UNUM owns home office property consisting of seven office buildings and three service buildings located throughout the Portland, Maine area. UNUM also owns office buildings in the United Kingdom, South Carolina and Argentina, which serve as the home offices of UNUM Limited, the Colonial Companies and Boston Seguros, respectively. In addition, UNUM leases office space, on periods principally from five to ten years, for use by its home office, affiliates and sales forces.
The following should be read in conjunction with UNUM's Consolidated Financial Statements and related notes reported in Item 8.
- - -------- nm = not meaningful or in excess of 100%
During 1998, to better reflect the business of Duncanson & Holt Underwriters Ltd., as reported in the Special Risk Insurance segment, the results have been reflected on separate lines in UNUM's consolidated statements of income and balance sheets. Previously, the operating results and financial position were reported as a net amount in fees and other income and other assets, respectively. The 1997 and 1996 amounts have been reclassified for comparative purposes.
Effective tax rates, which reflect income tax expense as a percentage of income before income taxes, were 29.8%, 31.0% and 30.3% for 1998, 1997 and 1996, respectively. Reported income tax expense was below the federal statutory tax rate of 35% primarily due to tax savings from investments in tax-exempt bonds and mortgages. The change in the effective tax rate over the three year period was primarily due to changes in tax-exempt income as a percentage of income before income taxes.
UNUM reported increased pretax operating income for the year ended December 31, 1998, as compared with the same period in 1997. The increase was primarily attributable to improvements in pretax operating income for the Special Risk Insurance and Disability Insurance segments, primarily resulting from solid premium growth in each segment. See the segment discussions that follow for a more detailed analysis of operating results.
in fee income represents increased reserves for the United States non-cancellable individual disability business that is reinsured with Centre Life Reinsurance Limited ("Centre Re"). See Item 8 Note 6 under the caption "Reinsurance" for further information on the reinsurance transaction. Management will continue to evaluate the impacts of the merger on disability claims experience and the assumptions around expected disability claims duration that were used in the determination of the claims reserve increase.
During fourth quarter 1997, UNUM recognized $6.5 million of operating expenses related to a management and field office reorganization within its North American reinsurance operations, reducing income before income taxes in the Special Risk Insurance segment. Included in the $6.5 million of costs was a $6.0 million restructuring charge and $0.5 million of direct costs, primarily relocation expenses. The restructuring charge of $6.0 million was comprised of $4.0 million of lease exit costs, $1.4 million of severance related costs and $0.6 million of abandoned assets.
During the third quarter of 1996, actions related to the merger of Commercial Life into UNUM America resulted in a $10.1 million increase in operating expenses for Corporate. The $10.1 million charge consisted of $2.9 million of direct costs incurred and the recording of a $7.2 million restructuring charge to recognize $2.8 million of severance costs and $4.4 million of lease exit costs, primarily related to the merger.
(b) Information relating to sales and persistency is presented as an indicator of premium growth in the segment. Persistency data also indicates experience in maintaining customers over time. Benefit ratios and operating expense ratios show the relative relationships among data to earned premiums in the segment's income statement.
A new product grouping, Individual Products, shown in the previous table, was reported in the Disability Insurance segment effective June 30, 1998, and prior year amounts have been reclassified for comparative purposes. Those products reported as Individual Products include long term care, guaranteed renewable individual disability (Lifelong Disability Protection) and certain other individual disability products. The traditional, fixed price, non- cancellable individual disability ("non-cancellable ID") business is now reported in the Other Disability Insurance line. Additionally, effective January 1, 1997, the individual components of the operating results for the reinsured non-cancellable ID business are not reflected on separate lines in UNUM's statements of income; instead, components of the operating results are combined and reflected as a net amount in fees and other income.
The following discussion of 1997 results, as compared with 1996 results, includes the underlying trends of both the reinsured and non-reinsured portions of the non-cancellable ID business in order for the analysis of operating results to be comparable. Refer to Item 8 Note 6 under the caption "Reinsurance" for further information. The increase in the Disability Insurance segment's pretax operating earnings in 1997, as compared with 1996, was primarily attributable to improved premium growth, increased investment income and favorable operating expense ratios across most lines of business. These favorable factors were partially offset by higher benefit ratios in certain disability businesses.
After adjusting for the effect of claim block acquisitions, the Disability Insurance segment reported premium growth of 15.5% in 1998 compared with prior year's growth of 9.4%, which was also adjusted for $255.4 million of premium ceded during 1997 under the non-cancellable ID reinsurance agreement. The improvement in premium growth was driven by strong sales results and persistency improvements, primarily in group LTD and group STD.
One-time premiums, which are generated by claim block acquisitions, are summarized in the table below. Management intends to pursue additional claim block acquisitions in the future.
During 1998, group LTD experienced increased pretax operating income that was driven primarily by strong premium growth of 13.6% and an improved operating expense ratio. Premium growth in 1998 resulted from the impact of solid sales growth and stronger persistency, which is a reflection of continuing customer service actions.
Group LTD 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. As discussed in the section titled Forward-Looking Information, certain risks and uncertainties are inherent in UNUM'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 1998. Therefore, management continues to monitor claims experience in group LTD and responds to changes by periodically adjusting prices, refining underwriting guidelines, changing product features and strengthening risk management policies and procedures. In addition, management will continue to evaluate the impacts of the merger on disability claims experience and the assumptions around expected disability claims duration that were used in the determination of the fourth quarter 1998 claims reserve increase.
UNUM Limited's pretax operating income declined for the year ended December 31, 1998, as compared with 1997. The decline was primarily due to an increased benefit ratio generally resulting from a longer duration of claims and increased levels of claims incidence and average size of claims. Favorable expense growth partially offset this decline.
- - -------- (a) For the definition of pretax operating income see the Consolidated Overview.
The segment's operating expense ratio improved in 1998, primarily driven by continued expense management combined with the strong premium growth. In 1998, the segment's benefit ratio declined slightly, primarily due to favorable claims experience in most lines of business offset by unfavorable experience in certain reinsurance pools.
Colonial's pretax operating income increased in 1997, as compared with 1996, primarily due to additional investment income, premium growth and reduced operating expense ratios across most lines of business.
- - -------- (a) For the definition of pretax operating loss see the Consolidated Overview.
Corporate includes transactions that are generally non-insurance related. For the year ended December 31, 1998, as compared with the same period in 1997, the increased pretax operating loss in Corporate was due to higher interest expense and decreased investment income, partially offset by lower operating expenses. The increased pretax operating loss for 1997, compared with 1996, was primarily due to decreased investment income, principally from the Company's increased use of capital to repurchase shares of its common stock, and higher operating expenses.
For the year ended December 31, 1997, in connection with contractholder and participant consents for assumption reinsurance related to the tax-sheltered annuity business UNUM sold in 1996, UNUM reduced its deposit assets by $2,317.8 million, policy loan assets by $104.8 million, other policyholder fund liabilities by $2,486.5 million and separate account assets and liabilities by $526.5 million. Also, during 1996, fixed maturities available for sale of $588.6 million and short-term investments of $1,825.9 million were transferred to the buyer on October 1, 1996. Upon transfer, there was a corresponding increase in UNUM's deposit assets.
Basis of Presentation The accompanying consolidated financial statements of UNUM Corporation and subsidiaries ("UNUM") have been prepared on the basis of generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
o Mortgage loans--at amortized cost less an allowance for probable losses.
Certain assets from tax-sheltered annuity ("TSA") contracts are in separate accounts that are pooled investment funds of securities. Investment income and realized gains and losses on these accounts accrue directly to the contractholders. Assets, carried at market value, and liabilities of the separate accounts are shown separately in the Consolidated Balance Sheets. The assets of the separate accounts are legally segregated and are not subject to claims that arise out of any other business of UNUM.
The assets of the PFA provide for the benefit, dividend and certain expense obligations of the participating individual life insurance policies and annuity contracts. This line of business participates in the experience of the PFA and its operations have been excluded from the Consolidated Statements of Income. The PFA represented approximately 2.4% and 2.7% of consolidated assets and 2.9% and 3.3% of consolidated liabilities at December 31, 1998, and 1997, respectively.
a plan of termination and communicates sufficient detail of the plan to employees. Liabilities for restructuring activities are included in other liabilities in the Consolidated Balance Sheets.
UNUM, through its life insurance subsidiaries, is involved in both the cession and assumption of reinsurance with other companies. Risks are reinsured with other companies to reduce UNUM's exposure to large losses and permit recovery of a portion of direct losses. UNUM remains liable to the insured for the payment of policy benefits if the reinsurers cannot meet their obligations under the reinsurance agreements. Deferred policy acquisition costs, premiums, benefits and expenses are stated net of reinsurance ceded to other companies. UNUM evaluates the financial condition of its reinsurers and monitors concentrations of credit risk to minimize exposure to significant losses from reinsurer insolvencies.
Effective January 1, 1998, UNUM adopted Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive Income," which established standards for reporting and display of comprehensive income and its components in a financial statement with the same prominence as other financial statements. Comprehensive income is defined as net income adjusted for changes in stockholders' equity resulting from events other than net income
Effective December 31, 1997, UNUM adopted FAS No. 128, "Earnings Per Share," ("EPS") which changed the computation of EPS and requires dual presentation of "basic" and "diluted" EPS. FAS 128 superseded Accounting Principles Board ("APB") Opinion No. 15, "Earnings Per Share."
In June 1998, the Financial Accounting Standards Board ("FASB") issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts, and for hedging activities. FAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative under FAS 133 depends on the intended use of the derivative and its hedging designation. UNUM is required to adopt FAS 133 effective January 1, 2000. UNUM has not yet determined the impact FAS 133 will have on its results of operations, liquidity or financial position.
The marketable securities held in trust relate to the individual disability reinsurance agreement (see Note 6 "Reinsurance"). Changes in fair value of the assets and the related adjustment to unpaid claims are reflected in the equity section of UNUM's Consolidated Balance Sheets.
Fixed Maturities The amortized cost and fair value of fixed maturities available for sale at December 31, 1998, were as follows:
The amortized cost and fair value of fixed maturities available for sale at December 31, 1997, were as follows:
Restructured mortgage loans amounted to $14.5 million and $39.3 million at December 31, 1998, and 1997, respectively. Troubled debt restructurings represent loans that are refinanced with terms more favorable to the borrower. Interest lost on restructured loans was not material for the years ended December 31, 1998, 1997, or 1996.
Real estate acquired in satisfaction of debt cumulatively amounted to $62.4 million at December 31, 1998. Real estate held for sale amounted to $15.6 million at December 31, 1998, and $23.3 million at December 31, 1997.
Reserves for Future Policy Benefits Reserves for future policy benefits are calculated by the net-level premium method and are based on UNUM's expected morbidity, mortality and interest rate assumptions at the time a policy is issued. These reserves represent the portion of premiums received, accumulated with interest and held to provide for claims that have not yet been incurred. The reserve assumptions are periodically reviewed and compared with actual experience and may be
Unpaid claims and claim expense reserves represent the amount estimated to fund claims that have been reported but not settled and claims incurred but not reported. Reserves for unpaid claims are estimated based on UNUM's historical experience and other actuarial assumptions that consider the effects of current developments, anticipated trends, risk management programs and renewal actions. Many factors affect actuarial calculations of claim reserves, including but not limited to, interest rates and current and anticipated incidence rates, recovery rates, and economic and societal conditions. Management periodically performs a review of reserve estimates and assumptions. If management determines reserve assumptions need to be updated, any resulting adjustment to reserves is reflected in current operations. Given that insurance products contain inherent risks and uncertainties, the ultimate liability may be more or less than such estimates indicate.
The interest rates used in the calculation of disability claims reserves at December 31, 1998, and 1997, were principally as follows:
In connection with entering into the merger agreement with Provident in fourth quarter 1998 (see Note 17 "Proposed Merger with Provident and Combined Condensed Pro Forma Financial Statements (Unaudited),") UNUM anticipates that as a result of integrating its claim operations with Provident, there will be a temporary increase in claim costs. UNUM expects that fewer claims will be resolved or closed during the period when the two companies are planning and implementing the integration of their claims organizations. The average length of duration for claims will increase, resulting in more benefit payments being paid for a relatively short time until the consolidation of operations is complete. During the fourth quarter of 1998, UNUM increased its unpaid claims reserve by $59.4 million related to the expected increase in disability claim duration on existing claims. This reserve increase was reflected as a $49.0 million increase in benefits to policyholders and a $10.4 million reduction in fee income in the Disability Insurance segment. The reduction in fee income represents increased reserves for the United States non-cancellable individual disability business that is reinsured with Centre Life Reinsurance Limited ("Centre Re"). See Note 6 "Reinsurance" for further information on the reinsurance transaction. Management will continue to evaluate the impacts of the merger on disability claims experience and the assumptions around expected disability claims duration that were used in the determination of the claims reserve increase.
UNUM, through its life insurance subsidiaries, is involved in both the cession and assumption of reinsurance with other companies.
On October 23, 1996, UNUM announced the execution of a definitive reinsurance agreement between UNUM America and Centre Re, a Bermuda-based reinsurance specialist, for reinsurance coverage of the active life reserves of UNUM America's existing United States non-cancellable individual disability ("non-cancellable ID") block of business. This agreement reinsures all claims incurred on or after January 1, 1996. The agreement follows UNUM's announcement in late 1994 that it would no longer market the non-cancellable form of ID coverage in the United States.
Under the agreement, UNUM funds a trust account equal to the amount of UNUM's exposure (i.e., up to the attachment point). These trust assets provide security (i.e., collateral) to Centre Re for amounts due by UNUM prior to reaching the attachment point. UNUM acts as the investment manager for 80% of the assets in the trust with Centre Re managing the remaining 20%.
In 1994 UNUM recorded a premium deficiency reserve strengthening related to the non-cancellable ID block of business in conjunction with its announcement to exit the non-cancellable form of ID coverage in the United
The effect of all reinsurance on premiums earned and written for the years ended December 31, 1998, 1997 and 1996, was as follows:
In connection with the merger of Commercial Life into UNUM America, the sale of the tax-sheltered annuity business (see Note 5 "Sale of Tax-Sheltered Annuity Business"), as well as UNUM's continued efforts to strengthen its focus on its core products, the company initiated a review of certain products, which resulted in the recognition of pretax charges totaling $39.4 million during 1996. The charges included the write-off of certain intangible assets and the establishment of a reserve for the present value of expected future losses on certain discontinued products. These charges reduced income before income taxes by $13.1 million in the Disability Insurance segment, $11.3 million in the Special Risk Insurance segment, and $15.0 million in the Retirement Products segment. On an after tax basis the charges reduced net income by $26.3 million.
Aggregate maturities of notes payable are as follows: 1999--$283.5 million; 2000--$60.0 million; 2001--none; 2002--$35.0 million, 2003 and thereafter--$503.3 million.
Changes in the projected benefit obligation and plan assets, as determined by the plan's actuaries were as follows:
At December 31, 1998, the plan assets included 448,784 shares of UNUM Corporation common stock with a fair value of $26.2 million. The amount of dividends paid on these shares during 1998 was not material.
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 6.75% and 4.25%, respectively, at September 30, 1998, and 7.25% and 4.75%, respectively, at September 30, 1997. The expected long-term rate of return on plan assets was 9.25% in 1998 and 9.0% in 1997 and 1996. 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 that provide additional compensation based on achievement of predetermined annual corporate and affiliate financial and non-financial goals. In 1998, 1997 and 1996, expense for these plans was $33.8 million, $37.2 million and $41.7 million, respectively.
Effective November 23, 1998, UNUM's Board of Directors rescinded the Company's stock repurchase program, related to the announced merger with Provident Companies, Inc.
The following number of outstanding options to purchase shares were excluded from the diluted weighted-average calculation as the options' exercise prices were greater than the average market prices.
Stock Options At December 31, 1998, UNUM had four stock-based compensation plans, which are described below. Had compensation cost for options issued under UNUM's four stock-based compensation plans been determined based on the fair value at the grant dates, UNUM's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
The 1987 Executive Stock Option Plan ("Option Plan") provided for granting to officers and key employees options to purchase UNUM Corporation common stock over ten years. Options were granted at the discretion of the Compensation Committee of the Board of Directors ("the Committee") and had vesting schedules of one to four years. The number of shares subject to options under the Option Plan could not exceed 5.0 million. Grants are no longer made under this plan.
The 1990 Long-Term Stock Incentive Plan ("Incentive Plan") provides for granting of options to officers, non-employee directors of UNUM Corporation and key employees, to purchase UNUM Corporation common stock over ten years. Options may be granted annually at the discretion of the Committee and vest in one to five years.
The 1996 Long-Term Stock Incentive Plan ("1996 Incentive Plan") provides for granting of options to officers, non-employee directors of UNUM Corporation, and key employees to purchase UNUM Corporation common stock over ten years. The 1996 Incentive Plan also provides for granting to key officers restricted stock awards whose vesting is contingent upon achieving prescribed financial performance objectives or upon the grantee remaining in UNUM's employ for a specified period of time. Options and restricted stock may be granted annually at the discretion of the Committee. The number of shares subject to issuance cannot exceed 7.0 million. At December 31, 1998, 1997 and 1996, 3,389,860 shares, 5,003,480 shares and 6,990,000 shares, respectively, were available for grant under the 1996 Incentive Plan.
The 1998 Goals Stock Option Plan ("1998 Option Plan") provides for granting to all eligible employees up to 300 options to purchase UNUM Corporation common stock. The options will vest to the employee nine years from the date of grant. Vesting may be accelerated to an earlier date at the discretion of the plan administrator. Grants of 166,200 shares and 205,000 shares were made in 1997 and 1996 , respectively. No 1998 Option Plan grants were made in 1998, and no further grants can be made under this plan.
In connection with the pending merger (see Note 17 "Proposed Merger with Provident and Combined Condensed Pro Forma Financial Statements (Unaudited),") outstanding options which have otherwise not vested will do so as a result of a change in control as defined by the plans. For outstanding options related to the Option Plan, Incentive Plan and the 1998 Option Plan, a change in control will occur at the time shareholders vote in favor of the merger. Outstanding options related to the 1996 Incentive Plan will vest upon the consummation of the merger.
A summary of the status of UNUM's four stock-based compensation plans as of December 31, 1998, 1997 and 1996, and changes during the years then ended are presented below:
The weighted-average exercise price of options outstanding at December 31, 1998, 1997 and 1996, was $31.07, $26.32 and $22.93 per share, respectively.
The weighted-average fair value of options granted during the years ended December 31, 1998, 1997 and 1996, was $12.88, $8.56 and $6.92, respectively.
Between 1991 and 1994, certain officers were granted limited stock appreciation rights ("LSARs") in conjunction with their options for those years. If a change in control of UNUM Corporation, as defined in the plans, should occur, the option holder can exercise the LSAR. The LSARs were amended such that the proposed merger with Provident would not be a change in control of UNUM Corporation. An LSAR is meant to compensate an officer if the associated options lose 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) highest price paid per share in connection with the change in control or (b) the highest fair market value per share as reported in the Wall Street Journal at any time during the sixty day period preceding the change of control. As an underlying stock option is exercised, the LSARs are automatically canceled. At December 31, 1998, 1997 and 1996, there were 495,750 LSARs, 557,800 LSARs and 796,600 LSARs outstanding, respectively.
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. The amount available under current law for payment of dividends during 1999 to UNUM Corporation from all U.S. domiciled insurance subsidiaries without state insurance regulatory approval is approximately $150 million. 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 $1,330 million and $1,186 million, at December 31, 1998, and 1997, respectively. The aggregate statutory net operating income, which excludes realized investment gains and losses net of tax, of UNUM Corporation's United States domiciled insurance subsidiaries was approximately $55 million, $227 million and $167 million for 1998, 1997 and 1996, 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. UNUM Corporation 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 legislation in the United Kingdom, which requires a minimum solvency margin. The amount available under current law for payment of dividends to UNUM Corporation from UNUM Limited during 1999 is approximately $20 million.
UNUM subsidiaries had operating loss carryforwards totaling $15.3 million and alternative minimum tax credit carryforwards totaling $35.2 million as of December 31, 1998. The operating loss carryforwards will expire, if not utilized, in 1999 through 2004; the alternative minimum tax credits do not expire.
The following table summarizes the carrying amounts and fair values of UNUM's financial instruments at December 31, 1998, and 1997:
offered currently for similar contracts with maturities consistent with those remaining for the contracts being valued. Fair values for liabilities under investment-type insurance contracts with no defined maturities are the amounts payable on demand after surrender charges at the balance sheet date.
In using these instruments, UNUM is subject to the off-balance-sheet credit risk that the counterparties of the transactions will fail to perform as contracted. UNUM manages this risk by only entering into contracts with highly rated institutions and listed exchanges. UNUM does not hold or issue derivative financial instruments for the purpose of trading.
The amount of any deferred gains or losses on outstanding interest rate futures contracts, which require daily cash settlement, are included in fixed maturities in UNUM's Consolidated Balance Sheets. The fair values of any outstanding forward exchange rate contracts, options and swap agreements, which do not require daily cash settlement, are not recognized in UNUM's Consolidated Balance Sheets.
On December 4, 1997, UNUM borrowed [British pound]100 million ($168.3 million) through a private placement with an investor in the United Kingdom (see Note 8 "Notes Payable"). Upon issuance of the [British pound]100 million borrowing, UNUM entered into currency and interest rate swap agreements that converted the principal amount to U.S. dollars and
the interest obligation on the debt from a pound sterling based fixed rate to a U.S. dollar fixed rate. No gains or losses on the swap agreements, which qualify for hedge accounting, are recorded while the related debt is outstanding. These swap agreements expire in December 2007 and have notional amounts that equal the principal amount of the loan.
In the normal course of its business operations, UNUM is involved in litigation from time to time with claimants, beneficiaries and others, and a number of lawsuits were pending at December 31, 1998. In some instances, these proceedings include claims for punitive damages and similar types of relief in unspecified or substantial amounts, in addition to amounts for alleged contractual liability or other compensatory damages. In the opinion of management, the ultimate liability, if any, arising from this litigation is not expected to have a material adverse effect on the consolidated financial position, operating results or liquidity of UNUM.
On December 29, 1993, UNUM filed a suit in the United States District Court for the District of Maine, seeking a federal income tax refund. The suit was based on a claim for a deduction in certain prior tax years for $652 million in cash and stock distributed to policyholders in connection with the 1986 conversion of Union Mutual Life Insurance Company to a stock company. UNUM fully paid, and provided for in prior years' financial statements, the tax at issue in this litigation. On May 23, 1996, the District Court issued its decision that the distribution in question was not a deductible expenditure. On December 2, 1997, the United States Court of Appeals affirmed the decision of the District Court denying UNUM's claim for refund. UNUM filed a petition requesting that the United States Supreme Court review the decision of the United States Court of Appeals, which was denied October 5, 1998; no further appeal is available.
UNUM's four reportable operating segments include: Disability Insurance, Special Risk Insurance, Colonial Products and Retirement Products. Each operating segment represents a product grouping based on the similarity of the products in such areas as risk-relief, economic characteristics, market potential and the specific markets being targeted for these products. The Disability Insurance segment includes disability products offered in North America, the United Kingdom and Japan including: group long term disability, group short term disability, long term care, individual disability and disability reinsurance operations. The Special Risk Insurance segment includes group life, accidental death and dismemberment, travel and voluntary accident insurance, special risk reinsurance operations and other special risk insurance products. The Colonial Products segment includes Colonial Life & Accident Insurance Company and affiliates, which offer payroll-deducted, voluntary employee benefit products, including accident and sickness, disability, cancer and life insurance. The Retirement Products segment includes products no longer actively marketed by UNUM including: tax-sheltered annuities, guaranteed investment contracts, deposit administration accounts, 401(k) plans, individual life and group medical insurance. In addition, UNUM records transactions that are generally non-insurance related in Corporate. Interest expense is reported by Corporate and totaled $49.9 million, $42.4 million and $40.7 million in 1998, 1997 and 1996, respectively.
Summarized financial information for the four reportable operating segments and Corporate is as follows:
The following is provided to reconcile certain financial information for the reportable segment totals to consolidated totals and provide a description of the reconciling items:
(d) See the Changes in Accounting Estimates section of Note 1 "Summary of Significant Accounting Policies."
NOTE 17. PROPOSED MERGER WITH PROVIDENT AND COMBINED CONDENSED PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
On November 22, 1998, UNUM entered into an agreement with Provident, pursuant to which UNUM and Provident will merge under the name UNUMProvident. Under the merger agreement, each outstanding share of Provident common stock will be reclassified and converted into 0.73 of a share of UNUMProvident common stock and each outstanding share of UNUM common stock will be converted into one share of UNUMProvident common stock. The merger will be accounted for as a pooling of interests. The merger is subject to regulatory and UNUM stockholder and Provident stockholder approval.
The unaudited pro forma financial statements are presented for comparative purposes only and are not necessarily indicative of the results of operations that would have been realized had the merger been completed during the periods or as of the date for which the pro forma financial statements are presented, nor are they necessarily indicative of the results of operations in future periods or the future financial position of UNUMProvident.
(b) UNUM and Provident are in the process of reviewing their accounting policies and financial statement classifications. One aspect of this preliminary review has indicated that UNUM's process and assumptions used to calculate the discount rate for claim reserves of certain disability businesses differs from that used by Provident. It has been determined that Provident's process and assumptions are more appropriate in the context of a combined entity. Upon completion of the merger, UNUM will reduce the rates used to discount unpaid claims reserves for group long term disability, individual disability and the disability businesses of UNUM Limited. The preliminary estimates of discount rate reductions will result in an estimated increase to UNUM's unpaid claims reserves upon consummation of the merger of approximately $230 million ($150 million after tax). This estimated merger related adjustment has not been reflected in the unaudited combined condensed pro forma statements of income and related per share calculations.
(c) The pro forma adjustments to common stock, additional paid-in capital and treasury stock reflect the retirement of shares of UNUM common stock held in treasury, the reduction in par value of Provident common stock from
The following is a summary of unaudited quarterly results of operations for 1998 and 1997: