The Company leases and occupies approximately 111,600 square feet of office space in Glendale, California and 146,400 square feet in facilities located in Ontario, Canada. Additionally, the Company leases other office space, for periods principally from five to ten years, for use by its affiliates and sales forces.
The Company’s review procedures include, but are not limited to, biweekly meetings of certain members of the Company’s senior management personnel to review reports on the entire portfolio, identifying investments with changes in market value of five percent or more, investments with changes in rating either by external rating agencies or internal analysts, investments segmented by issuer, industry, and foreign exposure levels, and any other relevant investment information to help identify the Company’s exposure to possible credit losses.
During 2001 the Company redeemed its $172.5 million par value 8.8% monthly income debt securities (junior subordinated debt), which were due in 2025 but callable at par in 2000 and thereafter. This early redemption was expected to lower the Company’s financing costs in 2002 through the use of commercial paper available at lower interest rates. The early extinguishment of debt resulted in a write-off of the remaining deferred debt cost of $4.5 million associated with the issuance of the securities. The extraordinary loss, net of a $1.6 million tax benefit, was $2.9 million.
The Company is able to hold to this investment philosophy throughout a credit cycle because of its capital position, the fixed nature of its liabilities, and the matching of those liabilities with assets and also because of the experience gained through many years of a consistent investment philosophy. It is the Company’s intent, and has been its practice, to hold investments to maturity to meet liability payments.
• $23.2 million loss during the first quarter of 2002 on securities issued by the holding company of a large national wholesale communications company. In the third quarter of 2001 the company reported sales of $298 million, a 42 percent increase over the comparable prior year period, and liquidity of $1.4 billion in cash equivalents. It was expected that the company would use the proceeds from the sale of non-core assets to further supplement liquidity. In January 2002, the company’s banks agreed to extend the negotiating period for an amendment to the credit agreement until the end of February 2002. During the first quarter of 2002, the company reported fourth quarter 2001 results, including an 11 percent increase in revenue to $330.3 million. The company had cash equivalents in excess of $1.0 billion, an indication that the company had sufficient liquidity to fund its business plan through 2003. However, late in the first quarter of 2002, the company’s banks unexpectedly refused to allow the company to draw on its credit lines. The company reported that it would seek bankruptcy protection. Both Moody’s and Standard & Poor’s downgraded the security during the first quarter of 2002. The investment was originally purchased as part of the Company’s below-investment-grade strategy. At the time of the write-down, the investment had been in an unrealized loss position for a period of greater than one year but less than two years. The circumstances of this impaired investment have no impact on other investments.
• $23.6 million loss during the fourth quarter of 2001 on securities issued by a leading U.S. based energy company. This company had an investment-grade rating prior to allegations of fraud and accounting irregularities in November 2001. The company subsequently filed for Chapter 11 bankruptcy protection in December 2001. The investment was downgraded to a below-investment-grade status in the fourth quarter of 2001. Prior to its write-down, the investment had been in an unrealized loss position for a period of greater than 180 days but less than 270 days. The Company owns senior notes of a related entity. This security was current on principal and interest payments at December 31, 2002. The Company also owns securities of another related entity, a utility company that services an industrial site in England and whose 98 percent parent filed for insolvency in December 2001. The subsidiary was excluded from this insolvency filing due to the financial separation from the parent and was operating as a going concern during 2001.
The credit facilities are available for general corporate purposes, including support of the Company’s $472.5 million commercial paper program, and contain certain covenants that, among other provisions, include a minimum tangible net worth requirement, a maximum leverage ratio restriction, and a limitation on debt relative to the consolidated statutory earnings of the Company’s insurance subsidiaries. The Company has been in compliance with all
In late March 2003, the Company’s Board of Directors replaced J. Harold Chandler as Chairman, President, and Chief Executive Officer of the Company. Pursuant to the employment contract between the Company and Mr. Chandler dating from 1999, Mr. Chandler will receive severance and pension benefits which is expected to reduce the Company’s first quarter of 2003 net income by approximately $9.8 million.
Value of Business Acquired: Value of business acquired represents the present value of future profits recorded in connection with the acquisition of a block of insurance policies. The asset is amortized based upon expected future premium income for traditional insurance policies and estimated future gross profits for interest-sensitive insurance policies, with the accrual of interest added to the unamortized balance at interest rates principally ranging from 5.55 percent to 8.13 percent. The accumulated amortization for value of business acquired was $260.7 million and $217.1 million as of December 31, 2002 and 2001, respectively. The Company periodically reviews the carrying amount of value of business acquired using the same methods used to evaluate deferred policy acquisition costs.
Accounting for Participating Individual Life Insurance: Participating policies issued by one of the Company’s subsidiaries prior to its 1986 conversion from a mutual to a stock life insurance company will remain participating as long as the policies remain in force. A Participation Fund Account (PFA) was established for the benefit of all such 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. The PFA was $369.5 million and $408.6 million at December 31, 2002 and 2001, respectively, and represented approximately 0.8 percent and 1.0 percent of consolidated assets and 0.9 percent and 1.1 percent of consolidated liabilities for December 31, 2002 and 2001, respectively.
The Company completed the required transitional impairment tests and determined that the carrying value of its goodwill should be reduced $11.0 million. The charge, net of a $3.9 million tax benefit, was $7.1 million ($0.03 per common share, basic and assuming dilution) and is reported as a cumulative effect of accounting principle change in the consolidated statements of income.
termination of these swaps and reported these amounts in other comprehensive income. These amounts are being amortized into earnings as a component of interest expense over the expected remaining life of the hedged debt instrument. See Note 8.
Commercial paper debt outstanding at December 31, 2001 was due within one year, but a portion was classified as long term because the Company had the ability through the senior revolving credit facilities to convert this obligation into longer-term debt.
Interest paid on short-term and long-term debt during 2002, 2001, and 2000 was $138.8 million, $137.1 million, and $156.9 million, respectively.
Substantially all of the Company’s employees are eligible to participate in an ESPP. Under the plan, up to 1,460,000 shares of the Company’s common stock are authorized for issuance. Stock may be purchased at the end of each financial quarter at a purchase price of 85 percent of the lower of its beginning or end of quarter market prices. The Company sold 191,383, 159,572, and 201,626 shares to employees with a weighted average exercise price of $18.67, $22.40, and $16.73 in 2002, 2001, and 2000, respectively.
In the normal course of business, the Company assumes reinsurance from and cedes reinsurance to other insurance companies. The primary purpose of ceded reinsurance is to limit losses from large exposures. However, if the assuming reinsurer is unable to meet its obligations, the Company remains contingently liable. The Company evaluates the financial condition of reinsurers and monitors concentration of credit risk to minimize this exposure. The reinsurance receivable at December 31, 2002 relates to approximately 347 reinsurance relationships. Of the five major relationships which account for approximately 79 percent of the reinsurance receivable at December 31, 2002, all are with companies rated A or better by A.M. Best Company or are fully securitized by letters of credit, investment-grade fixed maturity securities held in trust, and/or through agreements where the ceding company retains the assets in its general account.
During 2001, the Company reinsured on a 100 percent indemnity coinsurance basis certain cancer policies written by one of the Company’s insurance subsidiaries. The effective date of the transaction was November 1, 2001. Total policy reserves ceded were approximately $113.6 million. The $12.3 million before-tax gain on this transaction was deferred and is being amortized into income based upon expected future premium income on the policies ceded.
On July 15, 2002, the case of Edmundo M. Rombeiro v. Unum Life Insurance Company of America, et al., was filed in the Superior Court of Sonoma County, California. It was subsequently removed to the United States District Court in the Northern District of California. On January 21, 2003, a First Amended Complaint was filed, purporting to be a class action. This complaint alleges that plaintiff individually was wrongfully denied disability benefits under a group long-term disability plan and alleges breach of fiduciary duties on behalf of himself and others covered by a similar plan whose disability benefits have been denied or terminated after a claim was made. The complaint seeks, among other things, injunctive and declaratory relief and payment of benefits. A motion to dismiss or, in the alternative, for summary judgment, has been filed. The Company denies the allegations in the complaint and will vigorously defend the litigation.