This management's discussion and analysis reviews the consolidated financial condition of UNUM at December 31, 1994, and the consolidated results of operations for the past three years and, where appropriate, factors that may affect future financial performance are identified and discussed. Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Selected Consolidated Financial Data.
Group LTD earnings in 1994 were also adversely affected by a decrease in the discount rate used to determine reserves, from 9.34% at December 31, 1993, to 9.18% at December 31, 1994, which resulted in an increase to claim reserves. The discount rate is a composite yield of assets specifically matched with the group LTD reserves. Management expects the discount rate will further decline, since current cash flows are invested in high quality assets at current yields, which are below the composite yields of the existing assets purchased in prior years. UNUM has increased prices on both existing and new business in order to mitigate the impact of the interest rate environment.
During 1994, management implemented and strengthened various risk management programs to address the unfavorable claims trends experienced in group LTD. In addition to the selected price increases on new and inforce business, more stringent underwriting practices, and reducing benefit options for certain segments of the business, management has established special units to address specific aspects of disability claims, including complex and fraudulent claims. Additionally, management has implemented new group LTD contract provisions which provide risk management features and claimant rehabilitation incentives. Also, management continually reviews the benefits management process to identify and strengthen risk management policies and procedures.
During 1994, UNUM implemented an investment strategy to increase investments in tax-exempt securities which has reduced income before income taxes for the segment. Although investments in tax-exempt securities resulted in increased consolidated net income, this investment strategy reduced the Retirement Security segment's income before income taxes by approximately $6.7 million in 1994. In addition, the low interest rate environment during the past two years has reduced the investment yields on TSA assets. As a result of these factors, investment income decreased by $8.4 million and increased by only $0.8 million, during 1994 and 1993, respectively.
Certain reserve calculations are based on interest rates within these ranges graded down over periods from 15 to 20 years.
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 which could be realized in immediate settlement of the financial instrument.
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.
The following changes in unrealized investment gains (losses) were not reflected in the consolidated financial statements as these securities are carried at amortized cost:
Changes in the allowance for probable losses on invested assets and real estate held for sale were as follows:
UNUM periodically uses common derivative financial instruments such as options, futures and forward exchange contracts to hedge certain risks associated with future investments and certain payments denominated in foreign currencies, primarily British pound sterling, Canadian dollar and Japanese yen. These derivative financial instruments are used to protect UNUM from the effect of market fluctuations in interest and exchange rates between the contract date and the date on which the hedged transaction occurs. UNUM does not intend to hold derivative financial instruments for the purpose of trading.
The following represents the unfunded accumulated postretirement benefits obligation as determined by the plans' actuaries:
UNUM is subject to various state insurance regulatory restrictions that limit the maximum amount of dividends available from its United States domiciled insurance subsidiaries without prior approval. Under current law, during 1995 approximately $81.3 million will be available for payment of dividends to UNUM Corporation without state insurance regulatory approval. Dividends in excess of this amount may only be paid with state insurance regulatory approval. The aggregate statutory capital and surplus of the United States domiciled insurance subsidiaries of UNUM Corporation was approximately $840.1 million and $953.9 million, at December 31, 1994, and 1993, respectively. The aggregate statutory net income of UNUM Corporation's United States domiciled insurance subsidiaries was approximately $70.4 million, $216.0 million and $154.1 million for 1994, 1993 and 1992, 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.
The following is a summary of unaudited quarterly results of operations for 1994 and 1993: