UNUM owns home office property consisting of five office buildings and four service buildings located throughout the Portland, Maine area. UNUM also owns an office building in the United Kingdom, which is the home office of UNUM Limited. The home office of the Colonial Companies is located in Columbia, South Carolina, and is also owned by UNUM. In addition, UNUM leases, on periods from five to ten years, office and warehouse space for use by its home office affiliates and sales forces.
This management's discussion and analysis reviews the consolidated financial condition of UNUM at December 31, 1993, and the consolidated results of operations for the past three years and, where appropriate, factors that may affect future financial performance are identified and discussed. Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Selected Consolidated Financial Data.
Summary of income (loss) before income taxes Employee Benefits Segment $ 239.1 7.5% $ 222.5 14.7% $ 193.9 Related Businesses Segment 57.3 7.3 53.4 (12.6) 61.1 Colonial Companies Segment 70.4 16.4 60.5 5.2 57.5 Individual Disability Segment 69.0 54.7 44.6 21.5 36.7 Retirement Security Segment 21.1 nm 6.7 nm (2.1) Other Operations Segment 20.8 26.1 16.5 nm (16.5) Corporate (17.4) nm (5.7) nm (11.0) Total income before income taxes $ 460.3 15.5% $ 398.5 24.7% $ 319.6
Balance Sheet Data Assets $12,437.3 $11,959.8 $11,310.9 Long-term debt $ 128.6 $ 77.2 $ 51.5 Stockholders' equity $ 2,102.7 $ 2,010.9 $ 1,755.5 Shares outstanding 76.0 79.1 78.2 Weighted average shares outstanding during the year 78.8 78.5 77.8
As described in Notes 1 and 2 of the Consolidated Financial Statements, UNUM's consolidated financial statements have been restated to include the accounts of Colonial Companies, Inc., pursuant to the March 26, 1993, merger, which has been accounted for as a pooling of interests. As a result of the merger, UNUM formed a new business segment called "Colonial Companies," which exclusively reports the historical results of Colonial Companies, Inc., for all periods presented. Reflected in 1993 net income is a one time charge of $9.6 million, or $0.12 per share, for expenses incurred to effect the merger.
1992 Compared With 1991 Favorable group long term disability claims experience in the Employee Benefits segment, coupled with decreased expenses associated with the withdrawal from the 401(k) market reported in the Other Operations segment were two primary factors that resulted in increased income before income taxes in 1992. Additionally, net realized investment gains increased by $16.5 million in 1992.
The effective tax rate reflects income tax expense as a percentage of pretax income. The effective rates were 32.2% for 1993, 26.9% for 1992 and 23.2% for 1991. Excluding the adjustment to deferred income tax expense of $7.8 million for the enacted tax rate change, the 1993 effective tax rate would have been 30.5%. Reported income tax expense was below the federal statutory tax rate of 35% for 1993, and 34% for 1992 and 1991, primarily due to tax savings from investment in tax-exempt securities. UNUM's growth in pretax income has outpaced the growth of income from tax-exempt securities, which has resulted in increased effective tax rates for 1993 and 1992.
The effect of the 1993 tax rate increase on future income taxes is dependent on the levels of pretax income and UNUM's investment in tax exempt securities. Other provisions of OBRA include: the denial of a tax deduction for lobbying expenses; a decrease in the amount of meals and entertainment expenses deductible for tax purposes; and denial of a tax deduction for some amounts of compensation paid in excess of $1 million to certain individuals in a single year. These provisions are not expected to have a material effect on UNUM's future income tax expense.
During 1993, long-term interest rates dropped to their lowest levels in more than 20 years, the prime rate averaged 6%, and short-term rates hovered around 3%. The declining interest rate environment during the past two years has reduced investment yields on new fixed income purchases, and has resulted in decreased investment income for 1993, despite a continued growth in invested assets. UNUM has also experienced increased levels of prepayments and refinancings on its fixed rate investments during the past two years due to the lower interest rate environment. If the current interest rate environment persists, management anticipates that the average investment portfolio yield will further decline, since UNUM invests its cash flows in high quality assets that currently have yields below the existing average investment portfolio yields.
Sales of long term care insurance were unfavorably affected in 1993 by the Administration's proposal to include a limited home care benefit for severely disabled individuals. Management believes that the Administration will ultimately restrict long term care benefits to those who cannot otherwise afford coverage, a situation which would not affect UNUM's target markets. UNUM has since introduced a new program, LTC Assurance Plus, that offers a premium credit on home long term care if duplicate federal insurance is provided under enacted health care legislation.
President Clinton's reform plan has been met with opposition, and several parties have drafted and support alternative legislation. It is likely that congressional deliberations on health care reform will result in final legislation that is different from President Clinton's original proposal.
Management is not able to predict the effect that any such legislation might have on UNUM's businesses but believes that health care reform presents opportunities for business growth as brokers and other intermediaries search for a means to replace income lost from selling medical insurance products and as employers seek to differentiate their benefit packages by providing additional benefits. Management also believes that health care reform could allow UNUM to leverage its expertise in individual payroll-deduction marketing through its new affiliate, Colonial Companies, Inc., which is the leader in payroll deducted, voluntary employee benefits offered to employees at their worksites.
(Dollars in millions and percentage increase (decrease) over prior year) 1993 1992 1991
Revenues Premiums Group LTD $ 933.4 20.4% $ 775.2 8.8% $ 712.7 Group life insurance 272.0 28.2 212.2 23.8 171.4 Other employee benefits 147.4 22.2 120.6 9.7 109.9 Total premiums 1,352.8 22.1 1,108.0 11.5 994.0
Investment income 211.9 5.4 201.0 11.0 181.1 Net realized investment gains 22.8 (31.7) 33.4 nm 15.0 Fees and other income 9.8 19.5 8.2 36.7 6.0 Total revenues 1,597.3 18.3 1,350.6 12.9 1,196.1
Income before income taxes $ 239.1 7.5% $ 222.5 14.7% $ 193.9
Sales (annualized new premiums) Group LTD $ 196.2 $ 160.0 $ 147.8 Group life insurance $ 89.4 $ 77.6 $ 60.8 Other employee benefits $ 52.9 $ 46.7 $ 41.7 Persistency (premiums) Group LTD 88.7% 90.3% 89.7% Group life insurance 89.2% 89.2% 88.7% Benefit ratio (% of premiums) 75.3% 72.9% 73.4% Operating expense ratio (% of premiums) 21.0% 23.4% 23.0%
During 1992, the Employee Benefit segment's benefit ratio improved primarily due to more favorable group LTD claims experience resulting from risk management improvements, which was partially offset by lower claim recoveries and less favorable claims experience in the group life business. During 1992, claims experience in the group life business returned to a more normal level, following better than expected experience rates in 1991.
Strong premium growth and lower operating expenses that were partially offset by unfavorable claims experience in the group life business and lower realized investment gains resulted in increased income before income taxes for 1993 as compared to 1992. The improvement in income before income taxes for the Employee Benefits segment in 1992 was primarily due to more favorable group LTD claims experience and increased realized investment gains, which were partially offset by less favorable claims experience in the group life business.
Revenues Premiums $ 353.4 4.9% $ 336.8 4.2% $ 323.2 Investment income 82.1 (6.2) 87.5 (2.9) 90.1 Net realized investment gains 3.4 (17.1) 4.1 (21.2) 5.2 Fees and other income 49.1 nm 17.6 nm 1.0 Total revenues 488.0 9.4 446.0 6.3 419.5
Income before income taxes $ 57.3 7.3% $ 53.4 (12.6)% $ 61.1
The Related Businesses segment includes: UNUM Limited, the United Kingdom's leader in group disability insurance; Commercial Life Insurance Company ("Commercial Life"), a leader in special risk insurance and professional association insurance marketing; and Reinsurance Operations, which includes Duncanson & Holt, Inc., and other specialty reinsurance operations.
The economic recession in the United Kingdom could continue to negatively affect UNUM Limited's and the Related Businesses segment's growth and earnings. During the last two years the U.S. dollar continued to strengthen against the British pound sterling, which decreased earnings for UNUM Limited as reported in U.S. dollars. The weighted average exchange rate was approximately $1.51, $1.78 and $1.78 for the years ended December 31, 1993, 1992 and 1991. At December 31, 1993, the spot rate had declined to $1.48.
Income before income taxes $ 70.4 16.4% $ 60.5 5.2% $ 57.5
Sales (first month's premiums) $ 12.9 $ 13.5 $ 13.0 Benefit ratio (% of premiums) 51.4% 51.5% 49.9% Operating expense ratio (% of premiums) 23.3% 25.6% 28.2%
The Colonial Companies segment, which includes Colonial Life & Accident Insurance Company and affiliates, offers payroll-deducted, voluntary employee benefits to employees at their worksites. The Colonial Companies segment ("Colonial") markets its accident and sickness, cancer, and life insurance products primarily through independent sales representatives.
Due to the nature of the products sold, Colonial measures sales by first month's premiums. In 1993, Colonial experienced a slight decrease in sales, which management attributes to uncertainty in the marketplace about the types of coverage that would be included in the President's health care reform proposal. However, Colonial's products would be excluded from the President's plan and, therefore, would not be considered part of the universal coverage package. Management views health care reform as an opportunity for UNUM by allowing Colonial the ability to leverage its expertise in individual payroll-deduction marketing, since the workplace is considered to be a primary means of access to insurance benefits under the proposed plan.
Income before income taxes $ 69.0 54.7% $ 44.6 21.5% $ 36.7
The Individual Disability segment includes disability income products sold in the United States and Canada through UNUM America and First UNUM, and private label agreements. Private label agreements expand UNUM's distribution channels in the individual disability market by providing other insurance companies the right to market Individual Disability's CUSTOMAX (registered trademark) product under their own names.
The benefit ratio improved during 1993 to 67.9% from 72.4% in 1992. This favorable experience was a result of lower incidence of new claims, which management partially attributes to the success of a market segmentation strategy and disciplined underwriting. Additionally, during 1993 management continued to dedicate resources to develop and implement strategies to address the claim trends that developed during 1992. During 1992, the benefit ratio increased to 72.4% from 71.6% in 1991 primarily due to higher incidence of new claims with an increased average claim size and lower recovery rates, which management believes were linked to recessionary pressures experienced by the segment's insureds.
The Individual Disability segment's increase in income before income taxes in 1993 was primarily due to more favorable claims experience and continued expense management. The increase in income before income taxes for the Individual Disability segment in 1992 from 1991 was primarily due to a decreased expense ratio, which was partially offset by less favorable claims experience.
Revenues Premiums $ 32.0 17.6% $ 27.2 19.8% $ 22.7 Investment income 233.8 0.3 233.0 2.4 227.6 Net realized investment gains (losses) 1.7 nm (4.2) nm 0.2 Fees and other income 4.3 (15.7) 5.1 (3.8) 5.3 Total revenues 271.8 4.1 261.1 2.1 255.8
The Retirement Security segment includes tax sheltered annuities ("TSAs") and long term care insurance, and beginning in 1993, lifestyle security protection products, all of which are marketed by UNUM America and First UNUM.
Increased operating expenses were incurred during 1993 for the development of product and market initiatives for the lifestyle security protection products and investments in key business initiatives for the continued growth of TSAs and the Retirement Security segment. Additionally, UNUM continued its investment in the development of long term care products in 1993 and 1992.
The 1993 results of the Retirement Security segment were also affected by lower than expected growth for the long term care products due to the announcement of the President's health care reform proposal that includes long term care coverage. While management cannot predict whether health care reform legislation will be adopted with provisions for long term care, management expects that Congress will ultimately restrict long term care benefits to those who cannot otherwise afford coverage, which would not affect UNUM's target markets.
Income (loss) before income taxes $ 20.8 26.1% $ 16.5 nm% $ (16.5)
The Other Operations segment includes 401(k) plans, guaranteed investment contracts ("GICs"), deposit administration contracts ("DAs"), individual life insurance business of UNUM Life Insurance Company of America and group medical insurance, all of which are no longer actively marketed by UNUM.
In the fourth quarter of 1991, UNUM announced plans to withdraw from the 401(k) market by the end of 1992, and recorded a $16.0 million pretax charge to provide for the costs of withdrawal, reassignment of employees and to write-off deferred acquisition costs associated with the 401(k) business. The $16.0 million provision was charged to the 1991 Consolidated Statement of Income as deferred policy acquisition costs expense and operating expenses of $4.1 million and $11.9 million, respectively.
CORPORATE 1993 1992 1991 Loss before income taxes $(17.4) $(5.7) $(11.0)
UNUM's investment philosophy is to optimize "risk adjusted total return," which evaluates total expected return after consideration of all associated expenses and losses, within criteria established for each product line. Product line investment strategies are developed to complement the business risks by meeting the liquidity and solvency requirements of each product. UNUM purchases assets whose maturities, expected cash flows and prepayment conditions are consistent with these strategies. The nature and quality of the types of investments complies with policies established by management, which are more stringent overall than the statutes and regulations imposed by the jurisdictions in which UNUM's insurance subsidiaries are licensed.
Overall, management believes that its mortgage loan portfolio is well diversified geographically and among property types. UNUM's incidence of new problem mortgage loans declined in 1993 as overall economic activity improved modestly, and many of the real estate markets in which UNUM has mortgage loans stabilized. Foreclosure activity and new reserve additions have declined in 1993 from the higher levels of recent years; however, management continues to expect additional delinquencies and problem loans in the future. Management believes the allowance provided on mortgage loans is adequate to cover probable losses as of December 31, 1993.
Restructured loans are loans whose terms have been modified to interest rates less than market at the time of restructure and are currently performing pursuant to such modified terms. UNUM modifies loans to protect its investment and only when it is anticipated that the borrower will be able to meet the modified terms. As of December 31, 1993, and 1992, restructured mortgage loans totaled $65.9 million and $80.9 million, respectively. Interest lost on restructured loans was not material in 1993, 1992 or 1991.
At December 31, 1993, investment real estate and real estate held for sale amounted to $193.5 million and $24.7 million, respectively. This compares with $214.6 million of investment real estate and $48.6 million of real estate held for sale at December 31, 1992. UNUM continues to limit its real estate exposure as a percentage of invested assets through an active sales program. UNUM sold $40.5 million and $58.0 million of real estate at 105% of carrying value during 1993 and 1992, respectively.
Real estate which meets certain investment criteria and is intended to be held long term is carried at cost less accumulated depreciation. Real estate that has been acquired through foreclosure is valued at fair value at the date of foreclosure. Real estate held for sale is included in other assets in the Consolidated Balance Sheets and is valued net of an allowance which reduces the carrying value to the lower of fair value less estimated costs to sell, or cost. Occasionally, investment real estate is reclassified and revalued as real estate held for sale when it no longer meets UNUM's investment criteria. Additions to allowances for probable losses related to real estate held for sale resulted in realized investment losses of $18.8 million, $7.2 million and $10.7 million for the years ended December 31, 1993, 1992 and 1991, respectively.
Given the current real estate environment, additional foreclosures are anticipated, but at a reduced level from the early 1990s. Current and anticipated real estate acquired through foreclosure is not expected to have a significant impact on UNUM's investment income, liquidity and capital resources.
UNUM's businesses produce positive cash flows which are invested primarily in intermediate, fixed maturity investments intended to reflect the nature of anticipated cash obligations of insurance benefit payments and insurance contract maturities and to optimize investment returns at appropriate risk levels. To meet unexpected cash requirements and liquidity needs, UNUM maintains part of its investment portfolio in fixed maturities classified as available for sale, equity securities, cash and short-term investments.
In September 1993, UNUM announced the resumption of a program to repurchase its common stock pursuant to an existing Board of Directors' resolution. For the year ended December 31, 1993, UNUM acquired approximately 3.7 million shares of its common stock in the open market at an aggregate cost of $192.5 million that was primarily funded through additional borrowings. This share repurchase contributed to the decrease in the number of shares outstanding at December 31, 1993, to 76.0 million, from 79.1 million at December 31, 1992. Prior to the resumption of this repurchase program, UNUM had not acquired any shares in the open market since 1990. At December 31, 1993, approximately 1.5 million outstanding shares remained authorized for repurchase. On February 11, 1994, UNUM's Board of Directors voted to expand UNUM's authorization to repurchase an additional 5.0 million shares. Stock repurchase is one element of management's financial strategy for delivering long-term value to UNUM's shareholders.
During 1993 and 1992, withdrawals of contracts reported in the Other Operations segment, including contract terminations, payments to participants and transfers to other carriers, were approximately $309 million and $277 million, respectively. Withdrawals during 1993 and 1992 were at levels expected by management and reflect the run-off nature of these closed blocks of businesses. UNUM manages liquidity objectives by including certain conditions in pension contracts which prohibit or restrict availability of funds.
From time to time, dividend payments are made from the insurance subsidiaries to UNUM Corporation which may be subject to approval by insurance regulatory authorities. See Note 14 of the Consolidated Financial Statements for a discussion of dividend restrictions.
First UNUM Life Insurance Company ("First UNUM") also had its financial strength rating upgraded, to "A+" (Superior), by Best's in July 1993. In November 1993, Moody's confirmed First UNUM's financial strength rating as "Aa2" (Excellent). S&P also confirmed First UNUM's claims-paying ability rating as "AA+" (Excellent), in December 1993.
Commercial Life Insurance Company ("Commercial Life") is also rated by Best's, and was confirmed at the rating of "A-" (Excellent) in July 1993.
The National Association of Insurance Commissioners adopted a set of Risk Based Capital standards for the life and health insurance industry, which became effective in 1993. These Risk-Based Capital standards are one way to measure the risk that insurance companies assume in the course of conducting insurance and investment activities.
The Risk-Based Capital standards for life insurance companies are based on a formula that established capital requirements relating to asset default risk, insurance risk, interest rate (asset/liability mismatch) risk and business risk. A company's Total Adjusted Capital (statutory capital, surplus, and Asset Valuation Reserve plus certain other adjustments) is compared to the Authorized Control Level ("ACL") of Risk Based Capital produced by the formula. Subject to certain trend tests to determine the change in ratio from year to year, companies with Total Adjusted Capital above 200% of ACL are assumed to be adequately capitalized. Companies below 200% of ACL are identified as requiring various levels of regulatory action ranging from increased information requirements for companies between 150% and 200% of ACL, to mandatory control by the insurance department for companies below 70% of ACL.
At December 31, 1993, the ACL ratios for UNUM America, First UNUM, Colonial Life and Commercial Life were approximately 350%, 390%, 450% and 380%, respectively.
- - Fixed maturities that UNUM has the positive intent and ability to hold to maturity will be classified as "held to maturity" and will be reported at amortized cost. - - Fixed maturities and equity securities that are bought and held principally for the purpose of selling them in the near term will be classified as "trading" and will be reported at fair value with unrealized holding gains and losses included in earnings, net of taxes. Since UNUM does not trade its debt or equity securities, a trading account will not be established under the provisions of FAS 115. - - Fixed maturities and equity securities not classified as "held to maturity" or "trading" will be classified as "available for sale" and will be reported at fair value with unrealized holding gains and losses reported in a separate component of stockholders' equity, net of taxes.
On January 20, 1994, the Securities and Exchange Commission ("SEC") announced that they would expect SEC insurance registrants to adjust, upon adoption of FAS 115, certain assets and liabilities, namely deferred policy acquisition costs and policyholder liabilities, to the amount that would have been reported if the unrealized gains and losses from securities classified as available for sale had been realized. The SEC and the accounting profession continue to discuss the accounting and reporting implications of FAS 115 for the insurance industry.
UNUM is required to adopt this standard effective January 1, 1994, and estimates that the impact of valuing its fixed maturities available for sale at fair value will result in an increase to stockholders' equity of approximately $38 million. The adoption of FAS 115 will not affect UNUM's results of operations. UNUM continues to monitor the emerging implementation guidance offered by the SEC and the accounting profession, which could change the estimated impact of adopting FAS 115.
In November 1992, the FASB issued FAS No. 112, which requires employers to recognize obligations for certain postemployment benefits provided to former or inactive employees after employment but before retirement. UNUM will adopt FAS 112 effective January 1, 1994. Adoption of FAS 112 is not expected to have a material effect on UNUM's results of operations or financial position.
C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E
Revenues Premiums $2,474.1 $2,142.4 $1,938.9 Investment income 790.4 809.2 786.6 Net realized investment gains 49.4 41.5 25.0 Fees and other income 83.1 55.4 34.0 Total revenues 3,397.0 3,048.5 2,784.5
Benefits and expenses Benefits to policyholders 1,775.7 1,532.6 1,387.1 Interest credited 281.0 328.4 357.7 Operating expenses 675.6 590.9 554.8 Commissions 326.8 298.9 258.8 Increase in unamortized deferred policy acquisition costs (135.1) (111.7) (104.8) Interest expense 12.7 10.9 11.3 Total benefits and expenses 2,936.7 2,650.0 2,464.9
Income taxes Current 73.4 68.0 36.9 Deferred 74.9 39.3 37.4 Total income taxes 148.3 107.3 74.3 Income before cumulative effects of accounting changes 312.0 291.2 245.3
Cumulative effects of accounting changes Income taxes 20.0 -- -- Postretirement benefits other than pensions, net of tax (32.1) -- -- Net income $ 299.9 $ 291.2 $ 245.3
Liabilities and Stockholders' Equity Liabilities Future policy benefits $ 4,009.6 $ 3,543.3 Unpaid claims and claim expenses 676.3 637.6 Other policyholder funds 4,268.8 4,554.8 Federal income taxes Current 31.5 28.8 Deferred 376.7 298.1 Notes payable 238.6 199.9 Other liabilities 466.4 424.5 Separate account liabilities 266.7 261.9 Total liabilities 10,334.6 9,948.9 Stockholders' equity Preferred stock, par value $0.10 per share, authorized 10,000,000 shares, none issued Common stock, par value $0.10 per share, authorized 120,000,000 shares, issued 99,987,958 shares 10.0 10.0 Additional paid-in capital 1,078.4 1,066.6 Unrealized gains on equity securities, net of deferred taxes 149.1 121.1 Unrealized foreign currency translation adjustment (24.1) (20.9) Retained earnings 1,420.8 1,182.3 2,634.2 2,359.1 Less: Treasury stock, at cost (1993-24,006,816 shares; 1992-20,928,716 shares) 529.8 345.5 Restricted stock deferred compensation 1.7 2.7 Total stockholders' equity 2,102.7 2,010.9 Total liabilities and stockholders' equity $12,437.3 $11,959.8
C O N S O L I D A T E D S T A T E M E N T S O F S T O C K H O L D E R S ' E Q U I T Y
Year Ended December 31, (Dollars in millions) 1993 1992 1991 (Note 2)
Operating activities: Net income $ 299.9 $ 291.2 $ 245.3 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effects of accounting changes, net of tax 12.1 -- -- Increase in future policy benefits and unpaid claims and claim expenses 411.7 335.7 456.5 (Increase) decrease in amounts receivable under reinsurance agreements (129.1) 6.1 (133.8) Increase in federal income tax liability 109.8 51.6 43.2 Increase in unamortized deferred policy acquisition costs (125.5) (111.7) (106.0) Other (22.8) 26.5 1.5 Net cash provided by operating activities 556.1 599.4 506.7 Investing activities: Maturities of fixed maturities 924.6 783.7 478.5 Sales of fixed maturities held to maturity 45.7 122.4 594.7 Sales of fixed maturities available for sale 218.2 477.2 -- Sales of other investments 550.2 825.0 667.7 Purchases of investments (1,832.2) (2,700.7) (2,528.6) Net decrease in short-term investments 38.8 21.8 78.2 Net additions to property and equipment (18.2) (23.1) (52.7) Investments in subsidiaries, net 0.9 (49.3) -- Net cash used in investing activities (72.0) (543.0) (762.2) Financing activities: Deposits and interest credited to investment contracts 735.2 835.7 842.7 Maturities and withdrawals from investment contracts (1,021.2) (871.3) (618.2) Dividends to stockholders (61.4) (53.1) (43.4) Treasury stock acquired (192.5) -- (0.3) Proceeds from notes payable 51.5 74.6 9.5 Repayment of notes payable (50.1) (34.6) (0.8) Net increase (decrease) in short-term debt 37.3 (42.9) 75.7 Other 15.1 21.2 14.0 Net cash provided by (used in) financing activities (486.1) (70.4) 279.2 Effect of exchange rate changes on cash 2.4 0.1 0.4 Net increase (decrease) in cash 0.4 (13.9) 24.1 Cash at beginning of year 20.4 34.3 10.2 Cash at end of year $ 20.8 $ 20.4 $ 34.3
Disclosures of cash flow information: Cash paid during the year for: Income taxes $ 67.3 $ 41.6 $ 28.6 Interest $ 13.3 $ 11.7 $ 12.3
The accompanying consolidated financial statements of UNUM Corporation and subsidiaries ("UNUM") have been prepared on the basis of generally accepted accounting principles for stock life insurance companies and give retroactive effect to the March 26, 1993, merger with Colonial Companies, Inc., as discussed in Note 2 "Colonial Merger."
Certain December 31, 1992, and 1991 amounts have been reclassified in 1993 for comparative purposes.
- - Fixed maturities held to maturity (certain bonds, notes and redeemable preferred stocks) - principally at amortized cost less an allowance for probable losses. - - Fixed maturities available for sale (certain bonds and preferred stocks) - at lower of aggregate amortized cost less an allowance for probable losses, or fair value. - - Equity securities (common stocks and non-redeemable preferred stocks) - at market value. - - Mortgage loans - at amortized cost less an allowance for probable losses. - - Real estate - at cost less accumulated depreciation. - - Policy loans - at unpaid principal balance. - - Other long-term investments - at cost plus UNUM's equity in undistributed net earnings since acquisition. - - Short-term investments - at amortized cost.
Fixed maturities classified as held to maturity are valued principally at amortized cost less an allowance for probable losses, as it is UNUM's intent to hold these assets to maturity. Periodic sales may be necessary in response to significant deterioration in credit quality.
Real estate held for sale, which is included in other assets in the Consolidated Balance Sheets, is valued at the lower of fair value less estimated costs to sell, or cost. UNUM has provided an allowance for probable losses on real estate held for sale which reduces the carrying value of the asset to fair value. Real estate held for sale amounted to $24.7 million at December 31, 1993, and $48.6 million at December 31, 1992.
UNUM discontinues the accrual of investment income on invested assets when it is determined that collectibility is doubtful.
Gains and losses on interest rate futures contracts used as hedges are deferred and recognized as an adjustment of the carrying amount of the hedged investment or anticipated investments.
Purchases and sales of short-term financial instruments are part of investing activities and not necessarily a part of the cash management program. Short-term financial instruments are classified as investments in the Consolidated Balance Sheets and are included as investing activities in the Consolidated Statements of Cash Flows.
Group insurance premiums are recognized as income over the period to which the premiums relate. Individual disability premiums are recognized as income when due. Benefits and expenses are associated with earned premiums to result in recognition of profits over the life of the contracts. This association is accomplished by recording a provision for future policy benefits and amortizing deferred policy acquisition costs.
For individual disability, group disability, and group life and health business, the costs are amortized in proportion to expected future premiums. For universal life and certain retirement products, the costs are amortized in proportion to estimated gross profits from interest margins, mortality and other elements of performance under the contracts. The amounts deferred and amortized were as follows:
Deferred $282.8 $237.6 $216.6 Less amortized (147.7) (125.9) (111.8) Increase in unamortized deferred policy acquisition costs $135.1 $111.7 $104.8
Reserves for future payments on claims already incurred are estimated based on UNUM's historical experience and other actuarial assumptions. Such estimates and assumptions are continually reviewed and updated with any resulting adjustments to reserves reflected in current operating results.
The interest rates used in the calculation of disability product reserves at December 31, 1993, and 1992, were as follows: 1993 1992 Group long term disability (North America) 9.3% 9.7% Group long term disability (United Kingdom) 10.5% 11.0% Individual disability 8.0% to 10.0% 8.0% to 10.0%
For other group accident and health business, reserves are based on projections of historical claim runout patterns.
Reserves for future benefits are calculated by the net-level premium method, and are based on current morbidity and mortality tables, UNUM's historical experience and various interest rate assumptions. These reserves represent the portion of premiums received, accumulated with interest and held to provide for claims that have not yet been incurred. Reserves for group insurance policies consist primarily of unearned premiums, and are included in other policyholder funds in the Consolidated Balance Sheets.
The weighted average number of shares outstanding used to calculate earnings per share was 78,779,241 in 1993, 78,542,106 in 1992 and 77,790,959 in 1991. The assumed exercise of outstanding stock options would not result in a material dilution of earnings per share.
Cash dividends per share prior to the March 26, 1993, merger with Colonial Companies, Inc., are as reported for UNUM historically.
Financial Accounting Standard No. 107 ("FAS 107"), "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about certain financial instruments for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Valuation techniques require management to develop a significant number of assumptions, including discount rates and estimates of future cash flow. The derived fair value estimates cannot be substantiated by comparison to independent markets or to disclosures by other companies with similar financial instruments. FAS 107 fair value disclosures do not purport to be the amount which could be realized in immediate settlement of the financial instrument.
Cash, short-term investments and accrued investment income: The carrying amounts reported in the balance sheet for these financial instruments approximate their fair values.
Equity securities: The fair values for equity securities are based on quoted market prices and are reported in the balance sheet at these values.
Off-balance-sheet financial instruments: Fair values for UNUM's off- balance-sheet financial instruments (interest rate futures contracts) are based on current settlement values, and at December 31, 1993, and 1992, were $0.3 million and $0.1 million, respectively.
Short-term and long-term debt: The carrying amount of UNUM's commercial paper borrowings approximates its fair value. The fair value of UNUM's short-term and long-term debt is estimated using discounted cash flow analyses based on UNUM's current incremental borrowing rates for similar types of borrowing arrangements.
In May 1993, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standard ("FAS") No. 115, which specifies the accounting and reporting for certain investments in equity securities and for all investments in debt securities. Upon adoption of FAS 115, UNUM will classify and account for these investments as follows:
On December 3, 1992, UNUM and Colonial Companies, Inc. ("Colonial"), signed a definitive merger agreement. On March 26, 1993, Colonial Class A common stock shareholders voted to approve the merger. Under the agreement, UNUM exchanged .731 shares of its common stock for each share of Colonial Class A and Class B common stock outstanding on March 26, 1993. UNUM issued approximately 11.4 million shares of common stock from treasury in connection with the merger. In addition, outstanding options to acquire shares of Colonial Class B common stock were converted into options to acquire shares of UNUM common stock. The merger qualified as a tax-free reorganization.
Net income for the year ended December 31, 1993, includes a $9.6 million charge, or $0.12 per share, for expenses incurred to effect the merger.
This acquisition has been accounted for as a purchase and, accordingly, the acquired assets and liabilities have been recorded at their estimated fair values as of the date of acquisition. The results of operations for the acquired business have been included in UNUM's Consolidated Statements of Income from the date of acquisition. The effect of this acquisition on UNUM's consolidated results of operations is not significant. Accordingly, pro forma financial information has not been presented.
The following tables summarize the components of investment income, realized investment gains (losses) and change in unrealized investment gains (losses):
The amortized cost and estimated fair values of fixed maturities at December 31, 1993, are as follows:
Available for sale: United States Government and government agencies and authorities $ 388.9 $ 27.7 $ (0.3) $ 416.3 States, municipalities and political subdivisions 73.5 5.1 -- 78.6 Foreign governments 13.7 1.3 -- 15.0 Public utilities 107.3 6.5 -- 113.8 Corporate bonds 166.0 10.1 (0.6) 175.5 Redeemable preferred stocks 105.8 7.7 (1.0) 112.5 Mortgage-backed securities 16.8 1.4 -- 18.2 Total available for sale $ 872.0 $ 59.8 $ (1.9) $ 929.9
The amortized cost and estimated fair value of fixed maturities at December 31, 1993, by contractual maturity date, are shown below. Expected maturities will differ from contractual maturities since certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
(Dollars in millions) 1993 1992 1991 Gross gains $ 12.4 $ 18.9 $ 25.6 Gross losses $ 1.3 $ 3.5 $ 1.3
The market values, which also represent carrying amounts, and the cost of equity securities are as follows at December 31, 1993:
Real estate acquired in satisfaction of debt cumulatively amounts to $123.1 million at December 31, 1993.
NOTE 5. ALLOWANCE FOR PROBABLE LOSSES ON INVESTED ASSETS AND REAL ESTATE HELD FOR SALE
Changes in the allowance for probable losses on invested assets and real estate held for sale are as follows:
Balance at Balance beginning Addi- Deduc- at end (Dollars in millions) of year tions tions of year Year Ended December 31, 1993 Fixed maturities held to maturity and available for sale $ 4.1 $(3.8) $ -- $ 0.3 Mortgage loans 51.5 4.8 (7.7) 48.6 Real estate held for sale 13.6 18.8 (11.5) 20.9 Total $69.2 $19.8 $(19.2) $69.8
Year Ended December 31, 1991 Fixed maturities held to maturity $12.0 $ 3.5 $(10.0) $ 5.5 Mortgage loans 34.1 39.0 (30.0) 43.1 Real estate held for sale 15.8 10.7 (10.6) 15.9 Total $61.9 $53.2 $(50.6) $64.5
In connection with private labeling agreements, UNUM has assumed certain insurance liabilities in exchange for notes receivable. At December 31, 1993, and 1992, the amounts outstanding under these agreements were $115.4 million and $116.7 million, respectively, and are included as both liabilities and assets in the Consolidated Balance Sheets.
Effective January 1, 1993, UNUM adopted Financial Accounting Standard No. 113 ("FAS 113"), "Accounting and Reporting for Reinsurance of Short- Duration and Long-Duration Contracts," which eliminated the current practice by insurance enterprises of reporting assets and liabilities relating to reinsured contracts net of the effects of reinsurance. The new standard required prepaid reinsurance premiums and reinsurance receivables, for amounts related to claims incurred but not reported and liabilities for future policy benefits, to be reported as assets. It also prescribed conditions required for a contract with a reinsurer to be accounted for as reinsurance and defines accounting standards for short-duration and long- duration reinsurance contracts. As permitted, prior year consolidated financial statements have not been restated. The impact of the adoption on the Consolidated Balance Sheet was an increase in other assets of $80.0 million and a corresponding increase in future policy benefits and unpaid claims and claim expenses.
For the year ended December 31, 1993, recoveries recognized under reinsurance agreements reduced benefits to policyholders by $22.8 million.
During 1992, UNUM released the restructuring reserve for the costs of withdrawal and reassignment of employees associated with the 401(k) business in excess of amounts incurred, since actual costs were less than expected, which resulted in a pretax gain of $5.3 million. The gain associated with the release of this restructuring reserve reduced operating expenses in the 1992 Consolidated Statement of Income. At December 31, 1992, there was no restructuring reserve remaining associated with the withdrawal from the 401(k) business.
UNUM has a noncontributory defined benefit pension plan covering substantially all domestic employees, excluding employees of Colonial Companies, Inc., and Duncanson & Holt, Inc. The plan provides benefits based on the employee's years of service and compensation during the highest five years out of the last ten years of employment. UNUM funds the plan in accordance with the requirements of the Employee Retirement Income Security Act of 1974, as amended. Plan assets consist primarily of group annuity contracts and include approximately 224,392 shares of UNUM Corporation common stock.
The funded status of the plan and amounts recognized in UNUM's Consolidated Balance Sheets, as determined by the plan's actuaries, are as follows:
December 31, (Dollars in millions) 1993 1992 Actuarial present value of benefit obligation: Vested benefit obligation $ 102.3 $ 85.2
The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.25% and 4.70%, respectively, at December 31, 1993, and 7.50% and 5.20%, respectively, at December 31, 1992. The expected long-term rate of return on plan assets was 8.25% in 1993, 1992 and 1991. Prior year service costs are being amortized on a straight-line basis over expected employment periods for active employees.
UNUM has several annual incentive plans for certain employees and executive officers, which provide additional compensation based on achievement of predetermined annual corporate financial and non- financial goals. In 1993, 1992 and 1991, expense for these plans was $27.9 million, $24.6 million and $21.6 million, respectively.
The 1987 Executive Stock Option Plan ("Option Plan") provides for granting to officers and key employees options to purchase UNUM Corporation common stock over ten years at a price not less than 100% of the fair market value on the date of grant. An aggregate of 2,500,000 shares of UNUM Corporation common stock has been reserved for issuance under the Option Plan. Total shares available for grant under the Option Plan at December 31, 1993, 1992 and 1991, were 848,728 shares, 844,278 shares and 825,078 shares, respectively.
Both the Incentive Plan and the Option Plan also provide for the granting of stock appreciation rights ("SARs") in relation to stock options. SARs entitle the optionee to receive appreciation in the value of shares in cash, shares or a combination thereof. SARs utilize the same shares reserved for issuance of stock options and upon exercise automatically cancel the related stock options. There have been no SARs outstanding since December 31, 1991.
Beginning in 1991, certain officers were granted limited stock appreciation rights ("LSARs") in tandem with their outstanding options. LSARs afford the optionee the right to receive payment upon a change in control as defined in the plans equal to the higher of the excess of the highest price per share paid in connection with such change in control or the fair market value per share, over the option price per share. As an underlying stock option is exercised, the LSARs are automatically canceled. At December 31, 1993, 1992 and 1991, there were 556,500 LSARs, 685,550 LSARs, and 750,550 LSARs outstanding, respectively.
1992 Activity: Granted at $33.17 to $40.70 per share 1,043,969 -- -- Granted for restricted stock -- -- 34,600 Exercised at $7.13 to $54.00 per share (860,147) -- -- Cancelled/reissued (141,954) -- -- Outstanding at December 31, 1992 3,126,882 -- 115,400
UNUM provides certain health care and life insurance benefits for retired employees and covered dependents. Substantially all domestic employees of UNUM may become eligible for these benefits if they meet minimum age and service requirements, if they are eligible for retirement benefits and if they agree to contribute a portion of the cost. UNUM has the right to modify or terminate these benefits. The underlying plans are not currently funded.
Effective January 1, 1993, UNUM adopted Financial Accounting Standard No. 106 ("FAS 106"), "Employers' Accounting for Postretirement Benefits Other than Pensions," which changed the method for recognition of the cost of these benefits from a cash basis to an accrual basis over the years in which the employees render the related services. UNUM elected to immediately recognize the FAS 106 liability at January 1, 1993, of $48.8 million as a cumulative effect of an accounting change, which decreased net income by $32.1 million, or $0.40 per share, during 1993.
Postretirement benefits expense included the following components: Year Ended (Dollars in millions) December 31, 1993 Service cost $ 3.4 Interest cost 4.0 Postretirement benefits expense $ 7.4
The cost of covered health care benefits is assumed to increase 10.85% and 11.10% for retirees less than 65 years old, and 7.75% and 8.00% for retirees 65 years and older for 1994. These rates are assumed to decrease incrementally to 5.25% and 5.50% in 1999, and remain at that level thereafter. The weighted average discount rates used in determining the accumulated postretirement benefits obligation were 7.25% and 7.50%.
(Dollars in millions) December 31, January 1, 1993 1993 Deferred tax liabilities: Deferred policy acquisition costs $257.8 $225.3 Policy reserve adjustments 69.6 16.3 Net unrealized gains 79.4 61.3 Value of business acquired 19.0 21.0 Invested assets 10.5 19.1 Other 7.4 3.9 Total deferred tax liabilities 443.7 346.9
Deferred tax assets: Alternative minimum tax credit carryforwards 20.2 22.0 Net realized losses 17.3 21.6 Postretirement benefits 19.7 16.7 Loss carryforward 8.0 -- Other 1.8 7.0 Total deferred tax assets 67.0 67.3 Net deferred tax liability $376.7 $279.6
Deferred income taxes relating to cumulative net unrealized gains on equity securities are $79.4 million, $57.4 million and $45.8 million at December 31, 1993, 1992 and 1991, respectively. At December 31, 1993, $6.8 million of the $79.4 million deferred income taxes is reflected in retained earnings, while the remaining $72.6 million is netted against the unrealized gains component of stockholders' equity.
Year Ended December 31, (Dollars in millions) 1993 1992 1991 Foreign income $ 20.9 $ 32.7 $ 44.9
Carrying Estimated (Dollars in millions) Amount Fair Value 1993 1992 1993 1992 Short-term debt: Commercial paper $109.9 $ 72.3 $109.9 $ 72.3 8.81% bank notes payable -- 25.0 -- 26.0 8.88% bank notes payable -- 25.0 -- 26.1 Other notes payable 0.1 0.4 0.1 0.4 Total short-term debt 110.0 122.7 110.0 124.8
Fair values were determined using methods discussed in the Fair Values of Financial Instruments section of Note 1, "Summary of Significant Accounting Policies."
As of December 31, 1993, 1.5 million shares remained authorized for purchase under UNUM's Stock Repurchase Program. In February 1994, UNUM's Board of Directors approved an increase of 5.0 million shares in UNUM's Stock Repurchase Program.
On February 14, 1992, UNUM's Board of Directors authorized a two-for-one common stock split effected through the distribution of one additional share for each share of stock already issued, which was distributed on or about March 9, 1992, to holders of record on February 25, 1992. Accordingly, all numbers of common shares and per common share data have been restated to reflect the stock split. The par value of $5.0 million for the additional shares of common stock issued in connection with the stock split was transferred to common stock from additional paid in capital in first quarter 1992.
The Rights expire at the close of business on March 13, 2002, unless earlier redeemed by the Company under certain circumstances at a price of $0.01 per Right.
UNUM is subject to various state insurance regulatory restrictions that limit the maximum amount of dividends available from its United States domiciled insurance subsidiaries without prior approval. Under current law, during 1994 approximately $176.8 million will be available for payment of dividends to UNUM Corporation without state insurance regulatory approval. Dividends in excess of this amount may only be paid with state insurance regulatory approval. The aggregate statutory capital and surplus of the United States domiciled insurance subsidiaries of UNUM Corporation was approximately $953.9 million and $845.7 million, at December 31, 1993, and 1992, respectively. The aggregate statutory net income of UNUM Corporation's United States domiciled insurance subsidiaries was approximately $216.0 million, $154.1 million and $125.8 million for 1993, 1992 and 1991, respectively. State insurance regulatory authorities prescribe statutory accounting practices that differ in certain respects from generally accepted accounting principles. The significant differences relate to deferred acquisition costs, deferred income taxes, non-admitted asset balances, required investment risk reserves and reserve calculation assumptions.
The Employee Benefits segment includes group long term disability, group life and other employee benefits products, including short term disability, accidental death and dismemberment and dental insurance. The Related Businesses segment includes UNUM Limited in the United Kingdom, Commercial Life Insurance Company, and reinsurance operations including Duncanson & Holt, Inc. The Colonial Companies segment includes Colonial Companies, Inc. and subsidiaries, which offer payroll deducted, voluntary employee benefits to employees at their worksites. The Individual Disability segment includes disability income products. The Retirement Security segment includes tax sheltered annuities, long term care insurance and lifestyle security protection products. The Other Operations segment includes individual life insurance business of UNUM Life Insurance Company of America, group medical operations, guaranteed investment contracts, deposit administration accounts, and 401(k) plans, all of which are no longer actively marketed by UNUM. Corporate includes transactions which are generally noninsurance related and expenses incurred to effect the March 26, 1993, merger of UNUM and Colonial.
Summarized financial information for the six business segments and Corporate is as follows:
Revenues: Employee Benefits $ 1,597.3 $ 1,350.6 $ 1,196.1 Related Businesses 488.0 446.0 419.5 Colonial Companies 448.8 407.3 363.9 Individual Disability 405.0 367.9 320.9 Retirement Security 271.8 261.1 255.8 Other Operations 179.9 210.9 226.8 Corporate 6.2 4.7 1.5 Total revenues $ 3,397.0 $ 3,048.5 $ 2,784.5
Income (loss) before income taxes: Employee Benefits $ 239.1 $ 222.5 $ 193.9 Related Businesses 57.3 53.4 61.1 Colonial Companies 70.4 60.5 57.5 Individual Disability 69.0 44.6 36.7 Retirement Security 21.1 6.7 (2.1) Other Operations 20.8 16.5 (16.5) Corporate (17.4) (5.7) (11.0) Income before income taxes 460.3 398.5 319.6 Income taxes 148.3 107.3 74.3 Income before cumulative effects of accounting changes 312.0 291.2 245.3 Cumulative effects of accounting changes (12.1) -- -- Net income $ 299.9 $ 291.2 $ 245.3
(Dollars in millions, except per common share data) 4th 3rd 2nd 1st
Net income per common share $ 1.08 $ 0.91 $ 1.02 $ 0.81