were granted under the 1996 Incentive Plan on March 13, 1998, based
on the average market value on that date. Thirty-three percent of the
options became exercisable on March 13, 1999. An additional 33 and 34
percent become exercisable on March 13, 2000, and 2001, respectively, or
upon consummation of the merger, whichever is earlier.
(3) Potential realizable value at expiration is based on an assumption that the
stock price of UNUM Corporation common stock appreciates at the annual
rate shown (compounded annually) from the date of grant until the end of
the ten-year term. These numbers are calculated based on the requirements
promulgated by the SEC and do not reflect UNUM's estimate of future stock
price growth.
AGGREGATED OPTION EXERCISES IN FISCAL 1998
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Acquired Options at Fiscal Year-End at Fiscal Year-End(1)
On Exercise Value ------------------------------- ---------------------------------
Name Of Options Realized Exercisable Unexercisable Exercisable Unexercisable
- - -------------------- ---------------- ---------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
James F. Orr III -- -- 473,254 481,246 $17,653,083 $4,503,684
Robert W. Crispin -- -- 147,752 64,538 $ 5,132,505 $1,064,664
Elaine D. Rosen -- -- 46,306 45,494 $ 1,357,830 $ 729,271
Robert E. Broatch -- -- 31,099 51,811 $ 840,161 $1,051,026
Kevin P. O'Connell 12,000 $307,874 31,864 35,086 $ 906,475 $ 589,777
</TABLE>
(1) Potential unrealized value is (i) the average fair market value as of
December 31, 1998, ($58.97 per share) less the option exercise price times
(ii) the number of shares acquired on exercise of options.
66
<PAGE>
UNUM Corporation and Subsidiaries
PENSION PLAN
The following table illustrates the combined estimated annual benefits
payable under the UNUM Employees Pension Plan and Trust (the "Pension Plan")
and the Supplemental Retirement Plan (the "Supplemental Plan") upon normal
retirement of participants with varying Final Average Earnings (as defined
below) and years of Credited Service. The amounts shown are annual payments for
the life of a participant who retires at age 65. As of December 31, 1998,
Messrs. Orr, Crispin, Broatch and O'Connell, and Ms. Rosen had 12, 8, 6, 30 and
23 years of Credited Service, respectively. If each of the above were to
continue his or her employment until age 65, the respective years of Credited
Service would be 21, 27, 23, 42 and 42 for purposes of computing benefits.
<TABLE>
<CAPTION>
Estimated Annual Benefits by Years of Credited Service
-------------------------------------------------------------------------------------------------
Final Average
Earnings 10 15 20 25 30 35 40 45
- - -------------- ---------- ----------- ----------- ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 500,000 $ 75,400 $114,700 $155,200 $196,800 $239,400 $ 272,900 $ 306,300 $ 339,700
600,000 91,100 138,700 187,600 237,900 289,400 329,800 370,200 410,600
700,000 106,900 162,700 220,100 279,000 339,400 386,800 434,100 481,400
800,000 122,700 186,700 252,500 320,100 389,400 443,700 498,000 552,200
900,000 138,500 210,700 285,000 361,200 439,400 500,600 561,900 623,100
1,000,000 154,300 234,700 317,400 402,300 489,400 557,600 625,700 693,900
1,100,000 170,000 258,700 349,900 443,400 539,400 614,500 689,600 764,700
1,200,000 185,800 282,700 382,300 484,500 589,400 671,500 753,500 835,600
1,300,000 201,600 306,700 414,700 525,600 639,400 728,400 817,400 906,400
1,400,000 217,400 330,700 447,200 566,800 689,400 785,400 881,300 977,200
1,500,000 233,100 354,700 479,600 607,900 739,400 842,300 945,200 1,048,100
1,600,000 248,900 378,700 512,100 649,000 789,400 899,300 1,009,100 1,118,900
1,700,000 264,700 402,700 544,500 690,100 839,400 956,200 1,073,000 1,189,700
1,800,000 280,500 426,700 577,000 731,200 889,400 1,013,100 1,136,900 1,260,600
1,900,000 296,300 450,700 609,400 772,300 939,400 1,070,100 1,200,700 1,331,400
2,000,000 312,000 474,700 641,900 813,400 989,400 1,127,000 1,264,600 1,402,200
</TABLE>
The above table reflects the amendment of the Pension Plan to a Lifecycle
formula effective January 1, 1997. Retirement benefits under this plan include
a Basic Benefit based upon age at retirement, years of Credited Service, Final
Average Earnings and Social Security Covered Compensation and an additional
Transition Benefit based on the preceding factors and also upon each
participant's age at December 31, 1996. The plan also includes limited duration
grandfathered formulas in effect prior to 1997. "Final Average Earnings" is
defined as the average of salary plus annual cash incentive payments for the
five years in which earnings were highest within the last 10 years of
employment. "Social Security Covered Compensation" means the average of the
annual Social Security taxable wage bases in effect during the 35 year period
ending when the employee reaches Social Security Retirement Age. Accrued
benefits are 100 percent vested after five years of service. Because the
Transition Benefit varies based upon age at December 31, 1996, and Social
Security Covered Compensation varies with year of birth, the retirement
benefits shown above are averages; benefits for individual executives may be 10
to 15 percent higher or lower than shown.
The Supplemental Plan provides benefits equal to the difference between
what the Pension Plan can pay reflecting the limits imposed by Sections
401(a)(17) and 415 of the Code and what the Pension Plan otherwise would have
paid had these limits not existed. All participants in the Pension Plan who
retire or terminate after January 1, 1983, and are affected by the limits are
eligible to participate in the Supplemental Plan, including Messrs. Orr,
Crispin, O'Connell and Broatch, and Ms. Rosen. Effective January 1, 1997, the
Supplemental Plan also pays benefits that would have been paid by the Pension
Plan had compensation not been deferred.
The Supplemental Executive Retirement Plan (the "SERP") provides benefits
for certain executives who have been designated to participate by UNUM's board,
including certain of the named executive officers. The SERP benefits for
Messrs. Orr and Crispin equal 2.5 percent of Final Average Earnings for each
year of Credited Service, up to a maximum of 20 years, less benefits payable
from the Pension and Supplemental Plans. Mr. O'Connell and Ms. Rosen are
eligible to participate in a modified SERP; however, their benefits under the
Pension and Supplemental Plans are expected to exceed the minimum benefits
guaranteed under the SERP formula.
67
<PAGE>
COMPENSATION OF DIRECTORS
Non-employee directors are paid an annual retainer of $27,500 by UNUM.
Directors who chair a committee of UNUM's board are paid an additional annual
retainer of $4,000. Directors are also paid an attendance fee of $1,000 for
each board meeting attended, and an additional $1,000 for each committee
meeting attended. Directors may defer their compensation pursuant to a
nonqualified deferred compensation plan, including an opportunity to invest in
phantom UNUM Corporation common stock. Directors are also reimbursed for
out-of-pocket expenses relating to attendance at meetings.
In order to further align the interests of the directors with those of the
stockholders, during 1997 the Board of Directors adopted stock ownership
expectations which provide that over a five-year period each director is to
accumulate UNUM stock (exclusive of stock options) valued at three-times the
annual retainer paid to the director. In addition, during 1997, the Board
determined to discontinue the consulting fee arrangement that was previously in
place in favor of a stock-based form of compensation. Specifically, effective
as of the 1997 Annual Meeting, further benefits under that consulting fee
arrangement ceased to accrue, so that upon termination of Board service, each
eligible director will be entitled to receive an annual consulting fee fixed at
$27,500 for only the number of full years each such director had served as of
May 31, 1997. In lieu of the continued accrual of benefits under the consulting
fee arrangement, the Board of Directors voted to increase the size of the
existing annual non-employee director stock option grants under the 1990
Long-Term Stock Incentive Plan. As of May 10, 1997, each continuing
non-employee director receives an annual automatic grant of an option to
purchase 4,000 shares of UNUM Corporation common stock. Each newly elected
non-employee director will receive an automatic grant of an option to purchase
6,000 shares of UNUM Corporation common stock.
OTHER AGREEMENTS AND TRANSACTIONS
Severance Agreements
UNUM has entered into severance agreements (the "Severance Agreements")
with each of Messrs. Orr, Crispin, and Broatch and Ms. Rosen providing for
payments and other benefits to the officer if, within two years after a Change
in Control of UNUM, as defined in the Severance Agreements, his or her
employment is terminated (a) involuntarily other than for willful and continued
failure by the officer to perform substantially his or her duties or willful
conduct which is demonstrably and materially injurious to the employer; or (b)
voluntarily by the officer, if for Good Reason as defined in the Severance
Agreements. Under the Severance Agreements, an officer whose employment so
terminates will receive, in addition to accrued salary and prorated incentive
compensation, (1) a lump sum payment equal to three times the sum of his or her
salary in effect at termination or immediately prior to the Change in Control,
whichever is greater, plus three times the average of the annual incentive
compensation awards received by the officer in respect of the preceding three
years; (2) a lump sum payment equal to the present value of the reduction in
retirement payments resulting from the termination, assuming employment had
continued for three additional years; and (3) continuation of life, disability
and accident and health insurance benefits for a maximum of three years, except
to the extent that equivalent benefits are provided by a subsequent employer.
In the event of a Potential Change in Control, as defined in the Severance
Agreements, UNUM is obligated to fund a trust in an amount sufficient to
provide for all cash payments under the such agreements.
Employment Agreements
Pursuant to an agreement entered into between UNUM and Mr. Crispin at the
time of his hire, Mr. Crispin is entitled to a partially nonqualified pension
arrangement whereby he receives the equivalent of two years credit under the
Corporation's retirement plans in which executive officers participate for each
of his first ten years of employment. Furthermore, in the event of termination
of Mr. Crispin's employment for any reason (except in connection with a change
of control of the Corporation) other than resignation or cause during the first
five years of employment, the agreement provides that Mr. Crispin will receive
a severance payment equivalent to two years' base salary.
Pursuant to an agreement entered into between UNUM and Mr. Broatch at the
time of his hire, Mr. Broatch is entitled to a partially nonqualified pension
arrangement whereby he receives the equivalent of two years credit under the
Corporation's retirement plans in which executive officers participate for each
of his first five years of employment. Furthermore, in the event of termination
of Mr. Broatch's employment for any reason (except in connection with a change
of control of the Corporation) other than resignation or cause, the agreement
provides that Mr. Broatch will receive a severance payment equivalent to one
years' base salary.
68
<PAGE>
UNUM Corporation and Subsidiaries
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Indicated below is the number of shares beneficially owned as of December
31, 1998, by a holder of more than five percent of UNUM Corporation common
stock as reported to the SEC by such holder on Form 13G and the percentage of
the total shares of UNUM Corporation common stock outstanding, which such
holdings represented on such date.
o FMR Corp., 82 Devonshire Street, Boston, MA 02109, reported beneficial
ownership of 8,593,853 shares (6.2%), including sole voting power over
422,883 shares and sole dispositive power over all such shares.
69
<PAGE>
SECURITY OWNERSHIP
The following table sets forth information regarding the beneficial
ownership of UNUM Corporation common stock, as of March 1, 1999, by each
director, nominee and named executive officer, and by all directors, nominees
and executive officers of UNUM as a group. The share holdings reported for all
directors, nominees and executive officers as a group total 1.67 percent of the
outstanding shares on March 1, 1999, as calculated pursuant to the rules of
the SEC. All other amounts reported total less than one percent of the
outstanding shares on such date.
<TABLE>
<CAPTION>
Number of Shares
Beneficially Owned
Shares Subject to Options Total Shares
Directors and Named Beneficially Exercisable as of Beneficially
Executive Officers Owned(1)(2) April 30, 1999 Owned(1)(2)
- - ----------------------------------------------------- ------------------ -------------------- ----------------
<S> <C> <C> <C>
James F. Orr III ................................. 302,967(3) 627,340 930,307(3)
Gayle O. Averyt .................................. 300,251(4) 6,000 306,251(4)
Robert E. Dillon, Jr. ............................ 11,647 17,000 28,647
Gwain H. Gillespie ............................... 63,356(5) 12,000 79,356(5)
Ronald E. Goldsberry ............................. 7,537 14,000 21,537
Donald W. Harward ................................ 6,000(6) 12,000 18,000(6)
George J. Mitchell ............................... 3,583 10,000 15,583
Cynthia A. Montgomery ............................ 9,071(7) 18,000 27,071(7)
James L. Moody, Jr. .............................. 8,898 20,000 28,898
Lawrence R. Pugh ................................. 15,988 20,000 35,988
Lois Dickson Rice ................................ 2,382 14,000 16,382
John W. Rowe ..................................... 3,938 12,000 15,938
Robert W. Crispin ................................ 101,041 181,814 282,855
Elaine D. Rosen .................................. 62,662 68,852 131,514
Robert E. Broatch ................................ 39,323 54,958 94,281
Kevin P. O'Connell ............................... 58,024 50,169 108,193
All directors and executive officers as a group
(18 persons including the above named)* ......... 1,116,204(8) 1,305,075 2,421,279(8)
</TABLE>
- - --------
(1) The number of shares reflected which, under applicable SEC regulations, are
deemed to be beneficially owned. Unless otherwise indicated, the person
indicated holds sole voting and dispositive power.
(2) Includes restricted stock units with a value equivalent to 30,400 shares of
UNUM Corporation common stock held by Mr. Crispin; the following number of
shares of phantom UNUM Corporation common stock credited to the named
executive officers' accounts under UNUM's Nonqualified 401(k) Plan: Mr.
Orr: 2,108 shares; Mr. Crispin: 2,080 shares; Ms. Rosen: 1,333 shares; Mr.
Broatch: 1,198 shares; and Mr. O'Connell: 1,831 shares; and the following
number of shares of phantom UNUM Corporation common stock credited to the
non-employee directors' accounts under UNUM's Director Deferred
Compensation Plan: Mr. Dillon: 6,047; Mr. Gillespie: 5,610; Dr. Goldsberry:
5,737; Senator Mitchell: 2,583; Ms. Montgomery: 1,871; Mr. Moody: 898;
Mr. Pugh: 11,988; Ms. Rice: 1,782; and Mr. Rowe: 2,938.
(3) Includes 30,459 shares held by Mr. Orr's spouse and child.
(4) Includes 33,349 shares held by Mr. Averyt's spouse and 111,698 shares held
in trust for the benefit of the family members under various trusts
pursuant to which Mr. Averyt, as trustee, has sole or shared voting or
dispositive power. Mr. Averyt disclaims beneficial ownership of 19,077 of
these shares held in trust.
(5) Includes 51,694 shares held jointly with or by Mr. Gillespie's spouse.
(6) Includes 6,000 shares held jointly with Dr. Harward's spouse.
(7) Includes 7,200 shares held jointly with Ms. Montgomery's spouse.
(8) Includes 192,806 shares held in the name of a spouse, child or certain
other relative sharing the same home as the director or executive officer,
or held by the director or executive officer, or the spouse of the director
or executive officer, as a trustee or as a custodian for family members.
* Includes officers of subsidiaries who are not officers of UNUM but are
considered "executive officers" of UNUM under rules of the SEC.
70
<PAGE>
UNUM Corporation and Subsidiaries
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 11 "Executive and Director Compensation" under the caption "Other
Agreements and Transactions" for this information.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index of documents filed as part of this report:
1. The following Consolidated Financial Statements of UNUM Corporation
and subsidiaries are included in Item 8.
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Accountants ........................... 28
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996 .......................... 29
Consolidated Balance Sheets as of December 31, 1998
and 1997 .................................................. 30
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996 .............. 31
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998, 1997 and 1996 .................... 32
Consolidated Statements of Comprehensive Income for
the Years Ended December 31, 1998, 1997 and 1996 .......... 34
Notes to Consolidated Financial Statements .................. 35
2. Financial Statement Schedules
II Condensed Financial Information of UNUM Corporation
(Registrant) 73
III Supplementary Insurance Information 77
IV Reinsurance 78
V Valuation and Qualifying Accounts and Reserves 79
</TABLE>
3. Exhibits. See Index to Exhibits on page 80 of this report.
(b) Reports on Form 8-K:
On November 30, 1998, UNUM filed a current report on Form 8-K/A which
amended and replaced in its entirety Form 8-K filed on November 25, 1998, with
respect to UNUM entering into an Agreement and Plan of Merger dated as of
November 22, 1998, pursuant to which UNUM and Provident will merge under the
name UNUMProvident Corporation.
On December 11, 1998, in connection with the previously announced plan to
merge between UNUM and Provident, UNUM filed a current report on Form 8-K for
the purpose of filing the Condensed Consolidated Financial Statements and notes
thereto of Provident for the periods ended September 30, 1998, December 31,
1997, December 31, 1996, and Condensed Pro Forma Combined Financial Statements
and notes thereto of UNUM and Provident at September 30, 1998, and for the nine
months ended September 30, 1998 and 1997, and for the years ended December 31,
1997, 1996 and 1995.
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.
71
<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 31, 1999.
UNUM Corporation
By /s/ JAMES F. ORR III
-------------------------------------
James F. Orr III (Chairman, President
and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- - --------------------------------------------------------- ---------------------------- ---------------
<S> <C> <C>
/s/ JAMES F. ORR III Chairman, President and March 31, 1999
- - --------------------------------------------------------- Chief Executive Officer
(James F. Orr III)
/s/ ROBERT E. BROATCH Senior Vice President
- - --------------------------------------------------------- and Chief Financial Officer March 31, 1999
(Robert E. Broatch)
/s/ JOHN M. LANG, JR. Vice President and
- - --------------------------------------------------------- Corporate Controller March 31, 1999
(John M. Lang, Jr.)
*
- - --------------------------------------------------------- Director March 31, 1999
(Gayle O. Averyt)
*
- - --------------------------------------------------------- Director March 31, 1999
(Robert E. Dillon, Jr.)
*
- - --------------------------------------------------------- Director March 31, 1999
(Gwain H. Gillespie)
*
- - --------------------------------------------------------- Director March 31, 1999
(Ronald E. Goldsberry)
*
- - --------------------------------------------------------- Director March 31, 1999
(Donald W. Harward)
*
- - --------------------------------------------------------- Director March 31, 1999
(George J. Mitchell)
*
- - --------------------------------------------------------- Director March 31, 1999
(Cynthia A. Montgomery)
*
- - --------------------------------------------------------- Director March 31, 1999
(James L. Moody, Jr.)
*
- - --------------------------------------------------------- Director March 31, 1999
(Lawrence R. Pugh)
*
- - --------------------------------------------------------- Director March 31, 1999
(Lois Dickson Rice)
*
- - --------------------------------------------------------- Director March 31, 1999
(John W. Rowe)
/s/ KEVIN J. TIERNEY
- - ---------------------------------------------------------
*(Kevin J. Tierney, as Attorney-in-fact
for each of the persons indicated)
(Senior Vice President, General Counsel & Secretary)
</TABLE>
72
<PAGE>
UNUM CORPORATION (Parent Company)
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
(Dollars in millions) 1998 1997 1996
- - ---------------------------------------------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Revenues
Dividends from subsidiaries* ......................... $ 44.2 $ 462.4 $ 259.7
Investment income .................................... 0.2 0.1 0.3
Interest income on loans to subsidiaries* ............ 3.3 2.6 2.5
Fees and other income ................................ -- 0.1 --
------- -------- --------
Total revenues ...................................... 47.7 465.2 262.5
Expenses
Operating expenses ................................... 7.5 8.3 4.7
Interest expense ..................................... 40.9 41.7 40.7
Interest expense on loans from subsidiaries* ......... 17.4 2.5 0.1
------- -------- --------
Total expenses ...................................... 65.8 52.5 45.5
------- -------- --------
Income (loss) before income taxes ..................... (18.1) 412.7 217.0
Income tax benefit .................................... 29.6 17.3 15.1
------- -------- --------
Income before equity in undistributed net income
(loss) of subsidiaries ............................... 11.5 430.0 232.1
Equity in undistributed net income (loss) of
subsidiaries* ........................................ 351.9 ( 59.7) 5.9
------- -------- --------
Net income ............................................ $ 363.4 $ 370.3 $ 238.0
======= ======== ========
</TABLE>
- - --------
*Eliminated in consolidation
See note to condensed financial statements.
73
<PAGE>
UNUM CORPORATION (Parent Company)
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
(Dollars in millions) 1998 1997
- - ---------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Assets
Investments
Investment in subsidiaries* ............................... $ 3,661.5 $ 3,085.2
Short-term investments .................................... 4.5 2.1
---------- ----------
Total investments ........................................ 3,666.0 3,087.3
Cash ....................................................... 0.1 --
Amounts receivable from subsidiaries, net* ................. -- 16.2
Notes receivable from subsidiary* .......................... 51.3 35.7
Income taxes receivable .................................... 9.0 --
Other assets ............................................... 5.1 --
Property and equipment, net ................................ 31.5 28.8
---------- ----------
Total assets ............................................. $ 3,763.0 $ 3,168.0
========== ==========
Liabilities and Stockholders' Equity
Liabilities
Notes payable ............................................ $ 713.5 $ 467.5
Notes payable to subsidiary* ............................. 257.1 245.8
Amounts payable to subsidiaries, net* .................... 54.7 --
Income taxes ............................................. -- 8.3
Other liabilities ......................................... -- 11.6
---------- ----------
Total liabilities ....................................... 1,025.3 733.2
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
240,000,000 shares, issued 199,975,916 shares ............ 20.0 20.0
Additional paid-in capital ................................. 1,098.7 1,086.0
Unrealized gains, net ...................................... 300.9 248.4
Unrealized foreign currency translation adjustment ......... (19.4) (16.0)
Retained earnings (including undistributed earnings of
subsidiaries of $1,694.0 million and $1,342.1 million in
1998 and 1997, respectively) ............................. 2,444.9 2,162.5
---------- ----------
3,845.1 3,500.9
Less:
Treasury stock, at cost (1998--61,266,501 shares; 1997--
61,703,924 shares) ....................................... 1,085.9 1,050.3
Restricted stock deferred compensation ..................... 21.5 15.8
---------- ----------
Total stockholders' equity ................................ 2,737.7 2,434.8
---------- ----------
Total liabilities and stockholders' equity ................ $ 3,763.0 $ 3,168.0
========== ==========
</TABLE>
- - --------
*Eliminated in consolidation
See note to condensed financial statements.
74
<PAGE>
UNUM CORPORATION (Parent Company)
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
(Dollars in millions) 1998 1997 1996
- - -------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income ............................................... $ 363.4 $ 370.3 $ 238.0
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase (decrease) in income tax liability ............. (17.3) (8.2) 11.7
(Increase) decrease in amounts due to/from
subsidiaries* .......................................... 70.9 (1.2) (8.4)
Other ................................................... (6.6) 11.3 16.1
Equity in undistributed net income of
subsidiaries* .......................................... (351.9) (104.1) (5.9)
-------- -------- --------
Net cash provided by operating activities .............. 58.5 268.1 251.5
-------- -------- --------
Investing activities:
Investment in subsidiaries, net* ......................... (174.9) (107.8) (13.1)
Issuance of notes receivable from subsidiaries* .......... (15.6) (3.2) (32.5)
Repayment of notes receivable from subsidiaries* ......... -- -- 50.0
Net increase in short-term investments ................... (2.4) (1.5) --
Net additions to property and equipment .................. (4.1) (10.7) (8.6)
-------- -------- --------
Net cash used in investing activities .................. (197.0) (123.2) (4.2)
-------- -------- --------
Financing activities:
Dividends to stockholders ................................ (81.0) (79.2) (79.8)
Treasury stock acquired .................................. (65.0) (285.2) (119.1)
Proceeds from notes payable .............................. 278.1 -- --
Repayment of notes payable ............................... (68.0) (48.5) (15.0)
Net increase (decrease) in short-term debt ............... 36.0 (10.6) (42.3)
Proceeds from notes payable to subsidiaries* ............. 11.3 245.8 --
Repayment of notes payable to subsidiaries* .............. -- -- (10.0)
Other .................................................... 27.2 32.8 18.9
-------- -------- --------
Net cash provided by (used in) financing
activities ............................................. 138.6 (144.9) (247.3)
-------- -------- --------
Net increase in cash ...................................... 0.1 -- --
Cash at beginning of year ................................. -- -- --
-------- -------- --------
Cash at end of year ....................................... $ 0.1 $ -- $ --
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Income taxes ........................................... $ (13.2) $ (10.6) $ (25.8)
Interest ............................................... $ 40.3 $ 43.3 $ 40.8
Interest to subsidiaries* .............................. $ 17.5 $ -- $ 0.2
</TABLE>
Supplemental disclosure of noncash operating and investing activities:
During 1997, UNUM Corporation received a $168.3 million note receivable in
satisfaction of a dividend payment from one affiliate, which was immediately
contributed to another affiliate.
- - --------
*Eliminated in consolidation.
See note to condensed financial statements.
75
<PAGE>
UNUM CORPORATION (Parent Company)
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE TO CONDENSED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes of UNUM
Corporation and subsidiaries, which are included in Item 8.
76
<PAGE>
UNUM CORPORATION AND SUBSIDIARIES
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in millions)
<TABLE>
<CAPTION>
(1)(2)
Future policy
Deferred benefits, and (4)(5)
policy unpaid claims (3) Net
acquisition and claim Premium investment
Segment costs expenses revenue income
- - ------------------------------------------- ------------- --------------- ------------- ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998
Disability Insurance ..................... $ 651.8 $ 6,721.6 $ 2,167.5 $ 491.4
Special Risk Insurance ................... 281.3 1,318.2 1,208.4 80.6
Colonial Products ........................ 332.9 533.9 556.5 67.7
Retirement Products ...................... -- 627.7 26.6 38.6
Corporate ................................ -- -- -- 4.1
--------- ---------- ---------- --------
Total ................................... $ 1,266.0 $ 9,201.4 $ 3,959.0 $ 682.4
========= ========== ========== ========
Year Ended December 31, 1997
Disability Insurance ..................... $ 526.7 $ 5,977.4 $ 1,882.6 $ 468.0
Special Risk Insurance ................... 202.9 1,001.3 947.2 71.5
Colonial Products ........................ 302.1 458.6 530.8 57.6
Retirement Products ...................... -- 615.5 130.3 54.4
Corporate ................................ -- -- 0.1 5.9
--------- ---------- ---------- --------
Total ................................... $ 1,031.7 $ 8,052.8 $ 3,491.0 $ 657.4
========= ========== ========== ========
Year Ended December 31, 1996
Disability Insurance ..................... $ 443.1 $ 5,526.0 $ 1,917.7 $ 468.5
Special Risk Insurance ................... 150.5 727.9 783.3 57.6
Colonial Products ........................ 274.6 410.8 498.2 47.3
Retirement Products ...................... 0.9 618.6 65.8 217.2
Corporate ................................ -- -- -- 16.1
--------- ---------- ---------- --------
Total ................................... $ 869.1 $ 7,283.3 $ 3,265.0 $ 806.7
========= ========== ========== ========
<CAPTION>
Amortization
Benefits to of deferred (5)
policyholders policy Other (6)
and interest acquisition operating Premiums
Segment credited costs expenses written
- - ------------------------------------------- --------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998
Disability Insurance ..................... $ 1,794.7 $ 64.8 $ 492.9 $ 2,114.8
Special Risk Insurance ................... 803.3 143.3 181.1 414.5
Colonial Products ........................ 285.3 89.5 142.4 484.0
Retirement Products ...................... 49.3 -- 15.3 0.8
Corporate ................................ -- -- 62.1 --
---------- -------- -------- ----------
Total ................................... $ 2,932.6 $ 297.6 $ 893.8 $ 3,014.1
========== ======== ======== ==========
Year Ended December 31, 1997
Disability Insurance ..................... $ 1,503.9 $ 52.1 $ 481.9 $ 1,828.5
Special Risk Insurance ................... 643.9 94.0 179.5 311.2
Colonial Products ........................ 271.8 80.7 137.1 467.2
Retirement Products ...................... 102.7 0.1 5.7 2.5
Corporate ................................ -- -- 58.6 --
---------- -------- -------- ----------
Total ................................... $ 2,522.3 $ 226.9 $ 862.8 $ 2,609.4
========== ======== ======== ==========
Year Ended December 31, 1996
Disability Insurance ..................... $ 1,514.9 $ 99.0 $ 557.0 $ 1,893.0
Special Risk Insurance ................... 524.0 53.9 183.8 251.2
Colonial Products ........................ 246.8 72.5 133.8 446.5
Retirement Products ...................... 257.1 -- 24.5 15.0
Corporate ................................ -- -- 62.8 --
---------- -------- -------- ----------
Total ................................... $ 2,542.8 $ 225.4 $ 961.9 $ 2,605.7
========== ======== ======== ==========
</TABLE>
(1) Excludes other policyholder funds, as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
Segment 1998 1997 1996
- - ------------------------------------- --------- ------------ -----------
<S> <C> <C> <C>
Disability Insurance ........... $ 5.9 $ 2.4 $ 5.9
Special Risk Insurance ......... 13.3 15.4 12.7
Colonial Products .............. 287.5 258.1 156.6
Retirement Products ............ 568.7 729.0 3,358.4
------- --------- ---------
Total .......................... $ 875.4 $ 1,004.9 $ 3,533.6
======= ========= =========
</TABLE>
(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.
77
<PAGE>
UNUM CORPORATION AND SUBSIDIARIES
SCHEDULE IV--REINSURANCE
(Dollars in millions)
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
Amount companies companies Amount to net
--------------- -------------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998
Life insurance inforce ..................... $ 314,783.7 $ 15,755.0 $ 670.6 $ 299,699.3 0.2%
============ =========== ========= ============ ====
Premiums
Life insurance and individual annuities .... $ 788.9 $ 38.3 $ 16.3 $ 766.9 2.1%
Accident and health insurance .............. 3,145.5 376.0 304.5 3,074.0 9.9%
Group annuities ............................ 0.8 -- -- 0.8 --
------------ ----------- --------- ------------ ----
Total premiums ........................... $ 3,935.2 $ 414.3 $ 320.8 $ 3,841.7
============ =========== ========= ============
Year Ended December 31, 1997
Life insurance inforce ..................... $ 260,014.8 $ 16,036.5 $ 2,069.7 $ 246,048.0 0.8%
============ =========== ========= ============ ====
Premiums
Life insurance and individual annuities ... $ 650.7 $ 33.9 $ 9.0 $ 625.8 1.4%
Accident and health insurance ............. 2,656.7 368.9 272.6 2,560.4 10.6%
Group annuities ........................... 2.5 -- -- 2.5 --
------------ ----------- --------- ------------ ----
Total premiums ........................... $ 3,309.9 $ 402.8 $ 281.6 $ 3,188.7
============ =========== ========= ============
Year Ended December 31, 1996
Life insurance inforce ..................... $ 199,019.2 $ 11,476.5 $ -- $ 187,542.7 --
============ =========== ========= ============ ====
Premiums
Life insurance and individual annuities ... $ 552.0 $ 28.6 $ -- $ 523.4 --
Accident and health insurance ............. 2,406.9 77.8 252.9 2,582.0 9.8%
Group annuities ........................... 15.0 -- -- 15.0 --
------------ ----------- --------- ------------ ----
Total premiums ........................... $ 2,973.9 $ 106.4 $ 252.9 $ 3,120.4
============ =========== ========= ============
</TABLE>
78
<PAGE>
UNUM CORPORATION AND SUBSIDIARIES
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in millions)
<TABLE>
<CAPTION>
Additions
------------------------------
Balance at Charged to
beginning costs and Charged to Balance at end
Description of period expenses other accounts Deductions of period
- - --------------------------------------- ------------ ----------- ---------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Allowances for probable losses:
Mortgage loans .................... $ 33.9 $ 2.3 $-- $ (3.4) $ 32.8
Real estate held for sale ......... $ 17.8 $ (1.0) $-- $ -- $ 16.8
</TABLE>
79
<PAGE>
UNUM CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Description Method of Filing
- - -------- ------------------------------ --------------------------------------------------------------------
<S> <C> <C>
3.1 Certificate of Incorporation Filed as Exhibit 3.1 to the Registrant's Annual Report on Form
of UNUM Corporation, as 10-K dated March 10, 1998, and incorporated herein by reference.
amended
3.2 By-Laws of UNUM Filed as Exhibit 3.2 to the Registrant's Annual Report on Form
Corporation 10-K dated March 25, 1997, 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 and as
amended and filed as Exhibit 1 to the Registrant's Registration
Statement on Form 8-A/A dated June 21, 1996, and as amended and
filed as Exhibit 3 to the Registrant's Registration Statement on
Form 8-A/A dated November 25, 1998.
10.1 Deferred Compensation Plan Filed as Exhibit 10.1 to the Registrant's Annual Report on Form
10-K dated March 27, 1996, and incorporated herein by reference.
10.2 Incentive Compensation Plan Filed as Exhibit 3.2 to the Registrant's Annual Report on Form
for Designated Executive 10-K dated March 25, 1997, and incorporated herein by reference.
Officers
10.3 1987 Executive Stock Filed as Exhibit 10.3 to the Registrant's Annual Report on Form
Option Plan 10-K dated March 27, 1996, and incorporated herein by reference.
10.4 1990 Long-Term Stock Filed herewith.
Incentive Plan
10.5 1996 Long-Term Stock Filed herewith.
Incentive Plan
10.6 Supplementary Retirement Filed as Exhibit 10.4 to the Registrant's Registration Statement on
Plan Form S-1 (Registration No. 33-6571) dated June 18, 1986, and
incorporated herein by reference.
10.7 Supplemental Executive Filed as Exhibit 10.6 to the Registrant's Annual Report on Form
Retirement Plan 10-K dated March 26, 1991, and incorporated herein by reference.
10.8 Form of Executive Filed as Exhibit 10.7 to the Registrant's Annual Report on Form
Severance Agreement 10-K dated March 25, 1992, and incorporated herein by reference.
10.9 Non-Qualified 401(k) Plan Filed as Exhibit 3.2 to the Registrant's Annual Report on Form
10-K dated March 25, 1997, and incorporated herein by reference.
10.10 (a) Employment Letter Filed as Exhibit 10.10 to the Registrant's Annual Report on Form
10-K dated March 27, 1996, and incorporated herein by reference.
(b) Employment Letter Filed as Exhibit 10.9(b) to the Registrant's Annual Report on
Form 10-K dated March 10, 1998, and incorporated herein by
reference.
10.11 $500 Million Revolving Filed as Exhibit 10.9 to the Registrant's Annual Report on Form
Credit Agreement 10-K dated March 24, 1995, and incorporated herein by reference.
12 Computation of Ratio of Filed herewith.
Earnings to Fixed Charges
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
Number Description Method of Filing
- - -------- ------------------------- -----------------
<S> <C> <C>
21 Subsidiaries of UNUM Filed herewith.
Corporation
23 Consent of Independent Filed herewith.
Accountants
24 Power of Attorney Filed herewith.
27 Financial Data Schedule Filed herewith.
</TABLE>
81
EXHIBIT 10.4
UNUM CORPORATION
1990 LONG-TERM STOCK INCENTIVE PLAN
SECTION 1. Purpose.
The purpose of the UNUM Corporation 1990 Long-Term Stock Incentive Plan (the
"Plan") is to promote the interests of UNUM Corporation and its stockholders by
(i) attracting and retaining executive officers, other key employees and
corporation directors of outstanding ability; (ii) motivating such individuals,
by means of performance-related incentives, to achieve longer-range performance
goals; and (iii) enabling such individuals to participate in the long-term
growth and financial success of UNUM Corporation.
SECTION 2. Definitions.
"Affiliate" shall mean any corporation or other entity which is not a Subsidiary
but as to which the Corporation possesses a direct or indirect ownership
interest and has representation on the board of directors or any similar
governing body.
"Award" shall mean a grant or award under Sections 6 through 10, inclusive, of
the Plan, as evidenced in a written document delivered to a Participant.
"Board" shall mean the Board of Directors of the Corporation.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time to
time.
"Committee" shall mean the Compensation Committee of the Board.
"Common Stock" or "Stock" shall mean the common stock, $.10 par value, of the
Corporation.
"Corporation" shall mean UNUM Corporation.
"Employee" shall mean any employee of the Employer.
"Employer" shall mean the Corporation and any Subsidiary or Affiliate.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from
time to time.
"Fair Market Value" shall mean the average of the highest and lowest sales
prices reported for consolidated trading of the Stock on the New York Stock
Exchange on the date in question, or, if the Stock shall not have been traded on
such date, the average of such highest and lowest sales prices on the first day
prior thereto on which the Stock was so traded.
"Fiscal Year" shall mean the fiscal year of the Corporation.
"Incentive Stock Option" shall mean a stock option granted under Section 6 which
is intended to meet the requirements of Section 422A of the Code.
"Limited Right" shall mean a limited stock appreciation right granted under
Section 8.
<PAGE>
"Non-Qualified Stock Option" shall mean a stock option granted under Section 6
which is not intended to be an Incentive Stock Option.
"Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option.
"Participant" shall mean an Employee who is selected by the Committee to receive
an Award under the Plan.
"Restricted Period" shall mean the period of years selected by the Committee
during which a grant of Restricted Stock or Restricted Stock Unit Award may be
forfeited to the Corporation.
"Restricted Stock" shall mean shares of Common Stock contingently granted to a
Participant under Section 9 of the Plan.
"Restricted Stock Unit" shall have the meaning provided in 10(a).
"Subsidiary" shall mean any business entity in which the Corporation possesses
directly or indirectly fifty percent (50%) or more of the total combined voting
power.
SECTION 3. Administration.
Except as provided in Section 10, the Committee shall have full power to
interpret and administer the Plan and full authority to select the individuals
to whom Awards will be granted and to determine the type and amount of Award(s)
to be granted to each Participant, the terms and conditions of Awards granted
under the Plan and the terms and conditions of the agreements which will be
entered into with Participants. As to the selection and grant of Awards to
Participants who are not subject to Sections 16(a) and 16(b) of the Exchange
Act, or any successor sections, the Committee may delegate its responsibilities
to members of the Company's management consistent with applicable law.
The Committee shall have the authority to adopt, alter and repeal such rules,
guidelines and practices governing the Plan as it shall, from time to time, deem
advisable; to interpret the terms and provisions of the Plan and any Award
issued under the Plan (and any agreements relating thereto); to direct employees
of the Corporation and its subsidiaries or other advisors to prepare such
materials or perform such analysis as the Committee deems necessary or
appropriate; and otherwise to supervise the administration of the Plan.
Any interpretation and administration of the Plan by the Committee, and all
actions of the Committee, shall be final, binding and conclusive on the
Corporation, its stockholders, Subsidiaries, Affiliates, all Participants, their
respective legal representatives, successors and assigns and upon all persons
claiming under or through any of them. No member of the Board or of the
Committee shall incur any liability for any action taken or omitted, or any
determination made, in good faith in connection with the Plan.
SECTION 4. Eligibility.
Participation in the Plan shall be limited to those key employees of the
Corporation and any Subsidiary and Affiliate selected at the sole discretion of
the Committee.
<PAGE>
SECTION 5. Maximum Amount Available for Awards.
Subject to adjustment as provided in Section 12(j), the maximum number of shares
of Stock in respect of which Awards may be made under the Plan shall be a total
of 13,600,000 shares of Common Stock. Shares of Common Stock may be made
available from the authorized but unissued shares of the Corporation or from
shares reacquired by the Corporation, including shares purchased in the open
market. In the event that (i) an Option, or Stock Appreciation Right, or Limited
Right expires or is cancelled unexercised as to any shares of Common Stock
covered thereby, or (ii) any Award in respect of shares is forfeited for any
reason under the Plan, such shares shall thereafter be again available for award
pursuant to the Plan.
SECTION 6. Stock Options.
(a) Grant. Subject to the provisions of the Plan, the Committee shall
have sole and complete authority to determine the Employees to whom
Options shall be granted, the number of shares to be covered by each
Option, the Option Price, as defined below, therefor and the conditions
and limitations applicable to the exercise of the Option. The Committee
shall have the authority to grant Incentive Stock Options, or to grant
Non-Qualified Stock Options, or to grant both types of Options. In the
case of Incentive Stock Options, the terms and conditions of such grants
shall be subject to and comply with such rules as may be prescribed by
Section 422A of the Code and any regulations implementing Section 422A.
(b) Option Price. The Committee shall establish the exercise price of the
Option (the "Option Price") at the time each Option is granted, which
Option Price shall not be less than 100% of the Fair Market Value of the
Common Stock on the date of grant.
(c) Exercise.
(1) Each Option shall be exercisable at such times and subject to such
terms and conditions as the Committee may, in its sole discretion,
specify in the applicable Award or thereafter; provided, however,
that in no event may any Option granted hereunder be exercisable
after the expiration of ten years from the date of grant. The
Committee may impose such conditions with respect to the exercise
of Options, including without limitation, any relating to the
application of federal or state securities laws, as it may deem
necessary or advisable.
(2) No shares shall be delivered pursuant to any exercise of an Option
until payment in full of the Option Price therefor is received by
the Corporation. Such payment may be made in cash, or its
equivalent, or, subject to such rules and guidelines as the
Committee may establish, by exchanging shares of Common Stock owned
by the optionee (which are not the subject of any pledge or other
security interest), or by a combination of the foregoing, provided
that the combined value of all cash and cash equivalents and the
Fair Market Value of any such Common Stock so tendered to the
Corporation, valued as of the date of such tender, is at least
equal to such Option Price.
<PAGE>
(d) Termination of Employment.
(1) Except as provided below, if a Participant ceases to be an Employee
other than by reason of death, retirement or disability, any then
outstanding Options may be exercised any time before their
expiration date or within three months after the date of
termination, whichever is earlier, but only to the extent that such
Options were exercisable when employment ceased, absent a
determination by the Committee to the contrary; provided, however,
that a Participant is terminated for cause the Committee may
determine that no Option may be exercised at any time after the
termination date.
(2) If a Participant's employment terminates because of death or
disability, all then outstanding Options previously granted to the
Participant will become exercisable. In the case of death of the
Participant, such Options may be exercised at any time before their
expiration date or within three years after the date of
termination, whichever is earlier. In the case of permanent
disability, such Options may be exercised at any time before their
expiration date.
(3) If a Participant's employment terminates because of retirement
prior to January 1, 1995, any then outstanding Options may be
exercised any time before their expiration date or within three
years after the date of termination, whichever is earlier, but only
to the extent that such Options were exercisable when employment
ceased absent a determination by the Committee to the contrary. If
a Participant's employment terminates because of retirement on or
after January 1, 1995, any then outstanding Options may be
exercised any time before their expiration date or within five
years after the date of termination, whichever is earlier, but only
to the extent that such Options were exercisable when employment
ceased absent a determination by the Committee to the contrary.
SECTION 7. Stock Appreciation Rights.
(a) The Committee shall have the authority to grant Stock Appreciation Rights
in tandem with the grant of an Option or freestanding and unrelated to an
Option. Stock Appreciation Rights granted in tandem with an Option may be
granted either at or after the time of the grant of such Option.
Stock Appreciation Rights or any applicable portion thereof granted in
tandem with a given Option shall only be exercisable to the extent that
the related Option is exercisable and shall terminate and no longer be
exercisable upon the expiration or cancellation of the related Option.
The exercise of an Option shall result in an immediate forfeiture of any
Stock Appreciation Right granted in tandem with that Option, and the
exercise of such Stock Appreciation Right shall cause an immediate
forfeiture of its related Option. Stock Appreciation Rights shall not be
exercisable after the expiration of ten years from date of grant. A Stock
Appreciation Right granted in tandem with an Option may be exercised by
an optionee, in accordance with this Section 7, by surrendering the
applicable portion of the related Option. Upon such exercise and
surrender, the optionee shall be entitled to receive an amount determined
in the manner prescribed in this Section 7.
<PAGE>
(b) A Stock Appreciation Right shall entitle the Participant to receive
from the Corporation an amount equal to the excess of the Fair Market
Value of a share of Common Stock on the date of the exercise of the Stock
Appreciation Right over the grant price thereof, provided that the
Committee may for administrative convenience determine that, for any
Stock Appreciation Right which is not related to an Incentive Stock
Option and can only be exercised during limited periods of time in order
to satisfy the conditions of certain rules of the Securities and Exchange
Commission, the exercise of any such Stock Appreciation Right for cash
during such limited period shall be deemed to occur for all purposes
hereunder on the day during such limited period on which the Fair Market
Value of the Stock is the highest. Any such determination by the
Committee may be changed by the Committee from time to time and may
govern the exercise of Stock Appreciation Rights granted prior to such
determination as well as Stock Appreciation Rights thereafter granted.
The Committee shall determine whether Stock Appreciation Rights shall be
settled in cash, shares of Common Stock or a combination of cash and
shares of Common Stock.
SECTION 8. Limited Rights.
(a) The Committee shall have the authority to grant Limited Rights in tandem
with the grant of an Option or freestanding and unrelated to an Option.
Limited Rights granted in tandem with an Option may be granted either at
or after the time of the grant of such Option.
Limited Rights or any applicable portion thereof granted in tandem with a
given Option shall terminate and no longer be exercisable upon the
expiration or cancellation of the related Option. The exercise of an
Option shall result in an immediate forfeiture of any Limited Right
granted in tandem with that Option, and the exercise of such Limited
Right shall cause an immediate forfeiture of its related Option.
A Limited Right granted in tandem with an Option may be exercised by an
optionee, in accordance with this Section 8, by surrendering the
applicable portion of the related Option. Upon such exercise and
surrender, the optionee shall be entitled to receive an amount determined
in the manner prescribed in this Section 8.
(b) Limited Rights shall only be exercisable during the 30 day period
following a Change in Control as defined in Section 11 and shall not be
exercisable after the expiration of ten years from the date of grant.
(c) Upon the exercise of a Limited Right, an optionee shall be entitled
to receive from the Corporation an amount in cash equal in value to the
excess of (i) the higher of (A) the highest price per share paid in
connection with the Change in Control or (B) the highest Fair Market
Value per share as reported in the Wall Street Journal at any time during
the 60 day period preceding the Change in Control over (ii) in the case
of a Limited Right granted in tandem with an Option, the Option Price per
share specified in the related Option and in the case of all other
Limited Rights, the price per share established in the grant of the
Limited Right, such excess to be multiplied by the number of shares in
respect of which the Limited Right shall have been exercised; provided,
however, that upon the exercise of a Limited Right granted in tandem with
an Incentive Stock Option, the amount set forth in clause (i) shall not
exceed the Fair Market Value of a share on the date of exercise of the
Limited Right.
(d) Limited Rights shall be subject to such other terms and conditions, not
inconsistent with the provisions of the Plan, as shall be determined from
time to time by the Committee. This Section 8 shall be interpreted in
accordance and consistent with the principles set forth in Rule 16b-3 of
the Exchange Act.
<PAGE>
SECTION 9. Restricted Stock.
(a) Subject to the provisions of the Plan, the Committee shall have sole
and complete authority to determine the Employees to whom shares of
Restricted Stock shall be granted, the number of shares of Restricted
Stock to be granted to each Participant, the duration of the Restricted
Period during which, and the conditions under which, the Restricted Stock
may be forfeited to the Corporation, and the other terms and conditions
of such Awards. The Committee may determine that the Restricted Period
applicable to a particular grant may vary depending upon the attainment
of particular conditions, such as corporate earnings, share price or
other targets set by the Committee.
(b) Shares of Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered, except as herein provided, during the
Restricted Period. Certificates issued in respect of shares of Restricted
Stock shall be registered in the name of the Participant and deposited by
such Participant, together with a stock power endorsed in blank, with the
Corporation. At the expiration of the Restricted Period, the Corporation
shall deliver such certificates to the Participant or the Participant's
legal representative.
(c) If a Participant's employment terminates by reasons of disability or
death, any Restricted Stock held by such Participant shall thereafter
vest and any restriction lapse, to the extent such Restricted Stock would
have become vested and no longer subject to such restrictions within one
year from the time of termination had the Participant continued to
fulfill all of the conditions of the Restricted Stock during such period
(or on such accelerated basis as the Committee may determine at or after
grant). Unless otherwise determined by the Committee, if a Participant's
employment terminates for any reasons other than permanent disability or
death, any Restricted Stock which is unvested or subject to restriction
shall thereupon be forfeited.
SECTION 10. Restricted Stock Units.
(a) The Committee may, in its discretion, grant Restricted Stock Units to
such eligible Participants as it may select. Restricted Stock Units shall
entitle the Participant to receive one share of Common Stock per Unit at
the times and subject to the conditions determined by the Committee. The
Committee shall determine the number of Units to be granted to each
Participant, whether or not the Restricted Stock Units are designed to
satisfy the requirements of Section 162(m) of the Code and the
regulations thereunder, the duration of the Restricted Period (if any)
during which, and the conditions under which, the Restricted Stock Units
may be forfeited to the Corporation, the schedule for settlement, and any
other terms and conditions relating to each grant, not inconsistent with
the terms of this Plan, as the Committee shall deem advisable. The
Committee may provide that the holder of a Restricted Stock Unit Award
shall receive cash or Common Stock equal in value to the dividends paid
with respect to a specified number of shares of the Common Stock, as such
dividends accrue or upon settlement of the Restricted Stock Unit Award,
in which case dividends may be deemed to have been reinvested in
additional Common Stock or such other investment vehicles as the
Committee may specify.
(b) Restricted Stock Units may not be sold, assigned, transferred, pledged or
otherwise encumbered.
(c) Subject to the renumbered Section 12 of this Plan, all of the provisions
governing the satisfaction of Performance Measures and the termination of
the Restriction Period relating to a Restricted Stock Unit Award, or any
cancellation or forfeiture of shares of Restricted Stock Units upon
termination of employment of the Participant, whether by reason of death,
permanent disability, retirement, or otherwise, shall be set forth in the
Agreement relating to such Restricted Stock Unit Award, or in guidelines
established by the Committee and made applicable to such Restricted Stock
Unit Award.
<PAGE>
SECTION 11. Non-Employee Director Options.
Notwithstanding any of the other provisions of the Plan to the contrary, the
provisions of this Section 10 shall only apply to a non-employee member of the
Board. The other provisions of the Plan shall apply to grants of Options under
this Section 10 to the extent not inconsistent with the provisions of this
Section.
(a) This Section 11 shall be administered by the Board.
(b) Each non-employee member of the Board shall receive Non-Qualified Stock
Options in accordance with the provisions of this Section 11.
(c) (i) Recipients of Options under this Section 11 shall enter into a
stock option agreement with the Corporation, which agreement shall
set forth, among other things, the exercise price of the Option,
the term of the Option and provisions regarding exercisability of
the Option granted thereunder.
(ii) On the Effective Date (as defined below) each non-employee member
of the Board of the Corporation shall receive Options to purchase
2,000 shares of Common Stock. Beginning in 1997, on the date after
each annual stockholders meeting of the Corporation each continuing
non-employee member of the Board shall be granted an Option to
purchase 4,000 shares of Common Stock and, beginning in 1990, each
newly elected non-employee director shall be granted an Option to
purchase 6,000 shares of Common Stock. The Option Price per share
of Common Stock purchasable under such Options shall be equal to
the Fair Market Value of the Common Stock on the date of grant.
Such Option shall remain exercisable until the earlier of ten years
from the date of grant or the termination of any post-directorship
consultancy agreement with the Corporation; provided, however, that
if such consultancy agreement terminates by reason of death or
disability any then outstanding Options may be exercised (x) at any
time before their expiration date or (y), if such termination is by
reason of death, within three years of the date of death, whichever
is earlier. Such Options shall be exercisable one year from the
date of grant by payment in full in cash or in shares of Common
Stock having a Fair Market Value equal to the Option Price or in a
combination of cash and such shares.
(d) The Board may not amend, alter, or discontinue this Section 11 without
the approval of the stockholders of the Corporation.
SECTION 12. Change of Control.
Notwithstanding anything to the contrary contained herein, unless otherwise set
forth in any agreement relating to an Award, each outstanding Option, Stock
Appreciation Right and Limited Right granted under the Plan shall become
exercisable in full for the aggregate number of shares covered thereby, and any
restriction or deferral limitation applicable to any Restricted Stock or
Restricted Stock Units shall lapse and such shares and Awards shall be deemed
fully vested, in the event of a Change in Control (as hereinafter defined).
<PAGE>
For purposes of this Plan, a Change in Control shall be deemed to have occurred
upon the first to occur of the following events:
(i) any "person," as such term is used in Sections 13(d) and 14(d) of
the Exchange Act (other than the Corporation or any corporation
owned, directly or indirectly, by the stockholders of the
Corporation in substantially the same proportions as their
ownership of stock of the Corporation), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Corporation
representing more than 40% of the number of the Corporation's then
outstanding securities;
(ii) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board, and any new director
(other than a director designated by a person who has entered into
an agreement with the Corporation to effect a transaction described
in Subsection 12(i), (iii) or (iv) of this Section 12) whose
election by the Board or nomination for election by the
Corporation's stockholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either
were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any
reason to constitute at least a majority thereof;
(iii) the stockholders of the Corporation approve a merger or
consolidation of the Corporation with any other corporation, other
than a merger or consolidation which would result in the voting
securities of the Corporation outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or being
converted into voting securities of the surviving entity) more than
60% of the number of outstanding securities of the Corporation or
such surviving entity outstanding immediately after such merger or
consolidation; or
(iv) the stockholders of the Corporation approve a plan of complete
liquidation of the Corporation or an agreement for the sale or
disposition by the Corporation of all or substantially all of the
Corporation's assets.
SECTION 13. General Provisions.
(a) Withholding. The Employer shall have the right to deduct from all amounts
paid to a Participant in cash (whether under this Plan or otherwise) any
taxes required by law to be withheld in respect of Awards under this
Plan. In the case of payments of Awards in the form of Common Stock, at
the Committee's discretion the Participant may be required to pay to the
Employer the amount of any taxes required to be withheld with respect to
such Common Stock, or, in lieu thereof, to the extent permitted by
applicable federal and state securities laws, the Employer shall have the
right to retain (or the Participant may be offered the opportunity to
elect to tender) the number of shares of Common Stock whose Fair Market
Value equals the amount required to be withheld. The Optionee shall be
entitled to elect to pay all or a portion of the exercise price for
options granted under this Plan and any withholding taxes in connection
with such exercise by having the shares of Common Stock to be issued by
UNUM Corporation pursuant to such exercise sold by a broker-dealer under
circumstances meeting the requirements of 12 C.F.R. Section 220.
(b) Nontransferability. No Award shall be assignable or transferable, and no
right or interest of any Participant shall be subject to any lien,
obligation or liability of the Participant, except by will or the laws of
descent and distribution.
<PAGE>
(c) No Right to Employment. No person shall have any claim or right to be
granted an Award, and the grant of an Award shall not be construed as
giving a Participant the right to be retained in the employ of the
Employer. Further, the Employer expressly reserves the right at any time
to dismiss a Participant free from any liability, or any claim under the
Plan, except as provided herein or in any agreement entered into with
respect to an Award.
(d) No Rights as Stockholder. Subject to the provisions of the applicable
Award, no Participant or transferee of an Option or Restricted Stock
Units shall have any rights as a stockholder with respect to any shares
of Common Stock to be distributed under the Plan until he or she has
become the holder thereof. Notwithstanding the foregoing, in connection
with each grant of Restricted Stock hereunder, the applicable Award shall
specify if and to what extent the Participant shall not be entitled to
the rights of a stockholder in respect of such Restricted Stock.
(e) Construction of the Plan. The validity, construction, interpretation,
administration and effect of the Plan and of its rules and regulations,
and rights relating to the Plan, shall be determined solely in accordance
with the laws of the State of Delaware.
(f) Effective Date. Subject to the approval of the stockholders of the
Corporation, the Plan shall be effective on February 9, 1990 (the
"Effective Date"). No Options or Awards may be granted under the Plan
after February 9, 2000.
(g) Amendment of Plan. The Board may amend, suspend or terminate the Plan or
any portion thereof at any time, provided that no amendment shall be made
without stockholder approval if such approval is necessary to comply with
any tax or regulatory requirement, including for these purposes any
approval requirement which is a prerequisite for exemptive relief under
Section 16(b) of the Exchange Act. Notwithstanding anything to the
contrary contained herein, the Committee may amend the Plan in such
manner as may be necessary so as to have the Plan conform with local
rules and regulations. The Chief Executive Officer shall be authorized to
make minor or administrative modifications to the Plan as well as
modification to the Plan which may be dictated by requirements of federal
or state statutes applicable to the Corporation or authorized or made
desirable by such statutes. No modification or termination of the Plan
shall, without the optionee's consent, alter or impair any of his or her
rights or obligations under any Option, Stock Appreciation Right or
Limited Right theretofore granted to him or her under the Plan.
(h) Amendment of Award. The Committee may amend, modify or terminate any
outstanding Award with the Participant's consent at any time prior to
payment or exercise in any manner not inconsistent with the terms of the
Plan, including without limitation, (i) to change the date or dates as of
which (A) an Option, Stock Appreciation Right or Limited Right becomes
exercisable; (B) Restricted Stock or Restricted Stock Units becomes
nonforfeitable; or (ii) to cancel and reissue an Award under such
different terms and conditions as it determines appropriate.
(i) Hardship Distributions. In no event shall any Option granted under this
Plan be exercisable through payment of the Option Price in cash during
the period of one year following a hardship distribution under the UNUM
Employees Retirement Savings Plan and Trust, as defined therein.
<PAGE>
(j) Adjustments and Assumption. In the event of a reorganization,
recapitalization, stock split, stock dividend, combination of shares,
merger, consolidation, distribution of assets, or any other change in the
corporate structure or shares of the Corporation, the Committee shall
make such adjustments as it deems appropriate in the number and kind of
shares authorized by the Plan, in the number and kind of shares covered
by the Awards granted, and in the purchase price of outstanding Options.
In the event of any merger, consolidation or other reorganization in
which the Corporation is not the surviving or continuing corporation, all
Awards granted hereunder and outstanding on the date of such event shall
be assumed by the surviving or continuing corporation with appropriate
adjustment as to the number and kind of shares and purchase price of the
shares.
(k) In addition to the purposes set forth in Section 1, the Committee may
grant Awards to eligible Participants in order to compensate such
Participants to surrender existing rights to receive benefits from the
Employer under this or any other benefit plan or arrangement.
EXHIBIT 10.5
UNUM CORPORATION
1996 LONG-TERM STOCK INCENTIVE PLAN
SECTION 1. Purpose.
The purpose of the UNUM Corporation 1996 Long-Term Stock Incentive Plan (the
"Plan") is to promote the interests of UNUM Corporation and its stockholders by
(i) attracting and retaining executive officers and other key employees of
outstanding ability; (ii) motivating such individuals, by means of
performance-related incentives, to achieve longer-range performance goals; and
(iii) enabling such individuals to participate in the long-term growth and
financial success of UNUM Corporation.
SECTION 2. Definitions.
"Affiliate" shall mean any corporation or other entity which is not a Subsidiary
but as to which the Corporation possesses a direct or indirect ownership
interest and has representation on the board of directors or any similar
governing body.
"Award" shall mean a grant or award under Sections 6 through 10, inclusive, of
the Plan, as evidenced in a written document delivered to a Participant.
"Board" shall mean the Board of Directors of the Corporation.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time to
time.
"Committee" shall mean the Compensation Committee of the Board, or, to the
extent necessary to satisfy the requirements of Section 162(m) of the Code, a
subcommittee thereof .
"Common Stock" or "Stock" shall mean the common stock, $.10 par value, of the
Corporation.
"Corporation" shall mean UNUM Corporation.
"Employee" shall mean any employee of the Employer.
"Employer" shall mean the Corporation and any Subsidiary or Affiliate.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from
time to time.
"Fair Market Value" shall mean the average of the highest and lowest sales
prices reported for consolidated trading of the Stock on the New York Stock
Exchange on the date in question, or, if the Stock shall not have been traded on
such date, the average of such highest and lowest sales prices on the first day
prior thereto on which the Stock was so traded.
"Fiscal Year" shall mean the fiscal year of the Corporation.
<PAGE>
"Incentive Stock Option" shall mean a stock option granted under Section 6 which
is intended to meet the requirements of Section 422 of the Code.
"Limited Right" shall mean a limited stock appreciation right granted under
Section 8.
"Non-Qualified Stock Option" shall mean a stock option granted under Section 6
which is not intended to be an Incentive Stock Option.
"Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option.
"Participant" shall mean an Employee who is selected by the Committee to receive
an Award under the Plan.
"Performance Measures" shall mean the criteria and objectives, established by
the Committee, which shall be satisfied as a condition to the receipt of shares
by a Participant under a Restricted Stock Award, or to the payment or receipt of
shares or cash under a Restricted Stock Unit or Performance Share Award. With
respect to any Restricted Stock, Restricted Stock Unit or Performance Share
Award which the Committee designates as being intended to satisfy the
requirements of Section 162(m) of the Code and the regulations thereunder, such
criteria and objectives shall be based on one or more of the following: the
market price of a share of the Common Stock; earnings per share, return to
stockholders (including dividends), return on equity, earnings of the
Corporation on a GAAP or statutory accounting basis, revenues, market share,
cash flow or cost reduction goals, underwriting margin, or any combination of
the foregoing. Such criteria and objectives may be expressed on either an
absolute basis or relative to the performance of a peer group selected by the
Committee. In the case of any Restricted Stock or Performance Share Award which
the Committee does not designate as being intended to satisfy the requirements
of Section 162(m) of the Code and the regulations thereunder, such criteria and
objectives, if any, may include one or more of the criteria and objectives
referred to above or such other criteria and objectives as the Committee may
determine.
"Performance Period" shall mean a period designated by the Committee during
which the Performance Measures applicable to a Performance Share Award shall be
measured.
"Performance Share" shall mean a right, granted to a Participant under Section
10 of this Plan, contingent upon the attainment of specified Performance
Measures within a specified Performance Period, to receive one share of Common
Stock, which may be Restricted Stock, or in lieu thereof, the Fair Market Value
of such Performance Share in cash.
"Restricted Stock" shall mean shares of Common Stock contingently granted to a
Participant under Section 9 of this Plan.
"Restricted Stock Unit" shall have the meaning provided in Section 10(a).
"Restriction Period" shall mean a period designated by the Committee during
which the Performance Measures and other conditions applicable to a Restricted
Stock Award, Restricted Stock Unit Award or Performance Share Award shall be
measured.
"Stock Appreciation Right" shall mean an Award granted under Section 7 of the
Plan.
"Subsidiary" shall mean any business entity in which the Corporation possesses
directly or indirectly fifty percent (50%) or more of the total combined voting
power.
<PAGE>
"Voting Securities" shall mean securities which are entitled to cast votes as to
general corporate matters, including the election of directors.
SECTION 3. Administration.
The Committee shall have full power to interpret and administer the Plan and
full authority to select the individuals to whom Awards will be granted and to
determine the type and amount of Award(s) to be granted to each Participant, the
terms and conditions of Awards granted under the Plan and the terms and
conditions of the agreements which will be entered into with Participants.
The Committee shall have the authority to adopt, alter and repeal such rules,
guidelines and practices governing the Plan as it shall, from time to time, deem
advisable; to interpret the terms and provisions of the Plan and any Award
issued under the Plan (and any agreements relating thereto); to direct employees
of the Corporation and its subsidiaries or other advisors to prepare such
materials or perform such analysis as the Committee deems necessary or
appropriate; and otherwise to supervise the administration of the Plan. The
Committee may delegate such of its responsibilities set forth above to members
of the Corporation's management as the Committee may determine, with regard to
the grant, amendment, interpretation and administration of Awards to
Participants who are not subject to Sections 16(a) and 16(b) of the Exchange
Act, and except with respect to Awards which are designed to satisfy the
requirements of Section 162(m) of the Code and the regulations thereunder.
Any interpretation and action under this Plan by the Committee, or members of
the Corporation's management acting under authority delegated by the Committee,
shall be final, binding and conclusive on the Corporation, its stockholders,
Subsidiaries, Affiliates, all Participants, their respective legal
representatives, successors and assigns and upon all persons claiming under or
through any of them. Neither any member of the Board of Directors or of the
Committee nor any member of the Corporation's management acting under authority
delegated by the Committee shall incur any liability for any action taken or
omitted, or any determination made, in good faith in connection with the Plan.
SECTION 4. Eligibility.
Participation in the Plan shall be limited to those key employees of the
Corporation and any Subsidiary and Affiliate selected at the sole discretion of
the Committee.
SECTION 5. Maximum Amount Available for Awards.
Subject to adjustment as provided in Section 12(j), the maximum number of shares
of Stock in respect of which Awards may be made under the Plan shall be a total
of 7,000,000 shares of Common Stock, provided that during any single calendar
year (i) Options shall not be granted to any individual Participant to purchase
more than 400,000 shares of the Common Stock, and (ii) the sum of all shares of
Restricted Stock plus all Restricted Stock Units plus all Performance Shares
granted to any individual Participant shall not exceed 200,000. Common Stock may
be made available from the authorized but unissued shares of the Corporation or
from shares reacquired by the Corporation, including shares purchased in the
open market. In the event that (i) an Option, or Stock Appreciation Right, or
Limited Right expires, terminates, or is canceled, surrendered or exchanged
unexercised as to any shares of Common Stock covered thereby, or (ii) any other
Award in respect of shares is forfeited for any reason under the Plan, such
shares shall thereafter be again available for award pursuant to the Plan.
<PAGE>
SECTION 6. Stock Options.
(a) Grant. The Committee may, in its discretion, grant Options to such
eligible Participants as it may select. The Committee shall determine the
number of shares to be covered by each Option, the Option Price, as
defined below, therefor and the conditions and limitations applicable to
the exercise of the Option. The Committee shall have the authority to
grant Incentive Stock Options, or to grant Non-Qualified Stock Options,
or to grant both types of Options. In the case of Incentive Stock
Options, the terms and conditions of such grants shall be subject to and
comply with such rules as may be prescribed by Section 422 of the Code
and any regulations implementing Section 422.
(b) Option Price. The Committee shall establish the exercise price of the
Option (the "Option Price") at the time each Option is granted, which
Option Price shall not be less than 100% of the Fair Market Value of the
Common Stock on the date of grant.
(c) Exercise.
(1) Each Option shall be exercisable at such times and subject to such
terms and conditions as the Committee may, in its sole discretion,
specify in the applicable Award or thereafter; provided, however,
that in no event may any Option granted hereunder be exercisable
after the expiration of ten years from the date of grant. The
Committee may impose such conditions with respect to the exercise
of Options, including without limitation, any relating to the
application of federal or state securities laws, as it may deem
necessary or advisable.
(2) No shares shall be delivered pursuant to any exercise of an Option
until payment in full of the Option Price therefor is received by
the Corporation. Such payment may be made in cash, or its
equivalent, or, subject to such rules and guidelines as the
Committee may establish, by exchanging shares of Common Stock owned
by the optionee (which are not the subject of any pledge or other
security interest), or by a combination of the foregoing, provided
that the combined value of all cash and cash equivalents and the
Fair Market Value of any such Common Stock so tendered to the
Corporation, valued as of the date of such tender, is at least
equal to such Option Price.
(d) Termination of Employment.
(1) If a Participant ceases to be an Employee other than by reason of
death, retirement or permanent disability, any then outstanding
Options may be exercised at any time before their expiration date
or within three months after the date of termination, whichever is
earlier, but only (unless otherwise determined by the Committee) to
the extent that such Options were exercisable when employment
ceased, and to the extent not so exercisable, the Option shall
terminate on the date employment ceases; provided, however, that if
a Participant is terminated for cause the Committee may determine
that no Option may be exercised at any time after the termination
date.
(2) If a Participant's employment terminates because of death or
permanent disability, all then outstanding Options previously
granted to the Participant will become exercisable. In the case of
death of the Participant, such Options may be exercised at any time
before their expiration date or within three years after the date
of termination, whichever is earlier. In the case of permanent
disability, such Options may be exercised at any time before their
expiration date.
<PAGE>
(3) If a Participant's employment terminates because of retirement, any
then outstanding Options may be exercised at any time before their
expiration date or within five years after the date of termination,
whichever is earlier, but only (unless otherwise determined by the
Committee) to the extent that such Options were exercisable when
employment ceased, and to the extent not so exercisable, the Option
shall terminate on the date employment ceases.
SECTION 7. Stock Appreciation Rights.
(a) The Committee shall have the authority to grant Stock Appreciation Rights
in tandem with the grant of an Option or freestanding and unrelated to an
Option. Stock Appreciation Rights granted in tandem with an Option may be
granted either at or after the time of the grant of such Option.
Stock Appreciation Rights or any applicable portion thereof granted in
tandem with a given Option shall only be exercisable to the extent that
the related Option is exercisable and shall terminate and no longer be
exercisable upon the expiration, termination, or cancellation of the
related Option.
The exercise of an Option shall result in an immediate forfeiture of any
Stock Appreciation Right granted in tandem with that Option, and the
exercise of such Stock Appreciation Right shall cause an immediate
forfeiture of its related Option. Stock Appreciation Rights shall not be
exercisable after the expiration of ten years from date of grant. A Stock
Appreciation Right granted in tandem with an Option may be exercised by
an optionee, in accordance with this Section 7, by surrendering the
applicable portion of the related Option. Upon such exercise and
surrender, the optionee shall be entitled to receive an amount determined
in the manner prescribed in this Section 7.
(b) A Stock Appreciation Right shall entitle the Participant to receive from
the Corporation an amount equal to the excess of the Fair Market Value of
a share of Common Stock on the date of the exercise of the Stock
Appreciation Right over the grant price thereof, provided that the
Committee may for administrative convenience determine that, for any
Stock Appreciation Right which is not related to an Incentive Stock
Option and can only be exercised during limited periods of time in order
to satisfy the conditions of certain rules of the Securities and Exchange
Commission, the exercise of any such Stock Appreciation Right for cash
during such limited period shall be deemed to occur for all purposes
hereunder on the day during such limited period on which the Fair Market
Value of the Stock is the highest. Any such determination by the
Committee may be changed by the Committee from time to time and may
govern the exercise of Stock Appreciation Rights granted prior to such
determination as well as Stock Appreciation Rights thereafter granted.
The Committee shall determine whether Stock Appreciation Rights shall be
settled in cash, shares of Common Stock or a combination of cash and
shares of Common Stock.
SECTION 8. Limited Rights.
(a) The Committee shall have the authority to grant Limited Rights in tandem
with the grant of an Option or freestanding and unrelated to an Option.
Limited Rights granted in tandem with an Option may be granted either at
or after the time of the grant of such Option.
<PAGE>
Limited Rights or any applicable portion thereof granted in tandem with a
given Option shall terminate and no longer be exercisable upon the
expiration, termination or cancellation of the related Option. The
exercise of an Option shall result in an immediate forfeiture of any
Limited Right granted in tandem with that Option, and the exercise of
such Limited Right shall cause an immediate forfeiture of its related
Option.
A Limited Right granted in tandem with an Option may be exercised by an
optionee, in accordance with this Section 8, by surrendering the
applicable portion of the related Option. Upon such exercise and
surrender, the optionee shall be entitled to receive an amount determined
in the manner prescribed in this Section 8.
(b) Limited Rights shall only be exercisable during the 30 day period
following a Change in Control as defined in Section 11 and shall not be
exercisable after the expiration of ten years from the date of grant.
(c) Upon the exercise of a Limited Right, an optionee shall be entitled to
receive from the Corporation an amount in cash equal in value to the
excess of (i) the higher of (A) the highest price per share paid in
connection with the Change in Control or (B) the highest Fair Market
Value per share as reported in the Wall Street Journal at any time during
the 60 day period preceding the Change in Control over (ii) in the case
of a Limited Right granted in tandem with an Option, the Option Price per
share specified in the related Option and in the case of all other
Limited Rights, the price per share established in the grant of the
Limited Right (which shall not be less than the Fair Market Value of a
share of Common Stock on the date of grant), such excess to be multiplied
by the number of shares in respect of which the Limited Right shall have
been exercised; provided, however, that upon the exercise of a Limited
Right granted in tandem with an Incentive Stock Option, the amount set
forth in clause (i) shall not exceed the Fair Market Value of a share on
the date of exercise of the Limited Right.
(d) Limited Rights shall be subject to such other terms and conditions, not
inconsistent with the provisions of the Plan, as shall be determined from
time to time by the Committee. This Section 8 shall be interpreted in
accordance and consistent with the principles set forth in Rule 16b-3 of
the Exchange Act.
SECTION 9. Restricted Stock.
(a) Grant. The Committee may, in its discretion, grant shares of Restricted
Stock to such eligible Participants as it may select. The Committee shall
determine the number of shares of Restricted Stock to be granted to each
Participant, whether or not the Restricted Stock Award is designed to
satisfy the requirements of Section 162(m) of the Code and the
regulations thereunder, the duration of the Restriction Period ( if any)
during which, and the conditions under which, the Restricted Stock may be
forfeited to the Corporation, and the other terms and conditions of such
Awards. The Committee may condition the vesting of shares of Restricted
Stock on Performance Measures to be attained by the Corporation and/or
the Participant over a stated Performance Period.
(b) Assignability. Shares of Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered, except as herein provided,
during the Restriction Period.
(c) Dividends. The Committee shall determine whether dividends payable on
shares of Restricted Stock shall be paid to the Participant during the
Restriction Period or held in a suspense account for payment (with or
without interest) to the Participant only in the event of the vesting of
the underlying shares of Restricted Stock.
<PAGE>
(d) Termination of Employment. Subject to Section 11 of this Plan, all of the
provisions governing the satisfaction of Performance Measures and the
termination of the Restriction Period relating to a Restricted Stock
Award, or any cancellation or forfeiture of shares of Restricted Stock
upon termination of employment of the Participant, whether by reason of
death, permanent disability, retirement, or otherwise, shall be set forth
in the Agreement relating to such Restricted Stock Award, or in guidelines
established by the Committee and made applicable to such Restricted Stock
Award.
SECTION 10. Restricted Stock Units.
(a) Grant. The Committee may, in its discretion, grant Restricted Stock Units
to such eligible Participants as it may select. Restricted Stock Units
shall entitle the Participant to receive one share of Common Stock per
Unit at the times and subject to the conditions determined by the
Committee. The Committee shall determine the number of Units to be
granted to each Participant, whether or not the Restricted Stock Units
are designed to satisfy the requirements of Section 162(m) of the Code
and the regulations thereunder, the duration of the Restricted Period (if
any) during which, and the conditions under which, the Restricted Stock
Units may be forfeited to the Corporation, the schedule for settlement,
and any other terms and conditions relating to each grant, not
inconsistent with the terms of this Plan, as the Committee shall deem
advisable. The Committee may provide that the holder of a Restricted
Stock Unit Award shall receive cash or Common Stock equal in value to the
dividends paid with respect to a specified number of shares of the Common
Stock, as such dividends accrue or upon settlement of the Restricted
Stock Unit Award, in which case dividends may be deemed to have been
reinvested in additional Common Stock or such other investment vehicles
as the Committee may specify.
(b) Assignability. Restricted Stock Units may not be sold, assigned,
transferred, pledged or otherwise encumbered.
(c) Termination of Employment. Subject to the renumbered Section 12 of this
Plan, all of the provisions governing the satisfaction of Performance
Measures and the termination of the Restriction Period relating to a
Restricted Stock Unit Award, or any cancellation or forfeiture of shares
of Restricted Stock Units upon termination of employment of the
Participant, whether by reason of death, permanent disability, retirement,
or otherwise, shall be set forth in the Agreement relating to such
Restricted Stock Unit Award, or in guidelines established by the Committee
and made applicable to such Restricted Stock Unit Award.
SECTION 11. Performance Share Awards
(a) Grant. The Committee may, in its discretion, grant Performance Share
Awards to such eligible Participants as it may select. The Committee shall
determine the number of Performance Shares to be granted to each
Participant, whether or not the Performance Share Award is designed to
satisfy the requirements of Section 162(m) of the Code and the regulations
thereunder, the Performance Measures and Performance Period applicable to
each grant, and any other terms and conditions relating to each grant, not
inconsistent with the terms of this Plan, as the Committee shall deem
advisable.
(b) Settlement. The Agreement relating to a Performance Share Award (i) shall
specify whether such award may be settled in shares of Common Stock
(including shares of Restricted Stock) or cash or a combination thereof;
and (ii) may specify whether the holder thereof shall be entitled to
receive, on a current or deferred basis, dividend equivalents, and if
determined by the Committee, interest on any deferred dividend
equivalents with respect to the number of shares of Common Stock subject
to such Award. Prior to the settlement of a Performance Share Award in
shares of Common Stock, including Restricted Stock, the holders of such
award shall have no rights as a stockholder of the Corporation with
respect to the shares of Common Stock subject to such Award.
<PAGE>
(c) Termination of Employment. Subject to Section 12 of this Plan, all of the
terms relating the satisfaction of Performance Measures and the
termination of the Performance Period relating to a Performance Share
Award, or any cancellation or forfeiture of such Performance Share Award
upon a termination of employment, whether by reason of death, disability,
retirement, or otherwise, shall be set forth in the Agreement relating to
such Performance Share Award, or in guidelines established by the
Committee and made applicable to such Performance Share Award.
SECTION 12. Change of Control.
Notwithstanding anything to the contrary contained herein, unless otherwise set
forth in any agreement relating to an Award, in the event of a Change in Control
(as hereinafter defined), (i) each outstanding Option, Stock Appreciation Right
and Limited Right granted under the Plan shall become exercisable in full for
the aggregate number of shares covered thereby; (ii) any Performance Measure
relating to any Restricted Stock, Restricted Stock Units or Performance Share
Award (including any Restricted Stock already granted or to be granted in
satisfaction of a Performance Share Award) shall be deemed to be satisfied at
the maximum level; and (iii) any Restriction Period and/or Performance Period
relating to any Restricted Stock, Restricted Stock Unit or Performance Share
Award (including any Restricted Stock already granted or to be granted in
satisfaction of a Performance Share Award) shall lapse (and any other condition
pertaining to the vesting of any such Award shall be waived) and such shares or
Award shall be deemed fully vested.
For purposes of this Plan, a Change in Control shall be deemed to have occurred
upon the first to occur of the following events:
(i) any "person," as such term is used in Sections 13(d) and 14(d) of
the Exchange Act (other than the Corporation, a trustee or other
fiduciary holding Voting Securities under an employee benefit plan
of the Corporation, or any corporation owned, directly or
indirectly, by the stockholders of the Corporation in substantially
the same proportions as their ownership of stock of the
Corporation), is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Corporation representing more than 40% of the
number of the Corporation's then outstanding Voting Securities,
excluding any "person" who becomes such a beneficial owner in
connection with an Excluded Transaction described in clause (iii)
below;
(ii) the following individuals cease for any reason to constitute a
majority of the directors then serving: individuals who on January
1, 1996, constitute the Board, and any new director (other than a
director whose initial assumption of office is in connection with
an actual or threatened election contest, including but not limited
to a consent solicitation, relating to the election of directors of
the Corporation) whose appointment or election by the Board or
nomination for election by the Corporation's stockholders was
approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors on January 1, 1996
or whose appointment or election or nomination for election was
previously so approved;
<PAGE>
(iii) there is consummated a merger or consolidation of the Corporation
(or any direct or indirect wholly-owned Subsidiary of the
Corporation) with any other corporation, other than a merger or
consolidation which would result in the Voting Securities of the
Corporation outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or being converted into
voting securities of the surviving entity or any parent thereof)
more than 60% of the combined voting power of the Voting Securities
of the Corporation (or the voting securities of such surviving
entity or any parent thereof) outstanding immediately after such
merger or consolidation (an Excluded Transaction"); or
(iv) the stockholders of the Corporation approve a plan of complete
liquidation of the Corporation or there is consummated an agreement
for the sale or disposition by the Corporation of all or
substantially all of the Corporation's assets.
SECTION 13. General Provisions.
(a) Withholding. The Employer shall have the right to deduct from all amounts
paid to a Participant in cash (whether under this Plan or otherwise) any
taxes required by law to be withheld in respect of Awards under this
Plan. In the case of payments of Awards in the form of Common Stock, at
the Committee's discretion the Participant may be required to pay to the
Employer the amount of any taxes required to be withheld with respect to
such Common Stock, or, in lieu thereof, to the extent permitted by
applicable federal and state securities laws, the Employer shall have the
right to retain (or the Participant may be offered the opportunity to
elect to tender) the number of shares of Common Stock whose Fair Market
Value equals the amount required to be withheld. The Optionee shall be
entitled to elect to pay all or a portion of the exercise price for
options granted under this Plan and any withholding taxes in connection
with such exercise by having the shares of Common Stock to be issued by
the Corporation pursuant to such exercise sold by a broker-dealer under
circumstances meeting the requirements of 12 C.F.R. Section 220.
(b) Nontransferability. Unless so provided in the Agreement with respect to
such Award, no Award shall be assignable or transferable, and no right or
interest of any Participant shall be subject to any lien, obligation or
liability of the Participant, except by will or the laws of descent and
distribution.
(c) No Right to Employment. No person shall have any claim or right to be
granted an Award, and the grant of an Award shall not be construed as
giving a Participant the right to be retained in the employ of the
Employer. Further, the Employer expressly reserves the right at any time
to dismiss a Participant free from any liability, or any claim under the
Plan, except as provided herein or in any agreement entered into with
respect to an Award.
(d) No Rights as Stockholder. Subject to the provisions of the applicable
Award, no Participant or transferee of an Option or Restricted Stock Unit
shall have any rights as a stockholder with respect to any shares of
Common Stock to be distributed under the Plan until he or she has become
the holder thereof. Notwithstanding the foregoing, in connection with
each grant of Restricted Stock hereunder, the applicable Award shall
specify if and to what extent the Participant shall not be entitled to
the rights of a stockholder in respect of such Restricted Stock.
(e) Construction of the Plan. The validity, construction, interpretation,
administration and effect of the Plan and of its rules and regulations,
and rights relating to the Plan, shall be determined solely in accordance
with the laws of the State of Delaware.
<PAGE>
(f) Effective Date. Subject to the approval of the stockholders of the
Corporation, the Plan shall be effective on March 8, 1996 (the "Effective
Date"). No Options or Awards may be granted under the Plan after March 7,
2006.
(g) Amendment of Plan. The Board may amend, suspend or terminate the Plan or
any portion thereof at any time. The Chief Executive Officer shall be
authorized to make minor or administrative modifications to the Plan as
well as modifications to the Plan which may be dictated by requirements
of federal or state statutes applicable to the Corporation or authorized
or made desirable by such statutes. No modification or termination of the
Plan shall, without the optionee's consent, alter or impair any of his or
her rights or obligations under any Award theretofore granted to him or
her under the Plan.
(h) Amendment of Award. The Committee may amend, modify or terminate any
outstanding Award with the Participant's consent at any time prior to
payment or exercise in any manner not inconsistent with the terms of the
Plan, including without limitation, (i) to change the date or dates as of
which (A) an Option, Stock Appreciation Right or Limited Right becomes
exercisable, or (B) shares of Restricted Stock, Restricted Stock Units or
Performance Share Awards become nonforfeitable; or (ii) to cancel and
reissue an Award under such different terms and conditions as it
determines appropriate.
(i) Hardship Distributions. In no event shall any Option granted under this
Plan be exercisable through payment of the Option Price in cash during
the period of one year following a hardship distribution under the UNUM
Employees Retirement Savings Plan and Trust, as defined therein.
(j) Adjustments and Assumption. In the event of a reorganization,
recapitalization, stock split, stock dividend, combination of shares,
merger, consolidation, distribution of assets, or any other change in the
corporate structure or shares of the Corporation, the Committee shall
make such adjustments as it deems appropriate in the number and kind of
shares authorized by the Plan, in the number and kind of shares or
Performance Shares covered by the Awards granted, in the maximum number
of Options, Restricted Stock, Restricted Stock Units and Performance
Shares which may be granted to any individual Participant in a single
calendar year, and in the purchase price of outstanding Options. In the
event of any merger, consolidation or other reorganization in which the
Corporation is not the surviving or continuing corporation, unless
otherwise provided for in the documents governing such merger,
consolidation or other reorganization, all Awards granted hereunder and
outstanding on the date of such event shall be assumed by the surviving
or continuing corporation with appropriate adjustment as to the number
and kind of shares and purchase price of the shares.
EXHIBIT 12
UNUM CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31,
----------------------------
(Dollars in millions) 1998 1997 1996
- - ----------------------------------------------------------------------------
Earnings:
Income before income taxes $517.4 $536.4 $341.6
Add: Fixed charges 59.8 53.4 52.2
------ ------ -------
Earnings as adjusted $577.2 $589.8 $393.8
=============================================================================
Fixed charges:
Interest expense $ 49.9 $ 42.4 $ 40.7
Interest portion of rent expense 9.9 11.0 11.5
------ ------- ----
Total fixed charges $ 59.8 $ 53.4 $ 52.2
=============================================================================
Ratio of earnings to fixed charges 9.7 11.0 7.5
============================================================================
For purposes of computing the ratio of earnings to fixed charges, earnings as
adjusted consist of income before income taxes plus fixed charges. Fixed charges
consist of interest expense and the estimated interest portion of rent expense.
EXHIBIT 21
SUBSIDIARIES OF UNUM CORPORATION
Listed below are the subsidiaries of UNUM Corporation, as of December 31, 1998,
with their respective jurisdiction of incorporation.
UNUM Holding Company (Delaware)
First UNUM Life Insurance Company (New York)
Claims Service International, Inc. (Delaware)
UNUM International Underwriters Inc. (Delaware)
UNUM Life Insurance Company of America (Maine)
Colonial Companies, Inc. (Delaware)
Colonial Life & Accident Insurance Company (South Carolina)
BenefitAmerica, Inc. (South Carolina)
Options and Choices, Inc. (Wyoming)
UNUM European Holding Company Limited (United Kingdom)
UNUM Management Company Limited (United Kingdom)
UNUM Limited (United Kingdom)
Claims Services International Limited (United Kingdom)
Duncanson & Holt, Inc. (New York)
Duncanson & Holt Services, Inc. (Maine)
Duncanson & Holt Administrative Services, Inc. (Delaware)
Duncanson & Holt Canada Ltd. (Canada)
Duncanson & Holt Asia PTE Ltd. (Singapore)
Duncanson & Holt Europe Ltd. (United Kingdom)
Duncanson & Holt Underwriters Ltd. (United Kingdom)
Duncanson & Holt Agencies Ltd. (United Kingdom)
Duncanson & Holt Syndicate Management Ltd. (United Kingdom)
Trafalgar Underwriting Agencies Ltd. (United Kingdom)
UNUM Japan Accident Insurance Company Limited (Japan)
UNUM International Ltd. (Bermuda)
Boston Compania Argentina de Seguros (Argentina)
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the following Registration
Statements and related Prospectuses of our report dated February 2, 1999, on our
audits of the consolidated financial statements and the financial statements
schedules of UNUM Corporation and subsidiaries as of December 31, 1998 and 1997,
and for the years ended December 31, 1998, 1997, and 1996, which report is
included in the Annual Report on Form 10-K:
Form S-8 No. 33-31270 pertaining to the UNUM Employees 401(k) Plan
(formerly 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 (additional shares)
Form S-3 No. 33-36873 pertaining to the 1990 Debt Securities
Form S-3 No. 33-69132 pertaining to the 1993 Debt Securities,
Preferred Stock, Common Stock and Warrants
Post-Effective Amendment No. 1 on Form S-8 to Registration Statement
on Form S-4 No. 33-55870 pertaining to the issuance of UNUM
Corporation shares upon the exercise of stock options granted under
the Colonial Plans as defined therein
Form S-3 No. 333-08187 pertaining to the 1996 Debt Securities,
Preferred Stock, Common Stock and Warrants
Form S-8 No. 333-41917 pertaining to the 1998 Goals Stock Option Plan
Form S-8 No. 333-41897 pertaining to the 1996 Long-Term Stock
Incentive Plan
/s/ PRICEWATERHOUSECOOPERS LLP
Portland, Maine
March 31, 1999
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Kevin J. Tierney his true and lawful attorney-in-fact
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, 1998 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 his said attorney-in-fact and agent, 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 February 12, 1999
- - -----------------------------------
Gayle O. Averyt
/s/ Robert E. Dillon, Jr. Director February 12, 1999
- - -----------------------------------
Robert E. Dillon, Jr.
/s/ Gwain H. Gillespie Director February 12, 1999
- - -----------------------------------
Gwain H. Gillespie
/s/ Ronald E. Goldsberry Director February 12, 1999
- - -----------------------------------
Ronald E. Goldsberry
/s/ Donald W. Harward Director February 12, 1999
- - -----------------------------------
Donald W. Harward
/s/ George J. Mitchell Director February 12, 1999
- - -----------------------------------
George J. Mitchell
/s/ Cynthia A. Montgomery Director February 12, 1999
- - ----------------------------------
Cynthia A. Montgomery
<PAGE>
Signature Title Date
--------- ----- ----
/s/ James L. Moody, Jr. Director February 12, 1999
- - -----------------------------------
James L. Moody, Jr.
/s/ Lawrence R. Pugh Director February 12 1999
- - -----------------------------------
Lawrence R. Pugh
/s/ Lois Dickson Rice Director February 12, 1999
- - -----------------------------------
Lois Dickson Rice
/s/ John W. Rowe Director February 12, 1999
- - -----------------------------------
John W. Rowe
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
annual 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-K for the year ended December 31, 1998.
</LEGEND>
<CIK> 0000795581
<NAME> UNUM Corporation
<CURRENCY> U.S. DOLLARS
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 7,896,900
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 31,000
<MORTGAGE> 1,303,400
<REAL-ESTATE> 250,600
<TOTAL-INVEST> 9,837,700
<CASH> 80,500
<RECOVER-REINSURE> 1,770,000
<DEFERRED-ACQUISITION> 1,266,000
<TOTAL-ASSETS> 15,182,900
<POLICY-LOSSES> 9,201,400
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 875,400
<NOTES-PAYABLE> 881,800
0
0
<COMMON> 20,000
<OTHER-SE> 2,717,700
<TOTAL-LIABILITY-AND-EQUITY> 15,182,900
3,841,700
<INVESTMENT-INCOME> 661,400
<INVESTMENT-GAINS> 21,000
<OTHER-INCOME> 117,300
<BENEFITS> 2,886,200
<UNDERWRITING-AMORTIZATION> (235,100)<F1>
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 517,400
<INCOME-TAX> 154,000
<INCOME-CONTINUING> 363,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 363,400
<EPS-PRIMARY> 2.63
<EPS-DILUTED> 2.57
<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>