On October 23, 1996, UNUM announced the execution of a definitive reinsurance agreement between UNUM America and Centre Life Reinsurance Limited ("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 ("ID") block of business. This agreement does not reinsure any claims incurred prior to 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.
reflected in benefits to policyholders of the current operating period. Given the complexity of the reserving process, the ultimate liability may be more or less than such estimates indicate.
Claim block acquisitions, which generated one-time premium in the Disability Insurance segment in 1996, 1995 and 1994, are summarized in the table below. Management intends to pursue additional claim block acquisitions in the future. Additionally, premium for individual disability includes the recapture of reinsurance premium totaling $10.6 million in 1996.
The table below summarizes fixed maturity holdings by credit quality as of December 31, 1996, and 1995.
In November 1995, the Financial Accounting Standards Board issued "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," which provided a one-time opportunity to reassess the appropriateness of the classifications of securities described in Financial Accounting Standard ("FAS") No. 115, and to reclassify fixed maturities from the held to maturity category without calling into question the intent to hold other debt securities to maturity in the future. On December 31, 1995, UNUM reassessed its fixed maturity portfolio, and as allowed under the implementation guidance, reclassified fixed maturities with an amortized cost of $6,082.8 million and a related unrealized gain of $393.0 million from the held to maturity category to available for sale. The unrealized gain on the total available for sale fixed maturity portfolio was $551.9 million at December 31, 1995. In connection with the reclassification of the held to maturity fixed maturities to available for sale, on December 31, 1995, UNUM adjusted its unpaid claims by $261.2 million to reflect the changes that would have been necessary if the unrealized gains and losses related to fixed maturities classified as available for sale had been realized. At December 31, 1996, the unrealized gain on available for sale fixed maturities was $286.0 million and the related unpaid claims adjustment was $168.7 million.
Realized investment losses related to impaired mortgage loans amounted to $1.0 million, $9.2 million and $8.5 million for 1996, 1995 and 1994, respectively. Impaired mortgage loans as of December 31, 1996, are not expected to have a significant impact on UNUM's results of operations, liquidity, or capital resources.
[bullet] Mortgage loans--at amortized cost less an allowance for probable losses.
The increases in incurrals 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.
During 1995, UNUM increased the group long term disability reserves for incurred but not reported ("IBNR") claims, as reported in the Disability Insurance segment. The increased IBNR reserves were based on management's judgment that claims incurred but not yet reported would reflect increased levels of claims incidence and severity. This change in accounting estimate resulted in an increase to benefits to policyholders in the Consolidated Statement of Income of $38.4 million, and a decrease to net income of $25.0 million, or $0.34 per share.
Gross unrealized investment gains on equity securities available for sale totaled $7.5 million and $5.5 million, at December 31, 1996, and 1995, respectively. There were no gross unrealized investment losses at December 31, 1996, and gross unrealized investment losses totaled $1.4 million, at December 31, 1995.
Real estate acquired in satisfaction of debt cumulatively amounts to $86.4 million at December 31, 1996. Real estate held for sale amounted to $9.4 million at December 31, 1996, and $35.5 million at December 31, 1995.
On October 1, 1996, UNUM Life Insurance Company of America ("UNUM America") and First UNUM Life Insurance Company ("First UNUM") closed the sale of their respective group tax-sheltered annuity ("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 have initially been reinsured on an indemnity basis. Upon consent of the TSA contractholders and/or participants, the contracts will be considered reinsured on an assumption basis, legally releasing UNUM America and First UNUM from future contractual obligation to the respective contractholders and/or participants.
Year Ended December 31, -------------------------------------- (Dollars in millions) 1996 1995 1994 - --------------------------- ----------- ----------- ---------- Premiums earned: Direct .................. $2,973.9 $2,842.9 $2,663.1 Assumed ............... 252.9 241.5 170.7 Ceded .................. (106.4) (66.2) (112.5) -------- -------- -------- Premiums earned ...... $3,120.4 $3,018.2 $2,721.3 ======== ======== ======== Premiums written: Direct .................. $3,008.1 $2,877.2 $2,702.7 Assumed ............... 289.3 250.4 170.9 Ceded .................. (131.0) (64.4) (112.6) -------- -------- -------- Premiums written ...... $3,166.4 $3,063.2 $2,761.0 ======== ======== ========