UNUM CORPORATION AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA (DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
- ------------- (a) Includes investment income and net realized investment gains.
UNUM CORPORATION AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA (DOLLARS AND SHARES IN MILLIONS)
- --------------- (a) In November 1986, UNUM converted to a stock company from a mutual company.
SEGMENTS AFTER THE CHANGE - -------------------------------------------------------------------------------- DISABILITY INSURANCE - -Group Long Term Disability ("LTD") - -UNUM Limited - -Individual Disability - -Group Short Term Disability ("STD") - -Long Term Care - -LTD Reinsurance - -Association Group Disability - -UNUM Japan SPECIAL RISK INSURANCE - -Group Life - -Group Accidental Death & Dismemberment ("AD&D") - -Reinsurance Pools - -Special Risk Products - -Duncanson & Holt ("D&H") Reinsurance Management COLONIAL PRODUCTS - -Accident & Sickness - -Cancer - -Life RETIREMENT PRODUCTS - -Tax Sheltered Annuities - -401(k) - -Other Retirement Products - -Individual Life - -Group Medical
In 1995, net income increased by $126.4 million to $281.1 million, or $3.87 per share, from $154.7 million, or $2.09 per share, in 1994. When the following significant items, as described below, are excluded: the increased realized investment gains resulting primarily from the sale of the common stock portfolio, the increased reserves resulting from the lowering of certain disability product reserve discount rates, and the increased group long term disability ("group LTD") reserves for incurred but not reported ("IBNR") claims, all of which took place in 1995; and the individual disability reserve strengthening recorded in 1994, income before income taxes slightly decreased in 1995. The decrease was primarily attributable to higher benefit ratios at UNUM Limited and in the group LTD and group life businesses, increased interest expense and lower interest spread margins on the tax sheltered annuity business. Partially offsetting these items were increased investment income, a lower benefit ratio in the individual disability line of business and continued expense management. The decrease in income before income taxes in 1994 was primarily due to unfavorable claims experience in the individual disability and group LTD businesses.
During 1995, UNUM increased the group LTD reserves for IBNR claims by $38.4 million, which decreased net income by $25.0 million, or $0.34 per share, for the year ended December 31, 1995. IBNR reserves, which are established to fund anticipated case reserves for claims that have been incurred but not reported to UNUM, are actuarially established based on various factors, including incidence levels and claims severity. The increased IBNR reserves were based on management's judgment that claims currently incurred but not yet reported will reflect increased levels of claims incidence and severity. It is not possible to predict whether future incidence levels or claims severity will be consistent with UNUM's assumptions, or will improve or deteriorate.
Throughout 1994, UNUM's individual disability business experienced a higher incidence of new claims and a disproportionate number of large claims, which management attributed to certain geographic and occupational segments of the business, particularly physicians. During the third quarter of 1994, management concluded that the deterioration of claims experience was not a temporary fluctuation in certain segments of the business, but was indicative of expected claim trends for the future. As a result, in third quarter 1994, UNUM increased reserves for existing claims by $83.3 million and strengthened reserves for estimated future losses by $109.1 million. These increased reserves reflected management's expectations of morbidity trends for the existing non-cancellable individual disability business. This reserve strengthening resulted in an increase to benefits to policyholders in the Consolidated Statement of Income of $192.4 million and a decrease to net income of $125.1 million, or $1.69 per share, for the year ended December 31, 1994. It is not possible to predict whether morbidity trends will be consistent with UNUM's assumptions; however, as of December 31, 1995, management believes that the strengthened reserve levels continue to be adequate.
On January 24, 1996, UNUM America entered into an agreement for the sale of its group tax-sheltered annuity ("TSA") business to The Lincoln National Life Insurance Company ("Lincoln Life"), a part of Lincoln National Corporation, and to a new New York insurance subsidiary of Lincoln Life. The agreement also contemplates that First UNUM will enter into a similar agreement with Lincoln Life's New York insurance subsidiary. The sale, which is subject to regulatory approvals, involves approximately 1,700 group contractholders and assets under management of approximately $3 billion. The agreement initially contemplates the reinsurance of these contracts under an indemnity reinsurance arrangement. These contracts will then be reinsured pursuant to an assumption reinsurance arrangement upon consent of the TSA contractholders and/or participants. The purchase price (ceding commission) at closing is expected to be approximately $70 million. It is anticipated that it will take several months (perhaps six to nine months) to obtain the necessary approvals and otherwise close the sale. There is no guarantee that the sale will close. Including the expected purchase price of approximately $70 million, management expects to generate approximately $160 million of statutory capital from this transaction. Plans for the use of this capital may include repaying debt, investing in new and existing businesses and stock repurchase.
Reserves for certain disability products are discounted using an interest rate that is a composite yield of assets matched with each product. The sale of the common stock portfolio, which partially supported these disability reserves, and the subsequent reinvestment of the proceeds primarily in investment grade fixed income assets with yields below the average portfolio yield, resulted in lower reserve discount rates. The result of lowering these discount rates was an increase to the reserve liabilities and benefits to policyholders of $128.6 million, reported in the second quarter of 1995. The discount rate used to determine the group LTD reserves was reduced to 8.00% at June 30, 1995, as compared with 9.18% at December 31, 1994. At December 31, 1995, the group LTD discount rate was 7.94%.
During 1995, UNUM increased the group LTD reserves for IBNR claims by $38.4 million. IBNR reserves, which are established to fund anticipated case reserves for claims that have been incurred but not reported to UNUM, are actuarially established based on various factors, including incidence levels and claims severity. The increased IBNR reserves were based on management's judgment that claims currently incurred but not yet reported will reflect increased levels of claims incidence and severity. It is not possible to predict whether future incidence levels or claims severity will be consistent with UNUM's assumptions, or will improve or deteriorate.
In 1995, 1994 and 1993, claim block acquisitions generated one-time premium in the Disability Insurance segment of $63.8 million, $8.6 million and $58.3 million, respectively, for group LTD; $4.3 million and $15.0 million in 1995 and 1994, respectively, for long term care; and $25.8 million in 1994 for UNUM Limited. Management intends to pursue additional claim block acquisitions in the future.
Excluding the individual disability reserve strengthening and the related restructuring charge, income before income taxes decreased in 1994, as compared with 1993. This decrease was primarily attributable to a higher benefit ratio in individual disability and in group LTD, partially offset by continued expense management.
The group LTD premium growth in 1995 and 1994 reflected annualized premium from new sales, selected price increases and acquisitions of closed blocks of claims. Group LTD sales decreased in 1995, which management attributed to significant price increases in certain segments of the business. Rate increases to address unfavorable experience on selected segments of the inforce business also contributed to the decline in persistency rates for 1995 and 1994. In general, case terminations from rate increases have occurred in less profitable segments of the business. Management expects to continue to seek inforce case rate increases, as appropriate, given claims experience, to improve profitability. However, such rate actions may increase case terminations and decrease the persistency rate of the group LTD business.
During 1995, UNUM Limited's group long term disability business continued to be adversely affected by unfavorable claims experience, which began to emerge in late 1994. UNUM Limited has experienced a higher incidence of new claims and a disproportionate number of large claims in 1995, as compared with 1994, which management has attributed to certain segments of the business, particularly lawyers and accountants. To address the current claims environment, management has increased prices on those segments of the business that have experienced a higher incidence of new
During 1995, the U.S. dollar weakened slightly against the British pound sterling, increasing UNUM Limited's earnings as reported in U.S. dollars. The weighted average exchange rate was approximately $1.58, $1.53 and $1.51 for the years ended December 31, 1995, 1994 and 1993. At December 31, 1995, the spot rate had decreased to $1.55.
During 1995, the growth in individual disability's premium slowed as a result of management's decision in late 1994 to discontinue selling the non-cancellable individual disability insurance product in the United States and to transition to the new guaranteed renewable Lifelong Disability Protection product, which was introduced during the second quarter of 1995. Sales of the traditional, fixed price, non-cancellable individual disability product are being discontinued in each state following regulatory approval of the new product. As of the end of 1995, the new product has been approved for sale in most states.
Throughout 1994, UNUM's individual disability business experienced a higher incidence of new claims and a disproportionate number of large claims, which management attributed to certain geographic and occupational segments of the business, particularly physicians. Management believes that changes in and consolidation of the health care delivery system in the United States and the increased prevalence of emerging and often subjective types of disabilities contributed to increased benefit costs. Unlike the group long term disability product, management has limited ability to manage the claims risk associated with non-cancellable individual disability business, since UNUM is contractually unable to reprice or cancel inforce policies that became unprofitable because of changes in claims experience that were unforeseen when the policy was sold. During the third quarter of 1994, management concluded that the deterioration of claims experience was not a temporary fluctuation in certain segments of the business, but was indicative of expected claim trends for the future. As a result, in third quarter 1994, UNUM increased reserves for existing claims by $83.3 million and strengthened reserves for estimated future losses by $109.1 million. These increased reserves reflected management's expectations of morbidity trends for the existing non-cancellable individual disability business. It is not possible to predict whether morbidity trends will be consistent with UNUM's assumptions; however, as of December 31, 1995, management believes that the strengthened reserve levels continue to be adequate.
During the fourth quarter of 1994, excess-of-loss reinsurance totaling $60 million over three years was purchased through a Lloyd's of London syndicate to cover UNUM's exposure to claims exceeding levels assumed in the strengthened reserves. Management continues to evaluate its financial options for this business, including reinsurance opportunities.
Increased sales and selected price increases on new and inforce cases contributed to the group life premium growth of 13.7%. Rate increases to address unfavorable experience on certain segments of the inforce business contributed to the decline in group life persistency rates for 1995 and 1994. Management expects to continue to seek inforce case rate increases, as appropriate, to improve profitability. Premium growth in 1995 for other special risk products was primarily attributable to reinsurance operations, which had claim block acquisitions totaling $39.1 million and increased pool participation.
The Special Risk Insurance segment's income before income taxes increased in 1994, primarily due to favorable claims experience in the group life business and in special risk accident insurance, combined with premium growth and expense management. Partially offsetting these increases were reduced fee income from the reinsurance underwriting management operations and unfavorable claims experience in certain reinsurance pools.
During 1995, Colonial experienced improved sales growth as compared with 1994. These improved sales levels were attributed to increased productivity and the offering of a number of new products. During 1995, Colonial made further investments to automate policy enrollment for new sales and to realign the sales organization. These investments reflect management's continued focus on strategies to improve sales through increasing productivity, enhancing effectiveness, and differentiating Colonial in the marketplace. Premium growth slowed slightly again in 1995, reflecting the effects of weaker sales growth during 1994 and 1993; however, management believes that the record sales levels experienced during 1995, combined with the continuation of customer conservation programs and investments being made in the sales organization, will have a positive effect on future premium growth.
Colonial's income before income taxes increased in 1995, primarily because of increased investment income, higher realized investment gains and an improved benefit ratio. For 1994, income before income taxes decreased primarily because of reduced realized investment gains and increased expenses, partially offset by favorable claims experience.
The Retirement Products segment includes tax sheltered annuities ("TSAs"), which are marketed by UNUM America and First UNUM, and products which are no longer actively marketed by UNUM, including guaranteed investment contracts ("GICs"), deposit administration accounts ("DAs") and 401(k) plans.
During 1995 and 1994, investment income declined primarily due to investments in lower yielding tax-exempt securities, a reduced average investment yield caused by the low interest rate environment, and a reduced invested asset base under management for GICs, DAs and 401(k) plans. To facilitate the expected sale of the TSA business later in 1996, management expects to primarily liquidate fixed maturities and accumulate cash and short-term investments, which will further reduce investment yields earned on TSA assets during 1996.
During 1995, interest spread margins declined, as compared with the unusually favorable levels experienced during 1994 and 1993. As interest rates declined in 1993, the rate and level of interest credited to TSA contractholders declined as well. Despite a rising interest rate environment in 1994, the level of interest credited to TSA contractholders continued to
Corporate includes transactions that are generally non-insurance related. The increased loss before income taxes in 1995 was primarily attributable to increased interest expense on corporate borrowings, partially offset by reduced operating expenses. The increased loss before income taxes in 1994 was primarily due to increased interest expense and increased operating expenses related to UNUM's investment in Japan. Effective January 1, 1995, the operations of UNUM Japan are reported in the Disability Insurance segment. Costs related to UNUM's investment in Japan prior to January 1, 1995, are reported as operating expenses in Corporate.
Charges of $8.4 million and $14.4 million were recorded in 1995 and 1994, respectively, related to the acceleration of organizational changes within UNUM America and the decision to discontinue the individual disability non-cancellable product. Partially offsetting the charge recorded in 1995 was a $3.4 million curtailment gain, related to workforce reductions in UNUM Corporation's noncontributory defined benefit pension plan. Of the total $22.8 million charge, UNUM paid $15.9 million during 1995, which represented severance costs of $13.3 million for 373 of the 379 individuals included in the charges and $2.6 million of lease costs. The remaining $6.9 million includes $0.4 million of severance costs and $6.5 million of lease costs, the total of which is expected to be paid as follows: $3.4 million in 1996, $3.2 million in 1997, and $0.3 million in 1998.
UNUM's investments are reported in the consolidated financial statements at net realizable value or net of any applicable allowances for probable losses. Allowances for mortgages and real estate held for sale are established based on a review of specific assets as well as the overall portfolio, considering the carrying value of the underlying assets. If a decline in market value is considered to be other than temporary, the investment is reduced to estimated net realizable value and the reduction is recorded as a realized investment loss. UNUM discontinues the accrual of investment income on invested assets when it is determined that collectability is doubtful. Management monitors the risk associated with the invested asset portfolio and regularly reviews and adjusts the allowance for probable losses.
At December 31, 1995, the composition of UNUM's $11.7 billion of invested assets was 78.1% fixed maturities, 10.0% mortgage loans, 1.9% real estate, 0.2% equity securities, and 9.8% other invested assets. To facilitate the expected sale of the TSA business later in 1996, management expects to primarily liquidate fixed maturities and accumulate cash and short-term investments.
Gross realized investment gains were $287.0 million, $117.0 million, and $85.2 million, and gross realized investment losses were $61.9 million, $71.4 million, and $35.8 million for the years ended December 31, 1995, 1994, and 1993, respectively.
At December 31, 1995, and 1994, UNUM's mortgage loans were $1,163.4 million and $1,216.3 million, respectively. Management establishes allowances for mortgage loans based upon a review of individual loans and the overall loan portfolio, considering the value of the underlying collateral. UNUM uses a comprehensive rating system to evaluate the investment and credit risk of each mortgage loan and to target specific properties for inspection and reevaluation. The percentage of mortgage loans delinquent 60 days or more on a contract delinquency basis was 0.2% and 1.8% at December 31, 1995, and 1994, respectively.
Management believes that its mortgage loan portfolio is well diversified geographically and among property types. UNUM's incidence of new problem mortgage loans has continued to decline in 1995, as overall economic activity improved modestly, and many of the real estate markets in which UNUM has mortgage loans stabilized. Management expects a modest level of additional delinquencies and problem loans in the future. Management believes the allowance provided on mortgage loans as of December 31, 1995, is adequate to cover probable losses.
In general, impaired loans as defined by FAS 114 compare with loans previously defined and disclosed as problem and potential problem loans. Problem loans were defined as loans that were delinquent 60 days or more on a contract delinquency basis. Potential problem loans were defined as current and performing loans with which management had some concerns about the ability of the borrower to comply with present loan terms and whose book value exceeded the market value of the underlying collateral. At December 31, 1995, impaired loans totaled $50.1 million, as compared with $58.5 million of problem and potential problem loans at December 31, 1994. Included in the $50.1 million of impaired loans was $38.4 million of loans which had a related allowance for probable losses of $7.1 million, and $11.7 million of loans which had no related allowance for probable losses. Interest lost on impaired loans in 1995, and problem and potential problem loans in 1994 and 1993, was not material.
Realized investment losses related to impaired mortgage loans in 1995 amounted to $9.2 million, compared with realized investment losses related to restructured and problem mortgage loans of $8.5 million and $4.8 million for 1994 and 1993, respectively. Impaired mortgage loans as of December 31, 1995, are not expected to have a significant impact on UNUM's results of operations, liquidity, or capital resources.
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 affect on UNUM's results of operations, liquidity, or capital resources.
can be met through UNUM's investment portfolio of fixed maturities classified as available for sale, equity securities, cash and short-term investments. To facilitate the expected sale of the TSA business later in 1996, management expects to primarily liquidate fixed maturities and accumulate cash and short-term investments.
From time to time, dividend payments, which may be subject to approval by insurance regulatory authorities, are made from UNUM's affiliates and insurance subsidiaries to UNUM Corporation. These dividends, along with other funds, are used to service the needs of UNUM Corporation including: debt service, common stock dividends, stock repurchase, administrative costs and corporate development. Income determined using statutory accounting is one of the major determinants of an insurance company's dividend capacity to its parent in the following fiscal year. Statutory accounting rules and practices, which differ in certain respects from generally accepted accounting principles, are mandated by regulators in an insurance company's state of domicile.
At December 31, 1995, UNUM had short-term and long-term debt totaling $126.5 million and $457.3 million, respectively. At December 31, 1995, approximately $417 million was available for additional financing under the existing revolving credit facility and approximately $96 million of investment grade debt instruments were available for issuance under the shelf registration. Contingent upon market conditions and corporate needs, management may refinance short-term notes payable with longer term securities.
At December 31, 1995, approximately 2.7 million shares of common stock remained authorized for stock repurchase. During 1995, UNUM did not acquire any shares in the open market. During 1994 and 1993, UNUM repurchased 3.9 million and 3.7 million shares, respectively, in the open market. The aggregate cost of the 1994 and 1993 repurchases was $183.3 million and $192.5 million, respectively, which was primarily funded through additional borrowings.
UNUM was committed at December 31, 1995, to purchase fixed maturities and other invested assets in the amount of $91.2 million. Independent of the cash flows of UNUM Corporation, management anticipates that the operating cash flows of the subsidiaries of UNUM Corporation will be sufficient to meet benefit obligations, planned investment commitments and operational needs of those companies.
The table below reflects the debt ratings for UNUM Corporation and the claims paying ability and financial strength ratings for UNUM's United States domiciled insurance company subsidiaries at March 8, 1996:
At December 31, 1995, the ACL ratios for UNUM America, First UNUM, Colonial Life and Commercial Life were 382%, 382%, 436% and 329%, respectively. This compares with ACL ratios at December 31, 1994, of 307%, 357%, 442% and 378%, respectively.
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, 1995. In the opinion of management, the ultimate liability, if any, arising from this litigation is not expected to have a material effect on the consolidated financial position or the consolidated operating results 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 is 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. Although UNUM believes its claims are meritorious, the United States is aggressively resisting the claims and the ultimate recovery, if any, cannot be determined at this time.
In March 1995, the FASB issued FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. UNUM will adopt FAS 121 effective January 1, 1996. The adoption of FAS 121 is not expected to have a material effect on UNUM's results of operations or financial position.
In October 1995, the FASB issued FAS No. 123, "Accounting for Stock-Based Compensation," which establishes financial accounting and reporting standards for stock-based employee compensation plans. FAS 123 defines a new method of accounting for employee stock compensation plans using a fair value based method, under which compensation cost is measured and recognized in results of operations. Alternatively, FAS 123 allows an entity to retain the accounting method for employee stock compensation plans defined under APB Opinion No. 25, "Accounting for Stock Issued to Employees." If an entity retains the accounting defined under APB 25, certain pro forma disclosures of net income and earnings per share must be made as if the fair value based method defined under FAS 123 had been applied. UNUM is required to adopt FAS 123 effective January 1, 1996. UNUM has determined that it will retain the accounting methodology prescribed by APB 25 and will disclose the pro forma effects of such stock-based compensation as required in 1996.
We have audited the consolidated financial statements of UNUM Corporation and subsidiaries as listed in Item 8 and the financial statement schedules as listed in Item 14(a) of this Form 10-K. These consolidated financial statements and financial statement schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
As discussed in Notes 2, 7, and 9 to the consolidated financial statements, the Corporation changed its method of accounting for certain investments in debt securities in 1994 and its method of accounting for postretirement benefits other than pensions, and accounting for income taxes in 1993.
UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
- Mortgage loans -- at amortized cost less an allowance for probable losses.
- Short-term investments -- are considered available for sale and are carried at cost which approximates fair value.
Fixed maturities and equity securities are classified as available for sale as they may be sold in response to changes in interest rates, resultant prepayment risk, liquidity and capital needs, or other similar economic factors. Unrealized gains and losses related to securities classified as available for sale are excluded from net income and reported in a separate component of stockholders' equity, net of applicable deferred taxes and related adjustments to unpaid claims. The unrealized gains and losses are determined based on estimated market values at the balance sheet date and are not necessarily the amounts which would be realized upon sale of the securities or representative of future market values. Changing interest rates affect the level of unrealized gains and losses related to securities classified as available for sale. While rising interest rates are beneficial when investing current cash flows, they can also reduce the fair value of existing fixed rate long-term investments. In addition, lower interest rates can lead to early payoffs and refinancing of some of UNUM's fixed rate investments. Management generally invests in fixed rate instruments that are structured to limit the exposure to such reinvestment risk.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 that reduces the carrying value of the asset to fair value.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The interest rates used in the calculation of reserves for future policy benefits at December 31, 1995, and 1994, principally ranged from:
The interest rates used in the calculation of disability claims reserves at December 31, 1995, and 1994, were principally as follows:
For other accident and health business, reserves are based on projections of historical claims run-out patterns.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Activity in the liability for unpaid claims and claim expenses is summarized as follows:
The components of the increase in unpaid claims and claims expenses incurred and related to prior years were as follows:
During 1995, UNUM increased the group long term disability reserves for incurred but not reported ("IBNR") claims, as reported in the Disability Insurance segment. The increased IBNR reserves were based on management's judgment that claims currently incurred but not yet reported will reflect increased levels of claims incidence and severity. This change in accounting estimate resulted in an increase to benefits to policyholders in the Consolidated Statement of Income of $38.4 million, and a decrease to net income of $25.0 million, or $0.34 per share.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The assets of the PFA are to 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 2.5% and 2.5% of total assets and 2.8% and 3.0% of total liabilities at December 31, 1995, and 1994, respectively.
The amortized cost and fair values of fixed maturities at December 31, 1995, were as follows:
During 1994, UNUM sold fixed maturities of five issuers classified as held to maturity with an amortized cost of $49.8 million due to evidence of significant deterioration of the issuers' creditworthiness. These sales resulted in a net realized loss of $3.0 million.
Mortgages with an amortized cost of $1.9 million, real estate with a depreciated cost of $4.7 million and no bonds were non-income producing for the twelve months ended December 31, 1995. Interest lost on these investments was not material in 1995, 1994 or 1993.
Subsequent to January 1, 1994, adjustments for other than temporary declines in value of all fixed maturities are recorded as a direct adjustment to the securities' carrying value.
Exit costs, which relate to certain leased facilities and equipment, are expected to be paid as follows: $3.0 million in 1996; $3.2 million in 1997; and $0.3 million in 1998.
UNUM has several retirement savings and profit sharing plans for substantially all full-time and part-time employees who work 1,000 hours a year and have been employed for at least one year. Dependent upon which plan the employee participates in, eligible employees may contribute primarily up to 10% of their annual base salary, and UNUM matches a portion of each employee's contribution up to 6% of the employee's bi-weekly compensation. Participants may become 100% vested immediately upon becoming eligible to participate, or incrementally over a five year period. In 1995, 1994 and 1993, expense for these plans amounted to $8.4 million, $8.4 million and $8.3 million, respectively.
UNUM intends to introduce single pension and retirement savings plans for all domestic employees effective January 1, 1997.
NOTE 7. EMPLOYEE BENEFIT PLANS (CONTINUED) postretirement benefits obligation were 7.25% at December 31, 1995, and 8.00% and 8.25%, at December 31, 1994. The rates of increase in future compensation levels used in determining the accumulated postretirement benefits obligation were 4.7% and 5.2%, at December 31, 1995 and 1994, respectively.
The market value of the restricted shares issued under the Incentive Plan has been recorded as deferred compensation and is included as a reduction of stockholders' equity in the Consolidated Balance Sheets.
The 1998 Goals Stock Option Plan ("1998 Option Plan") was introduced in January 1995. The 1998 Option Plan provides for granting to all eligible employees up to 150 options to purchase UNUM Corporation common stock at a price not less than 100% of the fair market value on the date of the grant. The options will vest to the employee in nine years from the date of the grant; however, if UNUM achieves its 1998 goals, vesting will be accelerated to early 1999. During 1995, 1,105,350 shares were granted under the 1998 Option Plan. Options outstanding under the 1998 Option Plan are included in the summary of stock options.
NOTE 9. INCOME TAXES Effective January 1, 1993, UNUM adopted Financial Accounting Standard No. 109, "Accounting for Income Taxes," which changed the method for calculating and reporting deferred income taxes in the financial statements from the deferred method to the liability method. The liability method requires that deferred tax liabilities or assets at the end of each period be determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Under this method, income tax will increase or decrease in the same period in which a change in tax rate is enacted. The cumulative effect of this accounting change amounted to a $20.0 million increase in net income, or $0.25 per share, for the year ended December 31, 1993.
NOTE 9. INCOME TAXES (CONTINUED) A reconciliation of income taxes computed by applying the federal income tax rate to income before income taxes and the consolidated income tax expense charged to operations follows:
UNUM's Consolidated Statements of Income for 1995, 1994 and 1993, included the following amounts of foreign income and related income tax expense:
UNUM subsidiaries had operating loss carryforwards totaling $2.5 million and alternative minimum tax ("AMT") credit carryforwards totaling $29.0 million as of December 31, 1995. The operating loss carryforwards will expire, if not utilized, in 1999 through 2002. The AMT credits can be carried forward indefinitely.
NOTE 10. NOTES PAYABLE Notes payable consisted of the following at December 31, 1995, and 1994:
Aggregate maturities of notes payable are as follows: 1996-$126.5 million; 1997-$48.5 million; 1998-$68.0 million; 1999-$21.5 million; 2000-$60.0; thereafter-$259.3 million.
NOTE 11. CAPITAL STOCK AND PREFERRED STOCK PURCHASE RIGHTS At December 31, 1995, approximately 2.7 million shares of common stock remained authorized for stock repurchase. During 1995, UNUM did not acquire any shares in the open market. During 1994 and 1993, UNUM repurchased 3.9 million and 3.7 million shares, respectively, in the open market. The aggregate cost of the 1994 and 1993 repurchases was $183.3 million and $192.5 million, respectively, which was primarily funded through additional borrowings.
Under the Long-Term Stock Incentive Plan and Executive Stock Option Plan and the plans of Colonial Companies, Inc. (see Note 8 "Stock Based Compensation and Incentive Plans"), 612,138 shares, 329,579 shares, and 687,825 shares were issued in 1995, 1994 and 1993, respectively.
UNUM adopted a Shareholder Rights Plan on March 13, 1992. Under the Plan, each Right, under certain specific circumstances, entitles the holder to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock at a purchase price of $150. The Rights become exercisable at a specified time after (1) a person or group acquires 10% or more of UNUM Corporation common stock or (2) a tender or exchange offer for 10% or more of UNUM Corporation common stock. 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.
NOTE 13. LITIGATION 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, 1995. 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 or the consolidated operating results of UNUM.
NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS Fair values are based on quoted market prices, when available. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These valuation techniques require management to develop a significant number of assumptions, including discount rates and estimates of future cash flow. Derived fair value estimates cannot be substantiated by comparison to independent markets or to disclosures by other companies with similar financial instruments. These fair value disclosures do not purport to be the amount that could be realized in immediate settlement of the financial instrument.
FIXED MATURITIES: Fair values for fixed maturities are based on quoted market prices, where available. If quoted market prices are not available, 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.
NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) INDIVIDUAL ANNUITIES AND SUPPLEMENTARY CONTRACTS NOT INVOLVING LIFE CONTINGENCIES: Fair values approximate the carrying amounts reported in other policyholder funds in the Consolidated Balance Sheets.
NOTES PAYABLE: Fair values of short-term borrowings approximate the carrying amount. Fair values of long-term notes are estimated using discounted cash flow analyses based on UNUM's current incremental borrowing rates for similar types of borrowing arrangements.
NOTE 16. SEGMENT INFORMATION (CONTINUED) Summarized financial information for the four business segments and Corporate is as follows: