Management believes that the trends in new annualized sales in the Employee Benefits, Individual, and Voluntary Benefits segments are important for investors to assess in their analysis of the Company's results of operations. The trends in new sales are indicators of the Company's potential for growth in its respective markets and the level of market acceptance of price changes and new products. The Company has closely linked its various incentive compensation programs to the achievement of its goals for new sales and renewals of existing business. The Company's long-term financial objectives, which balance growth and profitability, are to achieve sales growth of 10 to 12 percent per year, earnings per share growth of 12 to 14 percent per year, and a return on equity of 14 to 16 percent per year.
See "Other Segment Operating Results" and Note 13 of the "Notes to Consolidated Financial Statements" for further discussion of the Company's reinsurance operations.
As explained in more detail below, the actual increase in claims durations during 1999 was greater than the increase assumed in the fourth quarter of 1998 claims disruption charge, resulting in a negative impact on the 1999 benefit ratio. Additionally, the 1998 benefit ratio was positively impacted by the updated factors used in calculating social security offset amounts.
There are numerous instances in which third parties having a relationship with the Company had and may continue to have year 2000 issues to address and resolve. These include, among others, vendors of hardware and software, holders of group insurance policies, issuers of investment securities, financial institutions, governmental agencies, and suppliers. An aspect of the Company's year 2000 program was to assess its critical external dependencies and, as part of its due diligence efforts, to contact certain third parties seeking written assurance as to their expectancy to be year 2000 compliant. The nature of the Company's follow up to its written requests to third parties depended upon its assessment of the response and of the materiality of the effect of non- compliance by the third party on the Company. In some instances the Company performed site visits to certain third party businesses and tested their systems for compliance. In addition, the Company tested external electronic interfaces with certain critical business partners. The Company implemented contingency plans to alleviate the potential business impact of third parties not being year 2000 compliant. 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 continue to be year 2000 trouble free. As a result, the Company will continue to monitor these dependencies for year 2000 problems.
Futures and Forwards Contracts are commitments to either purchase or sell a financial instrument at a specific future date for a specified price. Changes in the market value of contracts are generally settled on a daily basis. The notional amounts of futures and forwards contracts represent the extent of the Company's involvement but not the future cash requirements, as the Company intends to close out open positions prior to settlement. All of the Company's futures and forwards contracts are accounted for as hedges.
Policyholders' Funds: Policyholders' funds represent customer deposits plus interest credited at contract rates. The Company controls its interest rate risk by investing in quality assets which have an aggregate duration that closely matches the expected duration of the liabilities. For guaranteed investment contracts (GICs), which are no longer marketed, the Company uses a cash flow matching investment strategy.
Exit activities related to duplicate facilities/asset abandonments consist of closing of duplicate offices and write-off of redundant computer hardware and software. The Company currently expects to close approximately 90 duplicate field offices over a period of one year after June 30, 1999. The cost associated with these office closures is approximately $25.6 million, which represents the cost of future minimum lease payments less any estimated amounts recovered under subleases. As of December 31, 1999, $3.7 million of this estimated liability has been paid. Also, certain physical assets, primarily computer equipment, redundant systems, and systems incapable of supporting the combined entity, have been abandoned as a result of this merger. This abandonment resulted in a write-down of the assets' book values by approximately $41.8 million during 1999. Approximately $40.9 million of the $41.8 million of assets have been removed from service as of December 31, 1999. Of the $39.6 million of investment banking, legal, and accounting fees, $39.1 million has been paid in 1999.
The second component of the increase in benefit liabilities is the provision for claims incurred but not yet reported, which resulted in an increase in benefit liabilities of $101.4 million. This provision is an estimate of the outstanding liability related to claims that have been incurred by individual insureds as of the valuation date, but the claims have not yet been reported to the Company. This liability is affected by the estimate of the
Future contracts to hedge anticipated cash flows have also been utilized for other product portfolios. At December 31, 1999, the Company had no open contracts for other product portfolios.
been incurred but not yet reported are considered liabilities of the Company. These claims are expected to be reported during 1999 and will be affected by the claims operations integration activities. The $153.0 million claim reserve increase represents the estimated value of cash payments to be made to these claimants over the life of the claims as a result of the claims operations integration activities.
management on a quarterly basis. The review will consider claims operations integration activities planned for future periods and evaluate whether the future planned activities will result in claim resolution rates consistent with those considered in the reserve established at December 31, 1998.
Interest costs related to these securities are reported in the consolidated statements of operations as a component of interest and debt expense. Interest paid on these securities during 1999 and 1998 was $22.2 million and $11.1 million, respectively.
In computing earnings per share assuming dilution, only potential common shares that are dilutive (those that reduce earnings per share) are included. Potential common shares are not used when computing earnings per share assuming dilution if the results would be antidilutive, such as when a net loss is reported or if options are out of the money. In-the-money options to purchase approximately 3.1 million common shares for the year ended December 31, 1999, were not considered dilutive due to net losses being reported for the period. Approximately 3.7 million and 2.4 million options for the years ended December 31, 1999 and 1998, respectively, were not considered dilutive due to the options being out of the money. Out-of-the-money options for the year ended December 31, 1997 were immaterial.
The Company's first quarter charge of $101.1 million before tax and $88.0 million after tax consisted of the following:
Provision for Losses on Retained Business--The Company updated its review of reserves related to the retained pool participations. Based upon the most recent information available, the Company increased its reserves by $10.5 million, principally related to the long-term disability business. Also included in this provision is $3.0 million to recognize the estimated cost of potential uncollectible reinsurance recoveries for two reinsurers who reinsure certain of the Company's reinsurance facilities and who, as the losses have increased, have experienced financial difficulties.
Regulatory restrictions limit the amount of dividends available for distribution to the Company from its insurance subsidiaries, without prior approval by regulatory authorities, to the greater of ten percent of an insurer's statutory surplus as regards policyholders as of the preceding year end or the statutory net gain from operations, excluding realized investment gains and losses, of the preceding year. The payment of dividends is further limited to the amount of statutory unassigned surplus. Based on these restrictions, $267.6 million will be available for the payment of dividends to the Company from its top-tier domestic insurance subsidiaries during 2000. The Company also has the ability to draw a dividend from its United Kingdom subsidiary, 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 the Company from Unum Limited during 2000 is approximately $24.9 million. Regulatory restrictions do not limit the amount of dividends available for distribution to the Company from its non-insurance subsidiaries.