The Company occupies over 3,000,000 square feet of space at four principal operating centers in Chattanooga, Tennessee, Portland, Maine, Worcester, Massachusetts, and Columbia, South Carolina. The Company occupies two connected buildings totaling 840,000 square feet in Chattanooga, Tennessee. The office building and substantially all of the surrounding 25 acres of land used for employee parking are owned by the Company in fee along with a 27-unit apartment building for corporate use.
The Company occupies facilities in Portland, Maine, which are comprised of eight owned facilities totaling 1,037,000 square feet of office space and 40 acres of associated land used primarily for parking. In addition, approximately 111,000 square feet of office space is leased and occupied in two buildings with rents totaling $1.3 million per year.
The Company occupies facilities totaling 438,000 square feet in Worcester, Massachusetts, with approximately 5.6 acres of surrounding property used primarily for parking. In addition, the Company leases 15,000 square feet in Springfield, Massachusetts, and 13,000 square feet in Auburn, Massachusetts.
The Company also owns office buildings in the United Kingdom and Argentina, which serve as the home offices of Unum Limited and Boston Compania Argentina de Seguros SA, respectively.
The following should be read in conjunction with the consolidated financial statements and notes thereto contained herein in Item 8.
As a result of the merger, certain accounting policy changes and reclassification adjustments were made during 1999. The following summarizes these changes and reclassifications as well as the expenses related to the merger and the early retirement offer to employees.
study was to confirm or update the assumptions which were viewed as likely to affect the ultimate liability for contract benefits. Accordingly, as a result of the merger, the Company accelerated the performance of its normal reviews of the assumptions underlying reserves to determine the assumptions that the newly merged Company will use in the future for pricing, performance management, and reserving.
Group disability reported a loss of $225.7 million for 1999, as compared with $334.4 million of income for 1998. The loss was the result of the $191.7 million second quarter 1999 charge resulting from lowering the discount rate used to calculate certain of Unum's disability claim reserves to conform with Provident's process and assumptions and the $359.2 million third quarter 1999 charge resulting from the revision in the underlying assumptions used to estimate the ultimate cost of unpaid group long-term disability claims, as discussed in the preceding "Accounting Policy Changes, Financial Statement Reclassifications, and Merger Expenses." Excluding the effect of these two charges, this line reported an 83.5 percent benefit ratio for 1999. The benefit ratio for 1998 was 79.4 percent, excluding the effect of the fourth quarter of 1998 claims disruption charge discussed in the following paragraphs. The incidence rates for new claims submitted for long-term disability increased during 1999 over the level experienced in 1998, but new claim incidence rates in the third and fourth quarters of 1999 improved relative to levels experienced in the first half of 1999 and the last half of 1998. Small case business continues to perform well, and large case and mid-size business showed improvement in 1999. The health services sector continues to experience higher incidence levels than average, but improved in the last half of 1999. Incidence levels for the manufacturing sector also improved, declining to the levels experienced prior to the third quarter of 1998. The incidence rates for new claims submitted for short-term disability improved during 1999 as compared to 1998. The level of claim incidence for long-term and short-term disability is being taken into account in the pricing of new business and the renewal of existing cases.
Group disability reported income of $334.4 million in 1998 as compared with $326.2 million in 1997. Long-term disability 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. Positively impacting the benefit ratio in 1998 were updated factors used in calculating social security offset amounts. Short- term disability also experienced increased claims incidence levels and larger size cases in 1998 as compared with 1997.
In the fourth quarter of 1998, the Company recorded a $50.3 million charge for the group long-term disability line of business in the Employee Benefits segment for the expected increase in claims durations due to management's expectation that productivity in the claims organization would be impacted as a result of planning, consolidation, and integration efforts related to the merger. Management expects the claims integration efforts to have some benefits, primarily related to claims incurred in future periods, as well as the potential for improved customer satisfaction and lower ultimate claim costs as best practices in return-to-work and claims management are implemented. As benefits related to the integration become known, reserve assumptions will be revised, if appropriate. Insurance policies that are impacted by the temporary change in claim resolution rates will not perform as anticipated when priced. However, since the cause of the additional claim cost is of a temporary nature, it is not anticipated to have an effect on future policy pricing. The $50.3 million reserve increase was not considered material from a capital adequacy position.
As discussed under "Cautionary Statement Regarding Forward-Looking Statements," certain risks and uncertainties are inherent in the Company'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 1999 and 1998. Therefore, management continues to monitor claims experience in group disability and responds to changes by periodically adjusting prices, refining underwriting guidelines, changing product features, and strengthening risk management policies and procedures. The Company expects to price new business and re-price existing business, at contract renewal dates, in an attempt to mitigate the effect of these and other factors, including interest rates, on new claim liabilities. However, given the competitive market conditions for the Company's disability products, it is uncertain whether pricing actions can mitigate the entire effect.
New annualized sales increased to $395.3 million in 1999 compared to $363.2 million in 1998. Premium persistency for group life in the latter part of 1999 was lower than historical levels, and it is expected that persistency in 2000 will continue to be lower than historical levels. The amortization of deferred policy acquisition costs for 1999 includes $1.0 million of additional amortization due to the higher than expected level of terminations.
Group life, accidental death and dismemberment, and long-term care reported income of $197.5 million in 1998 compared to $141.4 million in 1997. The increase in 1998 income resulted from the growth in premium income, which was driven by strong sales, and a favorable benefit ratio in the group life and accidental death and dismemberment lines. New annualized sales were $363.2 million in 1998 and $294.4 million in 1997.
New annualized sales in the individual disability income line of business were $124.1 million in 1999 and $136.6 million in 1998. As discussed in the "Employee Benefits Segment Operating Results," several factors contributed to the decrease in sales, including rate increases, turnover in the sales force, and merger-related activities. However, the persistency of existing individual disability income business continued to be favorable during 1999. Management expects that premium income in the individual disability income line will grow on a year-over-year basis as the product transition produces increasing levels of new sales of individual disability products and as a result of the sales initiatives discussed under "Employee Benefits Segment Operating Results."
Income in the individual disability income line of business increased to $256.7 million in 1999 from $190.0 million in 1998. As discussed in the preceding "Accounting Policy Changes, Financial Statement Reclassifications, and Merger Expenses," in the second quarter of 1999 the Company lowered the discount rate used to calculate certain of Unum's disability claim reserves to conform with Provident's process and assumptions, which decreased individual disability income by $38.9 million in 1999.
This line reported an increase in the benefit ratio in 1999 compared to 1998. The 1999 claim resolution rate compares unfavorably with 1998, but has shown improvement throughout 1999. New claims for 1999 were fairly level with 1998. This line benefited from higher net investment income and a favorable operating expense ratio for 1999 as compared to 1998.
Revenue for individual disability was $2,299.8 million in 1998 and $2,018.8 million in 1997. The growth in revenue in 1998 was driven primarily by the growth in premium income as well as net investment income. New annualized sales in the individual disability line of business were up 8.6 percent in 1998, rising to $136.6 million from $125.8 million in 1997.
The Voluntary Benefits segment includes the results of products sold to employees through payroll deduction at the work site. These products include life insurance and health products, primarily disability, accident and sickness, and cancer.
Income in the Voluntary Benefits segment in 1999 was $137.0 million versus $131.1 million in 1998. The increase in income for 1999 was primarily due to the increase in premium income in all of the product lines and an increase in investment income, partially offset by a slightly higher benefit ratio in the life and the accident, sickness, and disability product lines.
Income for this segment increased for 1998 as compared with 1997, primarily due 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 work site marketed universal life insurance under reinsurance agreements entered into during 1998 and 1997. During 1998, management continued to implement organizational changes to focus on specific distribution channels to market Voluntary Benefits products.
The Other operating segment includes results from reinsurance pools and management and other products no longer actively marketed, including corporate- owned life insurance, group pension products, and individual annuities. It is expected that revenue and income in this segment will decline over time as these business lines wind down. Management expects to reinvest the capital supporting these lines of business in the future growth of the Employee Benefits, Individual, and Voluntary Benefits segments. The closed blocks of business have been segregated for reporting and monitoring purposes. During 1999, the Company recognized a charge of $270.1 million in the Other segment related to its decision to exit the reinsurance operations.
Premium income increased to $423.9 million in 1999 compared to $311.8 million in 1998 due primarily to increased participation in the Lloyd's of London syndicates. The reinsurance pools and management reported a loss of $279.7 million in 1999 compared to income of $10.0 million in 1998. Income in the reinsurance pools and management line decreased $270.1 million in 1999 due to the charges discussed below.
In the fourth quarter of 1998, the Company recorded a $2.4 million charge related to the revised claim resolution rates for group long-term disability reinsurance. If the impact of merger-related claim operations
In 1997, the Company transferred its dental business to another insurer. The dental block produced $39.2 million in premium income in 1997.
The Corporate segment includes investment income on corporate assets not specifically allocated to a line of business, corporate interest expense, amortization of goodwill, and certain corporate expenses not allocated to a line of business.
Revenue in the Corporate segment was $67.7 million in 1999, $31.7 million in 1998, and $29.6 million in 1997. As previously discussed under "Consolidated Operating Results," during 1999 the Company recorded refunds from the Internal Revenue Service relating to the final settlement of remaining issues for the 1986 through 1992 tax years. The interest on the refunds was $35.4 million and is included in 1999 revenue.
The Corporate segment reported losses of $484.6 million in 1999, $125.5 million in 1998, and $71.7 million in 1997. Interest and debt expense was $137.8 million in 1999, $112.0 million in 1998, and $82.3 million in 1997. The amortization of goodwill was $82.6 million in 1999, $28.0 million in 1998, and $18.2 million in 1997. The Company recorded write-downs of goodwill of $57.7 million during 1999 related to its reinsurance operations. See previous discussions under "Consolidated Operating Results" and "Other Segment Operating Results" and Note 13 of the "Notes to Consolidated Financial Statements."
As discussed in "Accounting Policy Changes, Financial Statement Reclassifications, and Merger Expenses," during 1999 the Company recognized $310.6 million of before-tax expenses related to the merger and the early retirement offer to employees. These expenses are as follows (in millions):
Approximately $27.7 million of assets were abandoned and removed from service on the date the merger was consummated. Of the remaining $14.1 million of identified abandonments, $13.2 million were abandoned and removed from service during the last half of 1999.
The financial statements do not reflect any benefit expected from revenue enhancements or derived from potential cost savings related to the merger. Although management anticipates revenue enhancements and costs savings will result from the merger, there can be no assurance that these items will be achieved. Economies of scale, the elimination of duplicative expenditures, and the consistent use of the best practices of Provident and Unum are expected to enable the Company to achieve annual cost savings of approximately $130 million in 2000. During 1999, the Company realized approximately $55 million of cost savings.
The following table provides the distribution of invested assets for the years indicated.
The Company's mortgage loan portfolio was $1,278.1 million and $1,321.2 million at December 31, 1999, and 1998, respectively. The Company 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. The Company establishes allowances for probable mortgage loan losses based on a review of individual loans and the overall loan portfolio, considering the value of the underlying collateral.
The mortgage loan portfolio is well diversified geographically and among property types. The incidence of new problem mortgage loans and foreclosure activity remained low in 1999 and 1998, reflecting improvements in overall economic activity and improving real estate markets in the geographic areas where the Company has mortgage loans. Management expects the level of delinquencies and problem loans to remain low in the future.
Restructured mortgage loans totaled $8.7 million at December 31, 1999, compared to $14.5 million at December 31, 1998, and represent loans that have been refinanced with terms more favorable to the borrower. Interest lost on restructured loans was immaterial for the years ended December 31, 1999, 1998, and 1997.
Real estate was $211.2 million and $309.8 million at December 31, 1999 and 1998, respectively. 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 the Company'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 to real estate held for sale when it no longer meets the Company's investment criteria. Real estate held for sale, which is valued net of a valuation allowance that reduces the carrying value to the lower of cost or fair value less estimated cost to sell, amounted to $79.4 million and $15.6 million at December 31, 1999 and 1998, respectively.
The Company utilizes interest rate futures contracts, forward interest rate swaps, interest rate forward contracts, and options on forward interest rate swaps, forward treasuries, or specific fixed income securities to manage duration and increase yield on cash flows expected from current holdings. All transactions are hedging in nature and not speculative. Almost all transactions are associated with the individual and group disability product portfolios. All other product portfolios are periodically reviewed to determine if hedging strategies would be appropriate for risk management purposes. See Note 5 of the "Notes to Consolidated Financial Statements" for further discussion of the Company's derivative financial instruments.
The Company's liquidity requirements are met primarily by cash flows provided from operations, principally in its insurance subsidiaries. Premium and investment income, as well as maturities and sales of invested assets, provide the primary sources of cash. Cash is applied to the payment of policy benefits, costs of acquiring new business (principally commissions) and operating expenses as well as purchases of new investments. The Company has established an investment strategy that management believes will provide for adequate cash flows from operations. Cash flows from operations were $1,566.7 million for the year ended December 31, 1999, as compared to $1,719.3 million and $1,332.9 million for the comparable periods of 1998 and 1997, respectively.
The Company is dependent upon payments from its subsidiaries to pay dividends to its stockholders and to pay its expenses. These payments by the Company's insurance and non-insurance subsidiaries may take the form of interest payments on amounts loaned to such subsidiaries by the Company, operating and investment management fees, and/or dividends. At December 31, 1999, the Company had outstanding from its insurance subsidiaries a $150.0 million surplus debenture due in 2006 with a weighted average interest rate during 1999 of 8.10 percent and a $100.0 million surplus debenture due in 2027 with a weighted average interest rate during 1999 of 8.25 percent. Semi-annual interest payments are conditional upon the approval by the insurance department of the state of domicile.
Restrictions under applicable insurance laws limit the amount of dividends that can be paid to the Company from its insurance subsidiaries without prior approval by regulatory authorities. For life insurance subsidiaries domiciled or commercially domiciled in the United States, generally prior approval is necessary for any amount that exceeds the greater of: (i) ten percent of an insurer's statutory surplus with respect to policyholders as of the preceding year end; or (ii) the statutory net gain from operations, excluding realized investment gains and losses, of the preceding year.
The payment of dividends to the Company from its insurance subsidiaries is further limited to the amount of statutory unassigned surplus. The Company 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 law in the United Kingdom, which requires a minimum solvency margin. Based on these restrictions under current law:
In March 1997, the Company consummated the acquisition of Paul Revere, which was financed through common equity issuance to Zurich Insurance Company, a Swiss insurer, and its affiliates, common equity issuance and cash to Paul Revere stockholders, debt, and internally generated funds. The debt financing was provided through an $800.0 million revolving bank credit facility with various domestic and international banks. The revolving bank credit facility was established in 1996 to provide partial financing for the purchase of Paul Revere and GENEX Services, Inc., to refinance the existing bank term notes of $200.0 million, and for general corporate uses. At December 31, 1997, outstanding borrowings under the revolving bank credit facility were $725.0 million. The revolving bank credit facility was repaid on February 24, 1998. The Company also redeemed its outstanding 8.10% cumulative preferred stock, which had an aggregate value of $156.2 million, on February 24, 1998. The debt repayment and preferred stock redemption were funded through short-term borrowing.
On March 16, 1998, the Company completed a public offering of $200.0 million of 7.25% senior notes due March 15, 2028. On March 16, 1998, Provident Financing Trust I, a wholly-owned subsidiary trust of the Company, issued $300.0 million of 7.405% capital securities in a public offering. These capital securities, which mature on March 15, 2038, are fully and unconditionally guaranteed by the Company, have a liquidation value of $1,000 per capital security, and have a mandatory redemption feature under certain circumstances. The Company issued $300.0 million of 7.405% junior subordinated deferrable interest debentures, which mature on March 15, 2038, to the subsidiary trust in connection with the capital securities offering. The sole assets of the subsidiary trust are the junior subordinated debt securities.
Cash flow requirements are also supported by a $500.0 million revolving credit facility which expires October 31, 2000 and a $500.0 million revolving credit facility which expires October 1, 2001. The Company's commercial paper program, which was increased to $1.0 billion during 1999, is supported by the revolving credit facilities and is available for general liquidity needs, capital expansion, and acquisitions. The revolving credit facilities contain certain covenants that, among other provisions, require maintenance of certain levels of stockholders' equity and limits on debt levels.
On December 15, 1998, the Company issued $250.0 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. The Company used the proceeds to repay short-term debt and for general corporate purposes. The shelf registration relates to $500.0 million of securities (including debt securities, preferred stock, common stock, and other securities). On August 15, 1996, the Company established a $250.0 million medium-term note program under the shelf registration.
In 1997, the Company borrowed $168.3 million through a private placement. Under the terms of the agreement, the investor exercised the right to redeem the private placement at par value during the second quarter of 1999. The Company refinanced this debt by issuing $200.0 million of variable rate medium- term notes in June 1999, due in June 2000. The notes had an interest rate of 6.12 percent at December 31, 1999.
At December 31, 1999, the Company had short-term and long-term debt totaling $1,075.0 million and $1,166.5 million, respectively. At December 31, 1999, approximately $396.0 million was available for additional financing under the existing revolving credit facilities. Contingent upon market conditions and corporate needs, management may refinance short-term notes payable for longer- term securities.
Standard & Poor's Corporation (S&P), Moody's Investors Service (Moody's), Duff & Phelps Credit Rating Company (Duff & Phelps), and A.M. Best Company (AM Best) are among the third parties that provide the Company assessments of its overall financial position. Ratings from these agencies for financial strength are available for the individual U.S. 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 the Company are based primarily on consolidated financial information prepared using generally accepted accounting principles. Both financial strength ratings and debt ratings incorporate qualitative analyses by rating agencies on an ongoing basis.
The rating agencies reviewed and, in some instances, revised their ratings to reflect the completion of the merger. During the fourth quarter of 1999, Moody's placed the ratings on review for possible downgrade and subsequently lowered the ratings by one notch, S&P placed its ratings on CreditWatch with negative
On February 1, 2000, S&P removed the CreditWatch, reaffirmed the financial strength ratings, and lowered the debt ratings by one notch. Should additional downgrades occur, the Company does not expect that sales will be materially impacted. The table below reflects the most recent debt ratings for the Company and the financial strength ratings for the U.S. domiciled insurance company subsidiaries.
Although there was a broad range of possibilities that could have occurred in connection with non-compliance with year 2000 that might have affected the Company, particularly as a consequence of third parties, the Company experienced no material problems before, on, or after January 2, 2000. Consequently, the Company has not experienced any material adverse impact on its business, results of operations, or financial condition from year 2000 issues. With regard to any subsequent non-compliance resulting from the Company's systems, which the Company believes to be less likely than that resulting from third parties, the Company will provide adequate financial and personnel resources to remediate the problem as soon as possible. With regard to non-compliance resulting from third party failure, the Company has appropriate contingency arrangements that will minimize such impact; however, given the range of possibilities, no assurance can be given that the Company's efforts will be successful. In addition, the Company developed detailed plans for activities for managing the year-end rollover period. This included plans for appropriate backup of data, year-end processing schedules, limiting installations of new code, and the availability of special response teams tasked with identifying and resolving any issues which might occur during the rollover period. These teams included both information technology and business professionals. The rollover was conducted with no material issues arising.
The foregoing discussion of the year 2000 issue contains forward-looking statements relating to such matters as financial performance and the business of the Company. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order for the Company to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience relating to compliance with year 2000 to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements concerning year 2000 issues, which involve certain risks and uncertainties. These factors include (i) the unanticipated material impact of a system fault of the Company relating to year 2000, (ii) the failure to successfully remediate, in spite of testing, material systems of the Company, (iii) the time it may take to successfully remediate a failure once it occurs, as well as the resulting costs and loss of revenues, and (iv) the failure of third parties to properly remediate material year 2000 problems.
Since inception of the project, the Company has expensed approximately $32.2 million through December 31, 1999, in connection with incremental cost of the year 2000 project and estimates an additional $1.0 million of expense during 2000.
We have audited the accompanying consolidated statements of financial condition of UnumProvident Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. The consolidated financial statements give retroactive effect to the merger of Unum Corporation and Provident Companies, Inc. on June 30, 1999, which has been accounted for using the pooling of interests method as described in the notes to the consolidated financial statements. Our audits also included the financial statement schedules listed in the index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We did not audit the financial statements and schedules of the former Unum Corporation which statements reflect total assets constituting 39% in 1998, and total revenues constituting 54% in 1998 and 1997 of the related consolidated totals. Those statements and schedules were audited by other auditors whose report has been furnished to us, and our opinion, in so far as it relates to data included for the former Unum Corporation, is based solely on the report of the other auditors.
Chattanooga, Tennessee February 9, 2000, except for Note 17, for which the date is March 7, 2000
Basis of Presentation: On June 30, 1999, Unum Corporation (Unum) merged with and into Provident Companies, Inc. (Provident) under the name UnumProvident Corporation (the Company). The merger was accounted for as a pooling of interests. The historical financial results presented herein give effect to the merger as if it had been completed at the beginning of the earliest period presented.
Other Long-term Investments are carried at cost plus the Company's equity in undistributed net earnings since acquisition.
Changes in the fair value of available-for-sale fixed maturity securities and equity securities are reported as other comprehensive income (loss). These amounts are net of deferred federal income taxes and valuation adjustments to reserves for future policy and contract benefits which would have been recorded had the related unrealized gains or losses on these securities been realized.
The fair values of interest rate swap agreements which hedge available-for- sale securities are reported in the consolidated statements of financial condition as a component of fixed maturity securities. The fair values of interest rate swap agreements which hedge liabilities are not reported in the consolidated statements of financial condition. Amounts to be paid or received pursuant to interest rate swap agreements are accrued and recognized in the consolidated statements of operations as an adjustment to net investment income for asset hedges or as an adjustment to policyholder benefits for liability hedges.
The Company accounts for all of its interest rate swap agreements as hedges. Accordingly, for anticipated transaction hedges, any gains or losses realized on closed or terminated interest rate swap agreements are deferred and amortized to net investment income for asset hedges or policyholder benefits for liability hedges over the expected remaining life of the hedged item. The Company also uses interest rate swap agreements to hedge existing assets. The income payment streams generated by these swaps are recorded in the same manner as the hedged asset income payment streams.
Deferred policy acquisition costs related to interest-sensitive policies are amortized over the lives of the policies in relation to the present value of estimated gross profits from surrender charges and mortality, investment, and expense margins. Adjustments are made each year to reflect actual experience for assumptions which deviate significantly compared to assumed experience.
Deferred policy acquisition costs for the Lloyd's of London (Lloyd's) business are amortized proportionately over the period the premium is earned. Adjustments are made periodically to reflect actual experience for assumptions which deviate significantly compared to assumed experience.
Property and Equipment: Property and equipment is depreciated on the straight-line method over its estimated useful life. The accumulated depreciation for property and equipment was $376.1 million and $319.5 million as of December 31, 1999 and 1998, respectively.
The Company follows the periodic method of accounting for its Lloyd's business in which premiums are recognized as revenue over the policy term, and claims, including an estimate of claims incurred but not reported, are recognized as they occur. Premiums for the Lloyd's business are based on participation in the individual syndicate underwriting years that generate premiums over a three year period of time. The Company 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 actuarial 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 adjustments to the estimates are reflected in the current results.
Reserves for future policy and contract benefits on group single premium annuities have been provided on a net single premium method. The reserves are calculated based upon assumptions as to interest, mortality, and
Separate Accounts: The separate account amounts shown in the accompanying consolidated financial statements represent contributions by contract holders to variable-benefits and fixed-benefits pension plans. The contract purchase payments and the assets of the separate accounts are segregated from other Company funds for both investment and administrative purposes. Contract purchase payments received under variable annuity contracts are subject to deductions for sales and administrative fees. Also, the sponsoring companies of the separate accounts receive management fees which are based on the net asset values of the separate accounts.
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 in 1986 will remain participating as long as they remain in force. A Participation Fund Account (PFA) was established for the benefit of all of 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. The experience of the PFA and its operations have been excluded from the consolidated statements of operations. The PFA was $362.2 million and $371.1 million at December 31, 1999, and 1998, respectively, and represented approximately 0.9 percent and 1.0 percent of consolidated assets and 1.1 percent and 1.2 percent of consolidated liabilities for December 31, 1999 and 1998, respectively.
Changes in Accounting Principles: Effective January 1, 1999, the Company adopted the provisions of Statement of Position 97-3 (SOP 97-3), Accounting by Insurance and Other Enterprises for Insurance-Related Assessments. SOP 97-3 provides guidance for determining when an entity should recognize a liability or an asset for insurance-related assessments and how to measure these items. The Company fully adopted the provisions of Statement of Position 98-1 (SOP 98- 1), Accounting for the Costs of Computer Software Developed for or Obtained for Internal Use, effective January 1, 1999. SOP 98-1 requires the capitalization of certain costs incurred in connection with developing or obtaining software for internal use. The effect of the adoptions of SOP 97-3 and SOP 98-1 on the Company's financial position and results of operations was immaterial.
Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities
Cash flow hedge. To the extent it is effective, changes in the fair value of the derivative are recognized as a component of accumulated other comprehensive income in stockholders' equity until the hedged item affects earnings. Any ineffective portion must be recognized in operating earnings at the same time the change in fair value is recognized on the statement of financial condition.
For a derivative not designated as a hedging instrument, the gain or loss is recognized in operating earnings in the period of change.
Statement of Financial Accounting Standards No. 137 (SFAS 137), Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133 was issued in June 1999. SFAS 137 defers for one year the effective date of SFAS 133. The Company plans to adopt the provisions of SFAS 133 effective January 1, 2001. At this time the Company has not determined the effects that adoption of SFAS 133 will have on its financial statements.
In 1998, the American Institute of Certified Public Accountants (AICPA) issued SOP 98-7, which provides guidance on applying the deposit method of accounting to insurance and reinsurance contracts that do not transfer insurance risk. The Company is required to adopt SOP 98-7 effective January 1, 2000. The adoption of SOP 98-7 is not expected to have a material impact on the Company's results of operations, liquidity, or financial position.
The third component of the change in benefit liabilities is the change in the rate used to discount claim reserves, including IBNR reserves, which resulted in a decrease of $114.8 million in benefit liabilities. Subsequent to the merger, the Company significantly restructured the investment portfolio backing these liabilities with the objective of improving asset and liability management and improving yield. As part of this strategy, during the third quarter of 1999, the Company sold $426.1 million of assets with a book yield of 5.98 percent and purchased $546.6 million of assets with a yield of 8.87 percent, improving the overall yield on the assets backing liabilities. As a result of this investment restructuring and consistent with its policy, the Company increased the rate used to discount claim reserves to 7.35 percent, resulting in a decrease of $114.8 million in benefit liabilities.
Fixed Maturity Securities: Fair values for fixed maturity securities are based on quoted market prices, where available. For fixed maturity securities not actively traded, 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. See Note 4 for the amortized cost and fair values of securities by security type and by maturity date.
Policy Loans: Fair values for policy loans are estimated using discounted cash flow analyses, using interest rates currently being offered.
Policyholders' Funds: The carrying amount for deferred annuity products approximate fair value. Other policyholders funds include GICs and supplementary contracts without life contingencies. Fair values for GICs are estimated using discounted cash flow calculations, based on current market interest rates available for similar contracts with maturities consistent with those remaining for the contracts being valued. The carrying amount for supplementary contracts without life contingencies approximates fair value.
Derivatives: Fair values of derivative financial instruments are based on market quotes or pricing models and represent the net amount of cash the Company would have received or paid if the contracts had been settled or closed on December 31.
Adjustments to reserves for future policy and contract benefits that would have been necessary if the unrealized investment gains and losses related to the available-for-sale securities had been realized as of December 31, 1999 and 1998, were $(123.1) million and $891.7 million, respectively.
The components of the change in net unrealized gains on securities included in other comprehensive income (loss) are as follows:
Mortgage loans are impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The recorded investment in mortgage loans considered to be impaired was $18.1 million and $20.7 million, respectively, at December 31, 1999 and 1998. Included in the December 31, 1999 amount of $18.1 million were loans of $6.6 million which had a related allowance for losses of $2.4 million and loans of $11.5 million which had no related allowance for losses. Included in the December 31, 1998 amount of $20.7 million were loans of $9.0 million which had a related allowance for losses of $2.4 million and loans of $11.7 million which had no related allowance for losses.
position. The Company also typically enters into bilateral, cross- collateralization agreements with its counterparties to help limit the credit exposure of the derivatives. These agreements require the counterparty in a loss position to submit acceptable collateral with the other counterparty in the event the net loss position meets or exceeds an agreed upon amount. The Company's current credit exposure on derivatives, which is limited to the value of those contracts in a net gain position, was $12.5 million at December 31, 1999.
The following table summarizes the timing of anticipated settlements of interest rate swaps outstanding at December 31, 1999, whereby the Company receives a fixed rate and pays a variable rate. The weighted average interest rates assume current market conditions.
futures contracts to partially offset hedges on fixed maturity securities purchased prior to the termination date of interest rate swaps and forwards. The Company also uses futures contracts to replace terminated forwards and interest rate swaps in order to maintain hedges until the fixed maturity securities are purchased. The notional amount outstanding for these cash flow hedges was $1,482.9 million, $1,285.0 million, and $1,528.5 million at December 31, 1999, 1998, and 1997, respectively. The deferred gain on these contracts was $94.0 million, $63.7 million, and $37.6 million, at December 31, 1999, 1998, and 1997, respectively.
At December 31, 1999 and 1998, the Company had an unrealized gain of $0.3 million and $194.0 million, respectively, on the open interest rate swaps, forwards, and futures. These derivatives are scheduled to be terminated in the years 2000 through 2003 as assets are purchased with the future anticipated cash flows.
In 1999, the Company entered into an interest rate swap to convert a variable rate security into a fixed rate security. The notional amount for this interest rate swap is $60.0 million and is scheduled for termination in 2007. Income from settlements of payment streams on this interest rate swap agreement as reported in the consolidated statements of operations was $0.8 million. At December 31, 1999, the Company had an unrealized loss of $2.9 million on this swap.
The estimated net amortization of value of business acquired for each of the next five years is $37.1 million in 2000, $36.2 million in 2001, $35.3 million in 2002, $34.3 million in 2003, and $33.2 million in 2004.
The majority of the net balances are related to disabled lives claims with long-tail payouts on which interest earned on assets backing liabilities is an integral part of pricing and reserving. Interest accrued on prior year reserves has been calculated on the opening reserve balance less one-half year's cash payments at the average reserve discount rate used by the Company during 1999, 1998, and 1997. During 1999, unpaid claims incurred for prior years increased primarily due to changes in reserves as disclosed in Notes 2 and 13.
During the fourth quarter of 1998, the Company recorded a $153.0 million increase in the reserve for individual and group disability claims incurred as of December 31, 1998. Incurred claims include claims known as of that date and an estimate of those claims that have been incurred but not yet reported. Claims that have
Management believes the reserve adjustment was required based upon the integration plans it had in place and to which it had committed and based upon its ability to develop a reasonable estimate of the financial impact of the expected disruption to the claims management process. Claims management is an integral part of the disability operations. Disruptions in that process can create material, short-term increases in claim costs. The merger has had a near-term adverse impact on the efficiency and effectiveness of the Company's claims management function resulting in some delay in claim resolutions and additional claim payments to policyholders. Claims personnel have been distracted from normal claims management activities as a result of planning and implementing the integration of the two companies' claims organizations. In addition, employee turnover and additional training have reduced resources and productivity. An important part of the claims management process is assisting disabled policyholders with rehabilitation efforts. This complex activity is important to the policyholders because it can assist them in returning to productive work and lifestyles more quickly, and it is important to the Company because it shortens the duration of claim payments and thereby reduces the ultimate cost of settling claims.
Immediately following the announcement of the merger and continuing into December of 1998, senior management of the Company worked to develop the strategic direction of the Company's claims organization. As part of the strategic direction, senior management committed claims management personnel to be involved in developing the detailed integration plans and implementing the plans during 1999. Knowing that those involved in the claims operations integration activities would not be available full time to perform their normal claims management functions, management deemed it necessary to anticipate this effect on the claim reserves at December 31, 1998. Prior to the merger, during the first six months of 1999 approximately 90 claims managers and benefit specialists spent nearly 40 percent of their time developing the detailed integration plans. Effective with the merger, virtually all claims personnel have been involved in the process of implementing the new work processes and required training. The implementation and training efforts were estimated to require an average of one month of productive time from each of the claims staff between June 30, 1999 and December 31, 1999. Management now believes that implementation and related systems conversions will continue into the second quarter of 2000. However, due to actions taken by management to mitigate effects on resolution rates, the effect on new claim resolution rates is not anticipated to be material after the end of 1999. Actions by management to mitigate the effect on resolution rates include aggressive hiring of new claims staff, restrictions on early retirement elections, selective use of personnel for integration planning, and significant communications with staff members.
The reserving process begins with the assumptions indicated by past experience and is modified for current trends and other known factors. The Company anticipated the merger-related developments discussed above would generate a significant change in claims department productivity, reducing claim resolution rates, a key assumption when establishing reserves. Management developed actions to mitigate the impact of the merger on claims department productivity, including the hiring of additional claims staff and the restriction of early retirement elections by claims personnel. Where feasible, management also planned to obtain additional claims management resources through outsourcing. All such costs are expensed in the period incurred and are not material in relation to results of operations. Management reviewed its integration plans and the actions intended to mitigate the impact of the integration with claims managers to determine the extent of disruption in normal activities. Considering all of the above, the revised claim resolution rates, as a percentage of original assumptions (i.e., before adjusting for the effect of the claims operations integration activities), were 90 percent
for the first and second quarters of 1999, 84 percent for the third quarter, and 89 percent for the fourth quarter of 1999. The revised claim resolution rates for the third quarter and fourth quarter were lower than the first and second quarters because all claims personnel were expected to be involved in the implementation and training efforts. The effect of integration activities on new claim resolution rates is not expected to be material after December 31, 1999.
In order to evaluate the financial effect of merger-related integration activities, the Company projected the ultimate cost of settling all claims incurred as of December 31, 1998, using the revised claim resolution rates. This projection was compared to the projection excluding the adjustment to the claim resolution rates to obtain the amount of the charge. The Company reviewed its estimates of the financial impact of the claims operations integration activities with its actuaries and independent auditors.
Claim reserves at December 31, 1998 include $153.0 million as the estimated value of projected additional claim payments resulting from these claims operations integration activities. This 1998 reserve increase was reflected as a $142.6 million increase in benefits and reserves for future benefits, and a $10.4 million reduction in other income. The adverse impact of the claims operations integration activities on new claim resolution rates is not expected to be material after the end of 1999. As part of the periodic review of claim reserves, management will review the status and execution of the claims operations integration plans with the claims
Quarterly information concerning the estimated and actual impact of the claims operations integration activities is shown below. The $7.5 million favorable variance from assumptions for the year was reflected in 1999 earnings.
Management expects the remaining claims operations integration activities to impact claim reserves as anticipated at December 31, 1998. The expected disruption to the claims management process and the related increase to the disability claim reserve was considered in the review and update of assumptions underlying the group disability policy and contract benefit liabilities completed in the third quarter of 1999. Management will continue to evaluate the impact of the merger on disability claims experience and the assumptions related to expected claim resolutions.
A reconciliation of the income tax (benefit) attributable to continuing operations computed at U.S. federal statutory tax rates to the income tax expense (credit) as included in the consolidated statements of operations follows:
Under the Life Insurance Company Tax Act of 1959, life companies were required to maintain a policyholders' surplus account containing the accumulated portion of current income which had not been subjected to income tax in the year earned. The Deficit Reduction Act of 1984 requires that no future amounts be added after 1983 to the policyholders' surplus account. Further, any future distributions from the account would become subject to federal income taxes at the general corporate federal income tax rate then in effect. The amount of the policyholders' surplus account at December 31, 1999, is approximately $233.4 million. Future distributions from the policyholders' surplus account are deemed to occur if a statutorily prescribed maximum for the account is less than the value of the account or if dividend distributions exceed the total amount accumulated as currently taxable income in the year earned. If the entire policyholders' surplus account were deemed distributed in 2000, this would result in a tax of approximately $81.7 million. No current or deferred federal income taxes have been provided on these amounts because management considers the conditions under which such taxes would be paid to be remote.
During 1999, the Company reached a settlement with the Internal Revenue Service (IRS) relating to its federal income tax liability for the 1986 through 1992 tax years, and the IRS continued its examination of subsequent years. For most of the Company's subsidiaries, tax years through 1992 are closed to further assessment by the IRS. Management believes any future adjustments that may result from IRS examinations of tax returns will not have a material impact on the financial position, liquidity, or results of operations of the Company. During 1999, results increased $36.8 million due to settlements of prior year tax issues with the IRS.
The Company's subsidiaries had net operating loss carryforwards of approximately $725.0 million, alternative minimum tax credit carryforwards of approximately $28.0 million, and foreign tax credit carryforwards of $4.0 million as of December 31, 1999. The majority of the net operating loss carryforwards will begin to expire, if not utilized, in 2015; the alternative minimum tax credits do not expire; the foreign tax credits begin expiring in 2003.
Federal income taxes paid during 1999, 1998, and 1997 were $77.8 million, $104.8 million, and $192.8 million, respectively.
Short-term debt consists of the following at December 31 (in millions):
Of the $1,166.5 million of long-term debt at December 31, 1999, $35.0 million will mature in 2002, $20.0 million will mature in 2003, and $1,111.5 million will mature in 2004 and thereafter.
Interest paid on short-term and long-term debt during 1999, 1998, and 1997 was $115.2 million, $100.5 million, and $84.7 million, respectively.
The Company sponsors several defined benefit pension and postretirement plans for its employees. The following tables provide the changes in the benefit obligation and fair value of plan assets for the years ended December 31, 1999 and 1998, and statements of the funded status of the plans as of December 31, 1999 and 1998.
At December 31, 1999, the plan assets include 448,784 shares of the Company's common stock with a fair value of $14.4 million. The amount of dividends paid during 1999 was not material.
For measurement purposes, the annual rate of increase in the per capita cost of covered health care benefits assumed for 2000 was a range of 5.50 percent to 7.50 percent. The rate range was assumed to change gradually to a rate of 5.50 percent for 2006 and remain at that level thereafter.
During February 1998, the Company redeemed its 8.10% cumulative preferred stock outstanding of $156.2 million at $150 per share equivalent to $25 per depositary share.
In March 1997 and July 1997, the Boards of Directors of Unum and Provident, respectively, authorized two-for-one stock splits. These stock splits were effected in the form of stock dividends distributed in 1997. As a result of this action, $11.9 million was transferred from additional paid-in capital to common stock. Historical share and per share amounts in the consolidated financial statements and notes thereto reflect these stock splits.
Prior to the Stock Plan, the Company had various stock option and stock award programs. For all stock option plans the exercise price of each option was not less than the fair market value of the Company's stock at the date of grant. In accordance with stock plan provisions, outstanding stock options and restricted stock became immediately exercisable as a result of a change in control (see Note 2).
The weighted average assumptions used in estimating compensation cost for the Company during 1999 and for the Provident plans in 1998 and 1997 are as follows:
Between 1991 and 1994, certain officers of the Company were granted LSARs in conjunction with their stock options for those years. An LSAR is meant to compensate an officer if the associated option loses 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) the highest price paid per share in connection with the change in control or (b) the highest fair market value per share as reported at any time during the 60 day period preceding the change in control. As an underlying stock option is exercised, the LSARs are automatically cancelled. The LSARs were amended such that the merger of Unum and Provident would not be considered a change of control. At December 31, 1999 there were no LSARs outstanding. At December 1998 and 1997, there were 495,750, and 557,800 LSARs outstanding, respectively.
The Company routinely assumes and cedes reinsurance with 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, 1999, relates to over 140 reinsurance relationships. Of the six major relationships which account for approximately 75 percent of the reinsurance receivable amount at December 31, 1999, all are with companies rated A or better by A.M. Best Company or are fully securitized by investment-grade fixed maturity securities held in trust.
Premium income assumed was $576.7 million, $489.0 million, and $453.9 million during 1999, 1998, and 1997, respectively.
In 1996, the Company executed a definitive reinsurance agreement with Centre Life Reinsurance Limited (Centre Re), a Bermuda-based reinsurance specialist, for reinsurance coverage of the existing United States non-cancellable individual disability active life reserves of one of the Company's insurance subsidiaries, Unum Life Insurance Company of America. This agreement reinsures all claims incurred on or after January 1, 1996. The Company has the right, but no obligation, to recapture the business after six years without penalty. Under the agreement, Centre Re has an obligation to absorb losses within a defined risk layer. The Company 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 the Company. As of December 31, 1999, the attachment point had not been reached.
Under this agreement, the Company funds a trust account equal to the amount of the Company's exposure. This trust account provides security for amounts due by the Company prior to reaching the attachment point. The Company controls the management of the business, including premium collection and claims management,
This reinsurance agreement transfers risk and is accounted for as a long- duration reinsurance contract in accordance with the provisions of Statement of Financial Accounting Standard No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. The underlying operating results of this contract are reflected in other income, and any realized gains or losses from sales of assets are reflected as realized investment gains and losses in the Company's consolidated statements of operations.
Included in deposit assets in the consolidated statements of financial condition at December 31, 1999, is a deposit asset for this reinsurance arrangement of approximately $321.1 million. The deposit asset is comprised of the Company'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 included in other comprehensive income (loss) in the equity section of the Company's consolidated statements of financial condition.
During 1999, the Company recognized $327.8 million of before-tax charges related to its reinsurance operations. The breakdown of these charges by quarter is as follows:
The review of estimates related to open years of account was performed based on a periodic review of these estimates as information was received from the Lloyd's syndicates. The review resulted in revised best estimates of the expected ultimate profit or loss for each open year of account, which were significantly below the levels estimated in 1998. The resulting charge to earnings in the amount of $44.0 million was reflected in the Company's income in the first quarter of 1999 for the open years of account 1996 through 1999. In addition to the risk participation charge, the Company recorded a charge of $1.5 million, which represented the reduction of previously recognized profit commissions related to the Lloyd's management company operations.
When an event or change in circumstance occurs that indicates the recoverability of an asset should be assessed for impairment, a recoverability test is performed to determine if an impairment has occurred. Following the poor results of the reinsurance operations in the first quarter of 1999, the Company updated the goodwill recoverability test using the most current results and forecasts. The goodwill recoverability test used the held-for-use model that compares the undiscounted cash flows of these operations to determine whether those cash flows can recover the unamortized goodwill. After factoring in the first quarter results and current revised forecasts due to recent poor performance for these operations, future undiscounted cash flows were insufficient to recover the entire goodwill amount, indicating that the goodwill was impaired. Goodwill recoverability testing of these operations performed prior to March 31, 1999 had indicated that the goodwill was not impaired.
Provision for Losses on Lloyd's of London Syndicate Participations-- During the third quarter of 1999, underwriters of syndicates provided to Lloyd's updated estimates of their expected ultimate profit or loss for each open year of account. These estimates were significantly below earlier estimates. Market conditions are not expected to improve dramatically in the near term.
During the third quarter of 1999, the Company entered into a non-binding agreement to sell one of its managed syndicates, and a definitive agreement is being negotiated. Unamortized goodwill of $2.4 million was written off in connection with this planned transaction. Under the terms of the agreement, the new owner will manage the syndicate for year 2000 and will manage the open syndicate years of account. The Company retains the underwriting risk on open syndicate years and agreed to provide up to $24.7 million ((Pounds)15 million) of capacity for year 2000, down from $36.2 million ((Pounds)22 million) in 1999.
Provision for Losses on Reinsurance Pool Participations Other than Lloyd's--In connection with the development of the cost of exiting the reinsurance operations, the Company updated its review of reserves related to non Lloyd's reinsurance operations as well as future costs associated with managing the run-off of the retained reinsurance pools liabilities. Based upon the most recent information available, the Company increased reserves related to its participation in certain managed and non-managed reinsurance facilities by $21.9 million.
An additional loss of $2.7 million before tax ($1.8 million after tax) was realized in the fourth quarter of 1999 upon completion of the transaction to reinsure the A&H and LTC risk participations.
In 1999, the Company sold certain portions of its reinsurance management operations to AUL. See Note 13 for further discussion.
In consideration for the transfer of statutory reserves, American General paid the Company a ceding commission of $58.0 million. In connection with the sale, the Company wrote off $18.7 million of goodwill associated with the annuity business acquired from Paul Revere. Total liabilities of $2,518.9 million were assumed by American General, and total assets, excluding the resulting reinsurance receivable, decreased $2,506.7 million. The gain recognized at the time of the sale increased 1998 operating earnings by $12.2 million before tax and $1.4 million after tax. Total revenue and income before federal income taxes for the annuity business sold were $152.7 million and $23.7 million, respectively, in 1997. Included in these amounts were net realized investment gains of $8.0 million in 1997.
In 1997 two alleged class action lawsuits were filed in Superior Court in Worcester, Massachusetts (Superior Court) against the Company--one purporting to represent all career agents of subsidiaries of Paul Revere whose employment relationships ended on June 30, 1997 and were offered contracts to sell insurance policies as independent producers and the other purporting to represent independent brokers who sold certain Paul Revere individual disability income policies with benefit riders. Motions filed by the Company to dismiss most of the counts in the complaints, which allege various breach of contract and statutory claims, have been denied, but the cases remain at a preliminary stage. A hearing to determine class certification was heard on December 20, 1999 in Massachusetts state court. The court certified a class for the independent brokers and has denied class certification for the career agents. The Company will appeal the class certification for the independent brokers. The Company has filed a conditional counterclaim in each action which requests a substantial return of commissions should the Superior Court agree with the plaintiff's interpretation of the contracts. The Company believes that it has strong defenses to both lawsuits and plans to vigorously defend its position and resist certification of the classes. In addition, the same plaintiff's attorney who has filed the purported class action lawsuits has filed 44 individual lawsuits on behalf of current and former Paul Revere sales managers alleging various breach of contract claims. The Company has filed a motion in federal court to compel arbitration for 16 of the plaintiffs who are licensed by the National Association of Securities Dealers and have executed the Uniform Application for Registration or Transfer in the Securities Industry (Form U-4). The federal court has denied 14 of those motions and granted two.
Three additional former general managers have filed similar lawsuits. The Company believes that it has strong defenses and plans to vigorously defend its position in these cases. Although the alleged class action lawsuits and individual lawsuits are in the early stages, management does not currently expect these suits to materially affect the financial position or results of operations of the Company.
During September and October 1999, the Company and several of its officers were named as defendants in five class action lawsuits filed in the United States District Court for the District of Maine. On January 3, 2000, the Maine district court appointed a lead class action plaintiff and ordered plaintiffs to file a consolidated amended complaint. On January 27, 2000, a sixth complaint against the same defendants was filed in the Southern District of New York. On March 7, 2000, the sixth action was transferred to the District of Maine. On February 23, 2000, two consolidated amended class action complaints were filed against the same defendants. The first amended class action complaint asserts a variety of claims under the Securities Exchange Act of 1934, as amended, on behalf of a putative class of shareholders who purchased or otherwise acquired stock in the Company or Unum between February 4, 1998 and February 9, 2000. The second amended complaint asserts a variety of claims under the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended, on behalf of a putative class of shareholders who exchanged the common stock of Unum or Provident for the Company's stock pursuant to the joint proxy/registration statement issued in connection with the merger between Unum and Provident. The complaints allege that the defendants made false and misleading public statements concerning, among other things, Unum's and the Company's reserves for disability insurance and pricing policies, the Company's merger costs, and the adequacy of the due diligence reviews performed in connection with the merger. The complaints seek money damages on behalf of all persons who purchased or otherwise acquired Company or Unum stock in the class period or who were issued Company stock pursuant to the merger. To date, no class has been certified, and no defendant has answered any complaint. The Company disputes the claims alleged in the complaint and plans to vigorously contest them.
The Company's insurance subsidiaries prepare their statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the National Association of Insurance Commissioners (NAIC) and the applicable state regulatory authorities. Prescribed statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the NAIC. Permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. At December 31, 1999, the Company had not applied any permitted accounting practices that differed from prescribed statutory accounting practices that had a material impact on the financial position or results of operations of the insurance subsidiaries.
In 1998, the NAIC approved a codification of statutory accounting practices effective January 1, 2001, which will serve as a comprehensive and standardized guide to statutory accounting principles. Following implementation, statutory accounting principles will continue to be governed by individual state laws and permitted practices until adoption by the various states. Accordingly, before codification becomes effective for the Company's insurance subsidiaries, their states of domicile must adopt codification as the prescribed basis of accounting. The adoption of the codification will change, to some extent, the accounting practices that the Company's insurance subsidiaries use to prepare their statutory financial statements. At this time, the Company has not determined the effects that codification will have on its insurance subsidiaries' statutory financial statements.
At December 31, 1999, the Company's insurance subsidiaries had on deposit with regulatory authorities securities with a book value of $1,277.0 million held for the protection of policyholders.