The Company occupies over 3,000,000 square feet of space at four principal operating centers in Chattanooga, Tennessee; Portland, Maine; Worcester, Massachusetts; and Columbia, South Carolina. The Company occupies two connected buildings totaling 840,000 square feet in Chattanooga, Tennessee. The office building and substantially all of the surrounding 25 acres of land used for employee parking are owned by the Company in fee along with a 27-unit apartment building for corporate use. A parking deck is currently under construction on a portion of the surrounding 25 acres of land used for employee parking. In addition, approximately 35,000 square feet of office space is leased and occupied in a nearby office building.
The Company occupies facilities totaling 341,000 square feet in Worcester, Massachusetts, with approximately 5.6 acres of surrounding property used primarily for parking. In addition, the Company leases 13,000 square feet in Auburn, Massachusetts.
Additionally, the Company leases office space, for periods principally from five to ten years, for use by its affiliates and sales forces.
The Company defers certain costs incurred in acquiring new business and amortizes (expenses) these costs over the life of the related policies. The Company uses its own historical experience and expectation of the future performance of its business in determining the expected life of the policies. Approximately 94 percent of the Company's deferred policy acquisition costs relates to traditional non interest-sensitive products, for which the costs are amortized in proportion to the estimated premium income to be received over the life of the policies. The estimated premium income in the early years of the amortization period is higher than in the later years due to anticipated policy lapses, which results in a greater proportion of the costs being amortized in the early years of the life of the policy. Amortization of deferred costs on traditional products is adjusted annually to reflect the actual policy lapse experience as compared to the anticipated experience. The Company will experience increased amortization if policies terminate earlier than projected.
Deferred costs related to group and individual disability products are amortized over a twenty-year period. Approximately 60 percent and 85 percent of the original deferred costs related to group disability products are expected to be amortized by years ten and fifteen, respectively. For individual disability policies, approximately 50 percent and 70 percent of the original deferred costs are expected to be amortized by years ten and fifteen, respectively. Deferred costs for group life products are amortized over a fifteen-year period, with approximately 20 percent of the cost expected to remain at year ten.
. Risk free interest rates of 4.30 percent for five-year maturities to 5.47 percent for 30-year maturities were derived from the current yield curve for U.S. Treasury Bonds with similar maturities. . Current Baa corporate bond spreads ranging from 1.48 percent to 2.99 percent plus an additional 30 basis points were added to the risk free rate to consider the lack of liquidity. . An additional ten basis points were added to the risk free rates for foreign investments. . Additional basis points were added as deemed appropriate for securities in certain industries that are considered to be of greater risk.
Historically, the Company's realized gains or losses on dispositions of its private placement fixed maturity securities have not varied significantly from amounts estimated under the valuation methodology described above.
During 2001, the Company entered into an agreement to limit its liabilities pertaining to the Lloyd's syndicate participations. Separately, the Company also reinsured 100 percent of the group disability reinsurance reserves and all future business underwritten and managed by Duncanson and Holt Services, Inc., a subsidiary of D&H. The transaction, in which reserves of approximately $323.8 million were ceded to the reinsurer, had an effective date of January 1, 2001. In a separate but related transaction, the Company also sold the reinsurance management operations of Duncanson and Holt Services, Inc. and divested the remaining assets of that facility.
During 2001, the Company reinsured on a 100 percent indemnity coinsurance basis certain cancer policies written by one of the Company's insurance subsidiaries and ceded approximately $113.6 million of reserves to the reinsurer. The transaction had an effective date of November 1, 2001.
In 2001, the Company acquired the assets of EmployeeLife.com, an Internet Capital Group partner company. This new subsidiary, Benefit Technologies, Inc. (doing business under the name BenefitAmerica), will enhance customer service by offering Internet business solutions to help employers efficiently manage and administer employee benefits. The Company also acquired Resource Opportunities, Inc. (ROI), a national provider of medical and vocational case management services. ROI will improve GENEX's ability to service its customers, in turn benefiting the Company's insurance customers.
In 2001, the Company recognized a tax benefit of $35.2 million related to its investment in the foreign reinsurance operations, which lowered the 2001 tax rate below the U.S. federal statutory rate of 35 percent. Additionally, as a
During 2001 the Company redeemed its $172.5 million par value 8.8% monthly income debt securities (junior subordinated debt), which were due in 2025 but callable at par in 2000 and thereafter. This early redemption is expected to lower the Company's financing costs in 2002 through the use of commercial paper available at lower interest rates. The early extinguishment of debt resulted in a write-off of the remaining deferred debt cost of $4.5 million associated with the issuance of the securities. The extraordinary loss, net of a $1.6 million tax benefit, was $2.9 million.
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141 (SFAS 141), Business Combinations, and No. 142 (SFAS 142), Goodwill and Other Intangible Assets. In accordance with SFAS 142, goodwill will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. The Company adopted the provisions of SFAS 141 and SFAS 142 effective January 1, 2002. Application of the non-amortization provision is expected to increase 2002 earnings $21.3 million before tax and $20.2 million after tax. In connection with the initial adoption of SFAS 142, the Company will perform the required transitional goodwill impairment tests. Any impairment loss resulting from the transitional goodwill impairment tests will be recognized as the effect of a change in accounting principle and will be presented as a separate caption, net of tax, in the income statement. The impairment loss, if any, is not expected to have a material impact on the Company's financial position or results of operations.
During 2000, the Company entered into a reinsurance agreement under which one of the Company's insurance subsidiaries will cede through a net quota share reinsurance agreement 50 percent of the group life volume above the aggregate retention limit. The treaties are five-year quota share treaties ceding 25 percent of premium, life volume, and paid claims to each reinsurer. The reinsurance agreements were effective as of October 1, 2000.
As a result of the aforementioned merger at June 30, 1999, certain accounting policy changes were made during 1999. The following summarizes these changes as well as the expenses related to the merger and the early retirement offer to employees.
factors influence assumptions underlying reserves, and considerable judgment is required to interpret current and historical experience underlying all of the assumptions and to assess the future factors that are likely to influence the ultimate cost of settling existing claims.
See Note 2 of the "Notes to Consolidated Financial Statements" for further discussion of these charges and "Liquidity and Capital Resources" for a discussion of capital and financing needs.
During 1999 the Company also recognized $327.8 million of before-tax charges related to its reinsurance operations. These charges were as follows (in millions of dollars):
North American Reinsurance Operations Loss on Sale of A&H and LTC Reinsurance Management $ 12.9 Operations (includes write-off of $6.0 million of goodwill) Loss on Reinsurance of A&H and LTC Risk Participations 12.7 Provision for Losses on Retained Business 42.1 International Reinsurance Operations Provision for Losses on Lloyd's of London Syndicate Participations 186.5 Provision for Losses on Reinsurance Pool Participations Other than Lloyd's 21.9 Goodwill Impairment Excluding Amount Recognized on Sale 51.7 ------ Total Before-tax Charge $327.8 ======
A portion of the losses recognized in 1999 relating to the Company's reinsurance operations does not receive a tax benefit, which unfavorably impacted the effective tax rate. Additionally, a portion of the 1999 expenses related to the merger was non-deductible for federal income tax purposes, resulting in a 1999 tax rate that was less than the U.S. federal statutory tax rate of 35 percent.
The Company monitors persistency and reflects adverse changes in persistency in the current period's amortization of deferred policy acquisition costs. Persistency during 2001 for group disability, group life, and accidental death and dismemberment products was generally improved overall from that experienced in 2000 but was unfavorable for certain issue years when compared to the persistency expected at the time the business was written, resulting in additional amortization of $41.5 million. The majority of the unfavorable persistency occurred in more recently issued business, which has higher associated unamortized deferred policy acquisition costs. The additional amortization related to persistency in 2000 and 1999 was $34.1 million and $5.2 million, respectively. It is expected that persistency for the foreseeable future may continue to be lower than historical levels. The Company's 2001 renewal program was generally successful at retaining business that is relatively more profitable than business that terminated. It is expected that the additional premium and related profits associated with renewal activity will emerge throughout 2002. The Company intends to maintain a disciplined approach in the re-pricing of renewal business, while balancing the need to maximize persistency and retain producer relationships. This approach may lead to lower profit margins on affected cases than originally planned.
Revenue from the managed disability line of business, which includes the Company's wholly-owned subsidiaries GENEX Services, Inc. and Options and Choices, Inc., totaled $150.6 million in 2001, compared to $126.1 million in 2000 and $107.8 million in 1999.
Positive impacts on 2001 income were a $152.3 million revenue increase and a change in the benefit ratio from 87.1 percent in 2000 to 84.1 percent in 2001, excluding losses related to September 11 for 2001 and the $65.6 million reserve increase for 2000. The commission ratio also improved slightly relative to 2000. Negatively impacting income was an increase in the operating expense ratio in 2001 compared to 2000. The 2001 results include $26.3 million of additional amortization necessitated by the higher level of group long-term and short-term disability terminations experienced during 2001 relative to that which was expected at the time the business was written. The additional amortization during 2000 was $25.8 million. For both 2001 and 2000, the disability business retained is relatively more profitable than the business that terminated.
For short-term disability, both the average claim duration and paid incidence increased from the prior year. The average weekly indemnity continued to increase as well, but the premium per life grew at a slightly higher level. The Company expects to modify its product and pricing strategy in short-term disability to be more selective in the product options offered in the large case market, with a focus on self funded or experience rated products.
Group disability revenue was $3,200.4 million in 2000 compared to $3,029.0 million in 1999. The high terminations and slow sales decreased the earned premium growth compared to that experienced during 1999 and 1998. Group disability reported income of $211.0 million for 2000 compared to a loss of $225.7 million for 1999. Included in the income for 2000 was an increase of $65.6 million in group long-term disability claim reserves, which represented approximately 1.2 percent of total group long-term disability claim reserves. The increase, which resulted from lengthening the projected average claim duration for certain of the Company's group long-term disability claims, was not a result of deteriorating experience but was believed appropriate based on the Company's assessment of the ultimate settlement of these claims. The 1999 loss of $225.7 million was the result of the $191.7 million charge resulting from lowering the discount rate used to calculate certain of Unum's disability claim reserves to conform with Provident's process and assumptions and the $359.2 million charge resulting from the revision in the underlying assumptions used to estimate the ultimate cost of unpaid group long-term disability claims, as discussed in the preceding "Results of Operations." See Note 2 of the "Notes to Consolidated Financial Statements" for further discussion.
Additionally, the increase in the amortization of deferred policy acquisition costs had a negative impact on 2000 income. This increase resulted from $25.8 million of additional amortization necessitated by the higher level of group long-term and short-term disability terminations experienced during 2000 relative to that which was expected at the time the business was written. The additional amortization during 1999 was $4.2 million. Also included in 1999 is $3.3 million of amortization related to the write-off of the unamortized balance of deferred costs related to certain discontinued products in the foreign operations.
As previously disclosed under "Results of Operations," during 2000 the Company entered into a 100 percent indemnity coinsurance agreement to cede the future claim payments on one of its insurance subsidiaries' long duration group long-term disability claims which were incurred prior to January 1, 1996. The agreement was effective January 1, 2000.
The Company, similar to all financial institutions, has some exposure if a severe and prolonged recession occurs, but management believes that the Company is well positioned if a weaker economy were to occur. Many of the Company's products can be re-priced, which would allow the Company to reflect in its pricing any fundamental change which might occur in the risk associated with a particular industry or company within an industry. The Company has a well-diversified book of insurance exposure, with no disproportionate concentrations of risk in any one industry. Because of improvements made in the claims organization in recent years, the Company believes it can respond to increased levels of submitted claims which might result from a slowing economy.
Offsetting the 2001 revenue increase was an increase in the benefit ratio and operating expense ratio when compared to the previous year reporting period. The amortization of deferred policy acquisition costs for 2001 includes $15.2 million of additional amortization due to the higher level of terminations for group life and accidental death and dismemberment products experienced than expected at the time the policies were written. The unfavorable variance of actual to expected terminations occurred primarily in the group life product line. The additional amortization during 2000 was $8.3 million.
Group life submitted and paid incidence continued to remain high in 2001, although the incidence rates during the last six months of the year were lower than the rates for the first half of 2001. The average paid claim size has also increased compared to the prior year, and waiver incidence continues to be above recent levels. The claim recovery rate on waiver claims has increased, somewhat mitigating the impact of the increase in waiver incidence.
The 2001 benefit ratio for accidental death and dismemberment was higher than 2000 primarily due to a significant increase in the average paid claim amounts. The rate of claim incidence in 2001 did not change significantly over the prior year. The 2001 results for accidental death and dismemberment include estimated gross ultimate losses of $25.0 million less estimated reinsurance recoverables of $21.3 million, for a net increase in benefits of $3.7 million related to the September 11, 2001 tragedy. These losses relate to both accidental death and dismemberment and travel accident coverages.
The reinsurance transaction entered into during 2000 under which an insurance subsidiary of the Company cedes through a net quota share reinsurance agreement 50 percent of the group life volume above the aggregate retention limit does not meet the conditions for reinsurance accounting and is therefore accounted for as a deposit. As such, there is no effect on reported premium income or benefits. The only impact on the income statement is the risk charge paid to the reinsurers. See Note 13 of the "Notes to Consolidated Financial Statements" for further discussion of the reinsurance transactions.
Group life, accidental death and dismemberment, and long-term care reported income of $214.0 million in 2000 compared to $239.5 million in 1999. Group life and long-term care both reported an increase in revenue for 2000 compared to 1999 due to increases in premium income and net investment income. Offsetting the revenue increase was an increase in the benefit ratio when compared to 1999. Group life reported a higher benefit ratio in 2000 compared to the prior year due to an increase in the average paid claim size and waiver incidence, partially offset by a decrease in paid mortality incidence.
The amortization of deferred policy acquisition costs for 2000 includes $8.3 million of additional amortization due to the higher level of terminations for group life and accidental death and dismemberment products experienced during 2000 relative to that which was expected at the time the policies were written. Positively impacting 2000 income was an improvement in the commission and operating expense ratios.
New annualized sales in the individual disability line of business were $145.1 million in 2001, compared to $116.1 million in 2000 and $124.1 million in 1999. The Company developed a new individual disability product portfolio that was released for sale in approved states early in the fourth quarter of 2000. The new portfolio utilizes a modular approach offering customers a range of product options and features. This portfolio was designed to combine the best features from prior Company offerings and includes return-to-work incentives and optional long-term care conversion benefits and/or benefits for catastrophic disabilities. Management expects that premium income in the individual disability line will grow on a year-over-year basis as the portfolio transition produces increasing levels of new sales of individual disability products and as a result of an increased focus on integrated disability sales in group and individual, as well as other sales initiatives discussed under "Employee Benefits Segment Operating Results." The persistency of individual disability business continues to be stable.
Revenue was $2,585.6 million in 2000 compared to $2,371.9 million in 1999. The growth in 2000 revenue was driven primarily by the growth in premium income as well as net investment income and other income. Premium income in 2000 included $96.6 million from an inforce block of individual disability business reinsured effective January 1, 2000. Other income benefited from the income on assets held in trust under this reinsurance arrangement. Net investment income for individual disability increased due to the increase in the level of invested assets allocated to this line of business.
This line reported an increase in the benefit ratio for 2000 compared to last year's ratio, excluding the 1999 discount rate change. Submitted incidence for 2000 was slightly higher than the average for the year 1999, while paid incidence improved relative to the prior year. The claim acceptance rate declined throughout 1999 and 2000, and the net claim resolution rate for 2000 increased from 1999. Offsetting these trends was an increase in reserves for existing claims. Individual disability benefited from improved commission and operating expense ratios for 2000 as compared to 1999. The amortization of value of business acquired increased in 2000 primarily as a result of the amortization on the block of inforce business reinsured effective January 1, 2000.
As noted in the "Employee Benefits Segment Operating Results," claim resolution rate assumptions were revised downward in the fourth quarter of 1998 for claim operations integration activities related to the merger. The Company recorded a $100.3 million charge in the fourth quarter of 1998 in the Individual segment related to the revised claim resolution rates for individual disability. If the impact of merger-related claim operations integration activities on claim durations had not been anticipated at December 31, 1998, income for the individual disability line of business would have been negatively impacted by $100.3 million in 1999. In addition, the excess of the actual 1999 experience over that assumed resulted in a positive effect on income of $25.6 million.
Revenue in the Voluntary Benefits segment increased to $928.8 million in 2001 from $859.3 million in 2000 primarily due to the increase in premium income which was attributable to sales growth and favorable persistency. New annualized sales for 2001 were $296.6 million, an increase of 11.9 percent over the prior year. Management continues its efforts to increase sales through the sales initiatives discussed under "Employee Benefits Segment Operating Results."
For 2001, all of the product lines reported an increase in premium income and net investment income over 2000. The life and disability product lines both reported a marginal increase in the benefit ratio relative to 2000. The increase for life was due primarily to an increase in the size of the average paid claim. Claim payments for disability increased due to an increase in the average monthly indemnity and a lengthening of the duration of claims, but the incidence rates remained stable. The benefit ratio for the other line was higher in 2001 compared to 2000 due partially to the poor results from the block of business which was reinsured in the fourth quarter of 2001 and also due to an increase in the average claim size for the Company's other cancer products.
Revenue in the Voluntary Benefits segment increased to $859.3 million in 2000 from $804.5 million in 1999. Sales growth and continued favorable persistency were the primary factors contributing to the increase in premium income. New annualized sales in this segment were $265.0 million in 2000 and $245.3 million in 1999. The investment income growth in 2000 as compared to 1999 was due to the repositioning of the investment portfolio subsequent to the merger.
The Other operating segment includes results from products no longer actively marketed, including individual life and corporate-owned life insurance, reinsurance pools and management operations, group pension, health insurance, and individual annuities. It is expected that revenue and income in this segment will decline over time as these business lines wind down. Management expects to reinvest the capital supporting these lines of business in the future growth of the Employee Benefits, Individual, and Voluntary Benefits segments. The closed blocks of business have been segregated for reporting and monitoring purposes.
As previously discussed, during 2000 the Company reinsured substantially all of the individual life and corporate-owned life insurance blocks of business. The Company ceded approximately $3.3 billion of reserves to the reinsurer. The $388.2 million before-tax gain on these transactions was deferred and is being amortized into income based upon expected future premium income on the traditional insurance policies ceded and estimated future gross profits on the interest-sensitive insurance policies ceded. The unamortized balance of the deferred gain was $343.9 million at the end of 2001 and $373.5 million at the end of 2000. The Company recognized a 2000 before-tax realized investment loss of $25.9 million on the fixed maturity securities transferred to the reinsurer. In connection with this realized loss, the Company retrospectively adjusted deferred policy acquisition costs and value of business acquired related to interest-sensitive individual life policies with credits to current period amortization of $9.4 million and $1.5 million, respectively, to reflect investment experience. See "Investments" for further discussion of the realized investment loss.
Total revenue for individual life and corporate-owned life insurance was $42.7 million, $236.1 million, and $435.0 million in 2001, 2000, and 1999, respectively. Income for the same periods was $38.9 million, $49.6 million, and $65.6 million.
During 2001, the reinsurance pools and management operations reported a gain of $0.1 million compared to losses of $32.7 million in 2000 and $279.7 million in 1999. Included in the 2000 results were $37.4 million of charges related to the Company's London accident reinsurance pool participation. During 1999, the Company recorded charges of $270.1 million resulting from its decision to exit these pools, but at that time there was insufficient information to fully evaluate all of the exposures. During 2000, additional changes to fund these exposures and provide for the run-off of its participation resulted in a claim reserve adjustment of $21.9 million and uncollectible receivables and loss provisions of $15.5 million.
The Corporate segment reported losses of $169.2 million in 2001, $49.5 million in 2000, and $484.6 million in 1999. Interest and debt expense was $169.6 million in 2001, $181.8 million in 2000, and $137.8 million in 1999. The amortization of goodwill was $26.6 million in 2001, $22.3 million in 2000, and $82.6 million in 1999. The Company recorded write-downs of goodwill of $5.4 million in 2001 related to its Argentina operations and $57.7 million during 1999 related to its reinsurance operations. See previous discussion under "Other Segment Operating Results" and Note 13 of the "Notes to Consolidated Financial Statements" for further discussion.
During 2000, the Company reported a net realized investment loss before tax of $14.6 million, including the realized investment loss of $25.9 million on the investment-grade fixed maturity securities transferred to the reinsurer in connection with the individual life and corporate-owned life reinsurance transactions. The loss on these transferred securities was driven by a change in market interest rates and was not attributable to any credit deterioration. Excluding the reinsurance transaction related loss, the Company reported a net gain of $51.0 million in 2000 from the sale of fixed maturity and equity securities. Offsetting this gain was a $94.0 million realized investment loss recognized because the value of certain fixed maturity securities had other than temporarily declined.
The following table provides the distribution of invested assets for the years indicated. Policy loans are reported on a gross basis in the consolidated statements of financial condition and in the table below. Policy loans of $2.3 billion and $2.2 billion were ceded as of December 31, 2001 and 2000, respectively, and the investment income thereon is no longer included in income.
The Company's investment in mortgage-backed securities was approximately $3.8 billion and $3.5 billion on an amortized cost basis at December 31, 2001 and 2000, respectively. At December 31, 2001, the mortgage-backed securities had an average life of 9.5 years and effective duration of 8.5 years. The mortgage-backed securities are valued on a monthly basis using valuations supplied by the brokerage firms that are dealers in these securities. The primary risk involved in investing in mortgage-backed securities is the uncertainty of the timing of cash flows from the underlying loans due to prepayment of principal. The Company uses models which incorporate economic variables and possible future interest rate scenarios to predict future prepayment rates. The Company has not invested in mortgage-backed derivatives, such as interest-only, principal-only or residuals, where market values can be highly volatile relative to changes in interest rates.
The Company has an investment in a collateralized bond obligation asset trust in which it is also the investment manager of the underlying high-yield securities. This investment was reported at fair value with fixed maturity securities in the consolidated statements of financial condition. The fair value of this investment was derived from the fair value of the underlying assets based on quoted market prices. The fair value and amortized cost of this investment was $20.4 million and $46.0 million, respectively, at December 31, 2001 and $29.4 million and $51.9 million at December 31, 2000.
At December 31, 2001, the Company had a retained interest in a special purpose entity trust that was securitized with financial assets consisting of a United States Treasury bond and several limited partnership equity interests. This investment was reported at fair value and included with fixed maturity securities in the consolidated statements of financial condition. The fair value of this investment was derived from the fair value of the underlying assets, which are based on quoted market prices as well as the limited partnership capital balances. The fair value and amortized cost of this investment was $113.6 million and $122.6 million, respectively, at December 31, 2001 and $121.8 million and $114.5 million at December 31, 2000. At December 31, 2001, the Company had capital commitments of $21.7 million to this special purpose entity trust. These funds are due upon satisfaction of contractual notice from the trust. These amounts may or may not be funded during the term of the trust.
The Company's mortgage loan portfolio was $941.2 million and $1,135.6 million at December 31, 2001 and 2000, respectively. The mortgage loan portfolio is well diversified geographically and among property types. The incidence of new problem mortgage loans and foreclosure activity remains low, and management expects the level of delinquencies and problem loans to remain low in the future. No new mortgage loans were added to the Company's investment portfolio during 2001 and 2000 other than two purchase money mortgages associated with the sale of real estate.
Restructured mortgage loans totaled $5.7 million and $8.5 million at December 31, 2001 and 2000, respectively, and represent loans that have been refinanced with terms more favorable to the borrower. Interest lost on restructured loans was immaterial for 2001 and 2000.
Real estate was $51.8 million and $116.7 million at December 31, 2000 and 1999. Investment real estate is carried at cost less accumulated depreciation. Real estate acquired through foreclosure is valued at fair value at the date of foreclosure and may be classified as investment real estate if it meets the Company's investment criteria. If investment real estate is determined to be permanently impaired, the carrying amount of the asset is reduced to fair value. Occasionally, investment real estate is reclassified to real estate held for sale when it no longer meets the Company's investment criteria. Real estate held for sale, which is valued net of a valuation allowance that reduces the carrying value to the lower of cost or fair value less estimated cost to sell, amounted to $7.6 million at December 31, 2001, and $18.3 million at December 31, 2000.
The Company's exposure to non-current investments totaled $176.7 million at December 31, 2001, or 0.7 percent of invested assets excluding ceded policy loans. These non-current investments are foreclosed real estate held for sale and fixed income securities and mortgage loans that became more than thirty days past due in principal and interest payments.
The Company has an investment program wherein it simultaneously enters into repurchase transactions and reverse repurchase transactions with the same party. The Company nets the related receivables and payables in the consolidated statements of financial condition as these transactions are with the same party and include a right of offset. As of December 31, 2001, the Company had $391.7 million face value of these contracts in an open position that were offset.
Historically, the Company has utilized interest rate futures contracts, current and forward interest rate swaps, interest rate forward contracts, and options on forward interest rate swaps, forward treasuries, or specific fixed income securities to manage duration and increase yield on cash flows expected from current holdings and future premium income. Positions under the Company's hedging programs for derivative activity that were open during 2001 involved current and forward interest rate swaps, as well as currency swaps which are used to hedge the currency risk of certain foreign currency denominated fixed income securities. All transactions are hedging in nature and not speculative. Almost all transactions are associated with the individual and group long-term care and the individual and group disability product portfolios. All other product portfolios are periodically reviewed to determine if hedging strategies would be appropriate for risk management purposes.
The Company's liquidity requirements are met primarily by cash flows provided from operations, principally in its insurance subsidiaries. Premium and investment income, as well as maturities and sales of invested assets, provide the primary sources of cash. Cash is applied to the payment of policy benefits, costs of acquiring new business (principally commissions), and operating expenses as well as purchases of new investments. The Company has established an investment strategy that management believes will provide for adequate cash flows from operations. Cash flows from operations were $1,770.6 million for the year ended December 31, 2001, as compared to $1,211.5 million and $1,566.7 million for the comparable periods of 2000 and 1999, respectively.
The Company's source of cash could be negatively impacted by a decrease in demand for the Company's insurance products or an increase in the incidence of new claims or the duration of existing claims. The Company's policy benefits are primarily in the form of claim payments, and the Company therefore has minimal exposure to the policy withdrawal risk associated with deposit products such as individual life policies or annuities. Cash flow could also be negatively impacted by a deterioration in the credit market whereby the Company's ability to liquidate its positions in certain of its fixed maturity securities would be impacted such that the Company might not be able to dispose of these investments in a timely manner.
The Company is dependent upon payments from its subsidiaries to pay dividends to its stockholders and to pay its expenses. These payments by the Company's insurance and non-insurance subsidiaries may take the form of interest payments on amounts loaned to such subsidiaries by the Company, operating and investment management fees, and/or dividends. At December 31, 2001, the Company had outstanding from its insurance subsidiaries a $150.0 million surplus debenture due in 2006 with a weighted average interest rate during 2001 of 7.85 percent and a $100.0 million surplus debenture due in 2027 with a weighted average interest rate during 2001 of 8.25 percent. Semi-annual interest payments are conditional upon the approval by the insurance department of the state of domicile.
Restrictions under applicable insurance laws limit the amount of ordinary dividends that can be paid to the Company from its insurance subsidiaries without prior approval by regulatory authorities. Generally, for life insurance subsidiaries domiciled or commercially domiciled in the United States, that limitation equals the greater of ten percent of an insurer's statutory surplus with respect to policyholders as of the preceding year end or the statutory net gain from operations, excluding realized investment gains and losses, of the preceding year. Further, pursuant to the 1999 merger of Unum and Provident, the Company is required to obtain approval from the Maine Bureau of Insurance (Maine Bureau) regarding payment of ordinary dividends from the Company's Maine domiciled insurance subsidiary until 2004.
The Company also has the ability to draw a dividend from its United Kingdom-based affiliate, Unum Limited. Such dividends are limited in amount, based on insurance company law in the United Kingdom, which requires a minimum solvency margin. Approximately $27.5 million will be available for the payment of dividends from Unum Limited during 2002.
At December 31, 2001, the Company had short-term and long-term debt totaling $161.8 million and $2,004.2 million, respectively. At December 31, 2001, approximately $403.0 million was available for additional financing under the Company's revolving credit facilities. The debt to total capital ratio was 29.8 percent at December 31, 2001 compared to 30.2 percent at December 31, 2000. Contingent upon market conditions and corporate needs, management may refinance short-term notes payable with longer-term securities.
During the fourth quarter of 2000, the Company entered into $1.0 billion senior revolving credit facilities with a group of banks. The facilities, which are split into five-year revolver and 364-day portions, replaced a 364-day revolver which expired in October 2000 and a five-year revolver which has been canceled. The new facilities are available for general corporate purposes, including support of the Company's $1.0 billion commercial paper program, and contain certain covenants that, among other provisions, include a minimum tangible net worth requirement, a maximum leverage ratio restriction, and a limitation on debt relative to the consolidated statutory earnings of the Company's insurance subsidiaries. The 364-day portion of the credit facilities was renewed as of October 30, 2001.
During the second quarter of 2000, the Company issued $200.0 million of variable rate notes in a privately negotiated transaction. The notes were used to refinance other short-term debt and had a weighted average interest rate of 7.52 percent during the first quarter of 2001. The notes matured in April 2001.
Contractual debt and Company-obligated mandatorily redeemable preferred securities commitments are as follows (in millions of dollars):
Commercial paper debt of $470.2 million was classified as long-term at December 31, 2001 because the Company has the ability through the senior revolving credit facilities to convert this obligation into long-term debt. The Company intends to refinance the commercial paper either by issuing additional commercial paper or by replacing commercial paper debt with long-term debt issued under the current shelf registration statement.
The table below reflects the current debt ratings for the Company and the financial strength ratings for the U.S. domiciled insurance company subsidiaries.
Use of Estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein.
Many factors influence the assumptions upon which reserves for policy and contract benefits are based, including historical trends in the Company's experience and expected deviations from historical experience. Considerable judgment is required to interpret actual historical experience and to assess the future factors that are likely to influence the ultimate cost of settling existing claims. Given that insurance products contain inherent risks and uncertainties, the ultimate liability may be more or less than such estimates indicate.
Investments: Investments are reported in the consolidated statements of financial condition as follows:
Real Estate classified as investment real estate is carried at cost less accumulated depreciation. Real estate acquired through foreclosure is valued at fair value at the date of foreclosure. If investment real estate is determined to be other than temporarily impaired, the carrying amount of the asset is reduced to fair value. Occasionally, investment real estate is reclassified to real estate held for sale when it no longer meets the Company's investment criteria. Real estate held for sale is valued net of a valuation allowance that reduces the carrying value to the lower of cost less accumulated depreciation or fair value less estimated cost to sell. Accumulated depreciation on real estate was $17.8 million and $31.0 million as of December 31, 2001 and 2000, respectively.
Policy Loans are presented at unpaid balances directly related to policyholders. Included in policy loans are $2,329.3 million and $2,237.6 million of policy loans ceded to reinsurers at December 31, 2001 and 2000, respectively.
Fixed maturity securities include bonds and redeemable preferred stocks. Equity securities include common stocks and nonredeemable preferred stocks. Fixed maturity and equity securities not bought and held for the purpose of selling in the near term but for which the Company does not have the positive intent and ability to hold to maturity are classified as available-for-sale. Fixed maturity securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity.
Fair value hedge. Changes in the fair value of the derivative as well as the offsetting change in fair value on the hedged item attributable to the risk being hedged are recognized in current operating earnings during the period of change in fair value. The gain or loss on the termination of an effective fair value hedge is recognized in current operating earnings.
For a derivative not designated as a hedging instrument, the change in fair value is recognized in current operating earnings during the period of change.
Reinsurance Receivable: The Company routinely cedes reinsurance to other insurance companies. For ceded reinsurance agreements wherein the Company is not relieved of its legal liability to its policyholders, the Company reports assets and liabilities on a gross basis. Reinsurance receivables include the balances due from reinsurers under the terms of these reinsurance agreements for ceded policy and contract benefits, ceded future policy and contract benefits, and ceded unearned premiums, less ceded policy loans.
of business becomes immaterial or results improve significantly. The assumptions used in loss recognition testing represent management's best estimates of future experience.
Value of Business Acquired: Value of business acquired represents the present value of future profits recorded in connection with the acquisition of a block of insurance policies. The asset is amortized based upon expected future premium income for traditional insurance policies and estimated future gross profits for interest-sensitive insurance policies, with the accrual of interest added to the unamortized balance at interest rates principally ranging from 5.55 percent to 8.13 percent. The accumulated amortization for value of business acquired was $217.1 million and $168.7 million as of December 31, 2001 and 2000, respectively. The Company periodically reviews the carrying amount of value of business acquired using the same methods used to evaluate deferred policy acquisition costs.
Property and Equipment: Property and equipment is depreciated on the straight-line method over its estimated useful life. The accumulated depreciation for property and equipment was $352.7 million and $350.1 million as of December 31, 2001 and 2000, respectively.
The Company follows the periodic method of accounting for its Lloyd's of London (Lloyd's) business in which premiums are recognized as revenue over the policy term, and claims, including an estimate of claims incurred but not reported, are recognized as they occur. Premiums for the Lloyd's business are based on participation in the individual syndicate underwriting years that generate premiums over a three year period of time. The Company uses its historical experience and information obtained from its managing agents to estimate revenues, losses, expenses, and the related assets and liabilities.
Reserves for future policy and contract benefits on group single premium annuities have been provided on a net single premium method. The reserves are calculated based on assumptions as to interest, mortality, and retirement that were appropriate at the date of issue. Mortality assumptions are based upon industry standards adjusted as appropriate to reflect actual Company experience. The assumptions vary by year of issue.
Policyholders' Funds: Policyholders' funds represent customer deposits plus interest credited at contract rates. The Company controls its interest rate risk by investing in quality assets which have an aggregate duration that closely matches the expected duration of the liabilities.
Separate Accounts: The separate account amounts shown in the accompanying consolidated financial statements represent contributions by contract holders to variable-benefits and fixed-benefits pension plans. The contract purchase payments and the assets of the separate accounts are segregated from other Company funds for both investment and administrative purposes. Contract purchase payments received under variable annuity contracts are subject to deductions
for sales and administrative fees. Also, the sponsoring companies of the separate accounts receive management fees based on the net asset values of the separate accounts.
Translation of Foreign Currency: Revenues and expenses of the Company's foreign operations, principally Canada and the United Kingdom, are translated at average exchange rates. Assets and liabilities are translated at the rate of exchange on the balance sheet date. The translation gain or loss is generally reported in accumulated other comprehensive income or loss, net of deferred tax.
Statements of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, and No. 138 (SFAS 138), Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133
Statement of Financial Accounting Standards No. 140 (SFAS 140), Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
Effective April 1, 2001, the Company adopted SFAS 140. SFAS 140 revised the standards for accounting and reporting for transfers and servicing of financial assets and extinguishment of liabilities. The adoption of SFAS 140 did not have a material impact on the Company's financial position or results of operations.
Statement of Financial Accounting Standards No. 141 (SFAS 141), Business Combinations
SFAS 141 addresses financial accounting and reporting for business combinations and requires that all business combinations be accounted for using the purchase method. SFAS 141 applies to all business combinations initiated after June 30, 2001. The adoption of SFAS 141 will have no immediate effect on the Company but does prohibit the future use of the pooling of interests method of accounting for business combinations.
Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets
Application of the non-amortization provision is expected to increase 2002 earnings $21.3 million before tax and $20.2 million after tax. At the initial adoption of SFAS 142, the Company will perform the required transitional goodwill impairment test. Any impairment loss resulting from the transitional goodwill impairment test will be recognized as the effect of a change in accounting principle and will be presented as a separate caption, net of tax, in the consolidated statements of operations. The impairment loss, if any, is not expected to have a material impact on the Company's financial position or results of operations.
Statement of Financial Accounting Standards No. 143 (SFAS 143), Accounting for Asset Retirement Obligations
SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company will adopt the provisions of SFAS 143 effective January 1, 2003. The adoption of this pronouncement is not expected to have a material impact on the Company's financial position or results of operations.
During 1999, the Company recognized expenses related to the merger and the early retirement offer to employees as follows (in millions of dollars):
The unpaid claim reserves for these disability lines as of June 30, 1999 were $5,318.3 million using the former method for determining reserve discount rates and $5,559.0 million using the current method. The impact on 1999 earnings related to the change in method of calculating the discount rate for claim reserves was $240.7 million before tax and $156.5 million after tax during the second quarter.
The review resulted in an increase in the benefits and reserves for future benefits for the Company's domestic and Canadian group long-term disability unpaid claim liabilities. As a result of the review, the Company increased its policy and contract benefit liabilities $359.2 million, which reduced 1999 earnings $359.2 million before tax and $233.5 million after tax.
The increase in policy and contract benefit liabilities primarily resulted from revisions to assumptions in the following three key components: claim termination rates, incurred but not reported (IBNR) factors, and discount rates. These components and their effect on the reserve increase are summarized and discussed below (in millions of dollars).
Claim termination rates $372.6 Incurred but not reported factors 101.4 Discount rates (114.8) ------ Net change $359.2 ======
Claim resolution assumptions have been determined considering both external trends and the Company's current and planned actions which would have a material effect on claim resolution rates. Due to the high variability in claim resolution rates, considerable judgment is required in setting claim resolution assumptions. Revised claim resolution assumptions have been determined after consideration of the merger integration plans, including the short-term disruption of the claims management process from integration activities. Other factors considered included emerging external trends, such as the developing trend for some claimants to remain on claim longer, current and historical claim resolution experience, industry claim resolution experience, and changes in planned actions, as well as the anticipated future effectiveness of the claims operations in settling existing claims. The revised assumptions for claim resolution rates resulted in an increase in benefit liabilities of approximately $194.8 million. These estimates rely on the Company's ability to complete integration and claims processing changes as planned and those changes having the anticipated impact on claim recovery rates.
The results of operations for the separate companies and the combined amounts for the period prior to the merger were as follows (in millions of dollars):
Policyholders' Funds: Carrying amounts for deferred annuity products approximate fair value. Other policyholders' funds include guaranteed investment contacts (GICs) and supplementary contracts without life contingencies. Fair values for GICs are estimated using discounted cash flow calculations, based on current market interest rates available for similar contracts with maturities consistent with those remaining for the contracts being valued. Carrying amounts for supplementary contracts without life contingencies approximate fair value.
Derivatives: Fair values are based on market quotes or pricing models and represent the net amount of cash the Company would have received or paid if the contracts had been settled or closed on December 31.
The amortized cost and fair values of fixed maturity securities by maturity date are shown below. The maturity dates have not been adjusted for possible calls or prepayments.
In the normal course of business, the Company both loans securities to broker dealers and invests in short-term repurchase agreements. For both types of transactions, the Company requires that a minimum of 102 percent of the fair value of the securities loaned or securities purchased under repurchase agreements be maintained as collateral. Generally, cash is received as collateral under these agreements. In the event that securities are received as collateral, the Company is not permitted to sell or repledge them.
At December 31, 2001, the Company had capital commitments of $36.6 million to fund certain of its private placement fixed maturity securities. The funds are due upon satisfaction of contractual notice from the issuer. These amounts may or may not be funded during the term of the security.
In accordance with the adoption of SFAS 133, the Company reclassified within accumulated other comprehensive income the beginning of the year balance in 2001 of $75.3 million of after-tax unrealized gains on derivatives from the net unrealized gain on securities to the net gain on cash flow hedges.
Additions to the investment valuation allowances represent realized investment losses, and deductions represent the allowance released upon disposal or restructuring of the related asset. Changes are as follows:
To help limit the credit exposure of the derivatives, the Company has entered into master netting agreements with its counterparties whereby contracts in a gain position can be offset against contracts in a loss position. The Company also typically enters into bilateral, cross-collateralization agreements with its counterparties to help limit the credit exposure of the derivatives. These agreements require the counterparty in a loss position to submit acceptable collateral with the other counterparty in the event the net loss position meets or exceeds an agreed upon amount. The Company's current credit exposure on derivatives, which is limited to the value of those contracts in a net gain position, was $37.0 million at December 31, 2001.
The table below summarizes by notional amounts the activity for each category of derivatives.
The following table summarizes the timing of anticipated settlements of interest rate swaps outstanding at December 31, 2001, whereby the Company receives a fixed rate and pays a variable rate. The weighted average interest rates assume current market conditions.
The Company's derivatives all qualify as hedges and have been designated as cash flow hedges. The cash flow hedging programs are described as follows.
The Company has invested in certain structured fixed maturity securities that contain embedded derivatives. These embedded derivatives represent forward contracts and are accounted for as cash flow hedges. The purpose of these forward contracts is to hedge the risk of changes in cash flows related to the anticipated purchase of equity securities.
The Company amortized $9.1 million of net deferred gains into earnings during 2001 including the amortization of deferred gains on derivative instruments that arose prior to the initial application of SFAS 133 and that were previously added to the carrying amount of recognized hedged assets. The estimated amount of net deferred gains that will be amortized into operating earnings during 2002 is $10.4 million. The notional amount of derivatives outstanding under the hedge programs was $1,125.1 million at December 31, 2001.
The estimated net amortization of value of business acquired for each of the next five years is $43.8 million in 2002, $42.6 million in 2003, $41.0 million in 2004, $39.5 million in 2005, and $38.0 million in 2006. Acquisition and disposition activity related to certain reinsurance transactions. See Note 13.
The tragedy of September 11, 2001 resulted in a third quarter 2001 before-tax charge of $24.0 million, or $15.6 million after tax. This charge includes estimated gross ultimate losses from reported and unreported claims of $65.0 million less an estimated $41.0 million recoverable from the Company's reinsurers. The charge does not include any indirect costs which the Company incurred in developing specialized procedures for filing claims resulting from the attacks and in providing additional support to impacted policyholders and group clients. The Company's reinsurance program provides a significant layer of catastrophic coverage for its individual disability and its group life, accidental death and dismemberment, travel accident, long-term disability, and short-term disability lines of business through a group of highly rated major national and international reinsurance organizations. Because of the quality and level of the Company's various reinsurance coverages, the Company does not anticipate that any of its reinsurers will be unable to cover the claims incurred as a result of the events. Should this occur, however, all of the Company's insurance subsidiaries are sufficiently capitalized such that each insurance subsidiary will be able to satisfy these claims and will face no liquidity or risk-based capital issues.
Prior year amounts have been reclassified to conform to the current year presentation.
During 2001, the Company's valuation allowance decreased by $44.3 million related to its investment in foreign operations.
The Company's subsidiaries had net operating loss carryforwards of approximately $627.5 million, alternative minimum tax credit carryforwards of approximately $2.8 million, and capital loss carryforwards of $5.9 million as of December 31, 2001. The majority of the net operating loss carryforwards will begin to expire, if not utilized, in 2020; the alternative minimum tax credits do not expire; the capital loss carryforward, if not utilized, will expire in 2006.
Federal income taxes paid during 2001, 2000, and 1999 were $127.3 million, $165.6 million, and $77.8 million, respectively.
In 2000, the Company entered into $1.0 billion senior revolving credit facilities with a group of banks. The facilities, which are split into five-year revolver and 364-day portions, replaced a 364-day revolver which expired in October 2000 and a five-year revolver which has been canceled. The 364-day portion of the credit facility was renewed as of October 2001. Interest is variable based upon a London Interbank Offered Rate (LIBOR) plus a margin or an alternate base rate. At December 31, 2001, approximately $403.0 million was available for additional financing under the Company's revolving credit facilities.
Of the $2,004.2 million of long-term debt at December 31, 2001, $470.2 million will mature in 2002, $20.0 million will mature in 2003, $227.0 million will mature in 2005, and $1,287.0 million will mature in 2011 and thereafter.
In 1998, Provident Financing Trust I, a wholly-owned subsidiary trust of the Company, issued $300.0 million of 7.405% capital securities in a public offering. These capital securities, which mature on March 15, 2038, are fully and unconditionally guaranteed by the Company, have a liquidation value of $1,000 per capital security, and have a mandatory redemption feature under certain circumstances. The Company issued $300.0 million of 7.405% junior subordinated deferrable interest debentures which mature on March 15, 2038, to the subsidiary trust in connection with the capital securities offering. The sole assets of the subsidiary trust are the junior subordinated debt securities.
The weighted average assumptions used in the measurement of the Company's benefit obligation are as follows:
A one percent increase or decrease in the assumed health care cost trend rate at December 31, 2001 and 2000 would have an insignificant impact on the net periodic postretirement benefit cost and postretirement benefit obligation.
In computing earnings per share assuming dilution, only potential common shares that are dilutive (those that reduce earnings per share) are included. Potential common shares are not used when computing earnings per share assuming dilution if the results would be antidilutive, such as when a net loss is reported or if options are out of the money. Approximately 10.2 million, 10.7 million, and 3.7 million options for the years ended December 31, 2001, 2000 and 1999, respectively, were not considered dilutive due to the options being out of the money. In-the-money options to purchase approximately 3.1 million common shares for the year ended December 31, 1999, were not considered dilutive due to net losses being reported for the period.
The Company has several annual incentive plans for certain employees and executive officers that are designed to encourage achievement of certain goals. Compensation cost recognized in the consolidated statements of operations for annual incentive plans is $27.0 million, $28.8 million, and $6.6 million for 2001, 2000, and 1999, respectively.
Under the stock plan of 1999, the Company has available up to 17,500,000 shares of common stock for awards to its employees, officers, producers, and directors. Awards may be in the form of stock options, stock appreciation rights, restricted stock awards, dividend equivalent awards, or any other right or interest relating to stock. The number of shares available to be issued as restricted stock or unrestricted stock awards is limited to 3,500,000 shares. The options have a maximum term of ten years after the date of grant. The Company granted 158,100 shares of restricted stock to certain employees during 2001 with a weighted average grant date value of $27.99 per common share.
Prior to these stock plans, the Company had various stock option and stock award programs. For all stock option plans the exercise price of each option was not less than the fair market value of the Company's stock at the date of grant. In accordance with stock plan provisions, outstanding stock options and restricted stock became immediately exercisable as a result of a change in control (see Note 2).
Substantially all of the Company's employees are eligible to participate in an ESPP. Under the plan, up to 1,460,000 shares of the Company's common stock are authorized for issuance. Stock may be purchased at the end of each financial quarter at a purchase price of 85 percent of the lower of its beginning or end of quarter market prices. The Company sold 159,572; 201,626; and 86,497 shares to employees with a weighted average exercise price of $22.40, $16.73, and $31.71 in 2001, 2000, and 1999, respectively.
The Company applies Opinion 25 and related interpretations in accounting for the stock option plans and ESPP. Accordingly, no compensation cost has been recognized for these plans. Compensation cost for the Company's stock option plans and ESPP under the fair value approach defined in Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation, was estimated as of the grant date using Black-Scholes option pricing models.
Had compensation cost for these plans been determined in accordance with the provisions of SFAS 123, the Company's net income (loss) and net income (loss) per common share would have been as follows:
Reinsurance activity is accounted for on a basis consistent with the terms of the reinsurance contracts and the accounting used for the original policies issued. Premium income and benefits and change in reserves for future benefits are presented in the consolidated statements of operations net of reinsurance ceded. The total amounts deducted for reinsurance ceded are as follows:
During 2001, the Company reinsured on a 100 percent indemnity coinsurance basis certain cancer policies written by one of the Company's insurance subsidiaries. The effective date of the transaction was November 1, 2001. Total policy reserves ceded were approximately $113.6 million. The $12.3 million before-tax gain on this transaction was deferred and is being amortized into income based upon expected future premium income on the policies ceded.
Net GAAP Reserves $ 843.9 Experience Layer 386.8 ---------- Attachment Point 1,230.7 Centre Re's Defined Risk Layer 128.9 ---------- Defined Risk Limit $ 1,359.6 ==========
Under this agreement, the Company funds a trust account equal to the amount of the Company's exposure. This trust account provides security for amounts due by the Company prior to reaching the attachment point. The Company controls the management of the business, including premium collection and claims management, under this agreement. All premiums, less amounts for management expenses and claim payments, are transferred to the trust account on a quarterly basis. The Company also acts as the investment manager for 80 percent of the assets in the trust with Centre Re managing the remaining 20 percent.
in year 2000 underwriting risks, ceased participation in Lloyd's underwriting risks after year 2000, and managed the run-off of its risk participation in open years of account of Lloyd's reinsurance syndicates.
The Company entered into a separate indemnity reinsurance agreement with AUL whereby AUL would assume the Company's existing risk participation in the A&H and LTC reinsurance facilities. As a result, the Company recognized a 1999 before-tax loss of $12.7 million.
The reinsurance pool business consists of more than 20 different pool facilities, the majority of which are managed by D&H and a few pools which are managed by third parties. Reserve assumptions are periodically reviewed to support the determination of the ultimate cost of settling claims for certain reinsurance pools. During the first quarter of 1999, the Company reviewed the actuarial assumptions used to set reserves for certain reinsurance facilities based on the most current information available from the reinsurance pool managers. The Company also received new information pertaining to a reinsurance pool managed by a third party that indicated a reserve increase was required. The Company relied primarily on the third party pool manager's judgement and recorded its portion of the reserve as reflected in the reinsurance pool statement from the third party pool manager. The new information received from the managed facilities and the third party facility indicated deterioration in loss experience, primarily related to a longer duration of claims and increased incidence of new claims in certain facilities. The result of these reviews was an increase to claim reserves of $39.1 million during 1999. The Company determined that the increase to reserves was needed based on revised actuarial assumptions to reflect current and expected trends in claims experience and expenses.
Using this information and recent experience with prior revisions of estimated losses in this business, the Company performed a review of its claim reserve liabilities related to its open years of account. The review of estimates related to open years of account was performed based on a periodic review of these estimates as information was received from the Lloyd's syndicates. The review resulted in revised best estimates of the expected ultimate profit or loss for each open year of account, which were significantly below the levels estimated in 1998. The resulting charge to earnings in the amount of $185.0 million was reflected in the Company's income during 1999 for the open years of account 1996 through 1999.
In addition to the risk participation charge, during 1999 the Company recorded a charge of $1.5 million, which represented the reduction of previously recognized profit commissions related to the Lloyd's management company operations.
During 2000 the Company, working with the pool managers in London, revised its estimates to reflect current and expected trends in claims experience and expenses. The 2000 charge included an increase of $21.9 million in claim reserves for certain of the reinsurance pools and $15.5 million related to uncollectible receivables and loss provisions.
In 2001 and prior, goodwill and the amortization thereof was reported in the Corporate segment. In conjunction with the adoption of SFAS 142, effective January 1, 2002, the unamortized goodwill balance will be reclassified to the segments expected to benefit from the originating business combinations. The reclassification will increase assets $78.2 million, $585.5 million, and $11.0 million in the Employee Benefits, Individual, and Other segments, respectively, with a corresponding decrease of $674.7 million in the Corporate segment.
The Company has an agreement with an outside party wherein the Company is provided computer data processing services and related functions. The contract expires in 2010, but the Company may cancel this agreement effective August 2005 or later upon payment of applicable cancellation charges. The aggregate noncancelable contractual obligation remaining under this agreement is $258.8 million at December 31, 2001, with no annual payment expected to exceed $69.9 million.
On April 10, 2000, the defendants filed a motion to dismiss the complaints. On January 8, 2001, the district court affirmed a Recommended Decision by the Magistrate Judge, entered November 8, 2000, that granted in part, and denied in part, the motion. The district court granted the motion to dismiss plaintiff's claims (i) under Section 10(b) of the Securities Exchange Act of 1934, (ii) under Section 14(a) of the Securities Exchange Act of 1934 on behalf of the former shareholders of Unum, and (iii) under Section 12(a) of the Securities Act of 1933 on behalf of purchasers of the Company stock after the merger. The district court also dismissed plaintiff's claims relating to disclosures regarding the costs associated with Unum's exit from its reinsurance business, but otherwise denied defendants' motion to dismiss plaintiff's claims under Sections 11 and 12(a) (2) of the Securities Act of 1933 and the claim under Section 14(a) of the Securities Exchange Act of 1934.
Regulatory restrictions limit the amount of dividends available for distribution to the Company from its insurance subsidiaries without prior approval by regulatory authorities. Generally, that limitation equals the greater of ten percent of an insurer's statutory surplus as regards policyholders as of the preceding year end or the statutory net gain from operations, excluding realized investment gains and losses, of the preceding year. Pursuant to the 1999 merger of Unum and Provident, the Company is required to obtain approval from the Maine Bureau of Insurance regarding payment of ordinary dividends from its Maine domiciled insurance subsidiary to the Company until 2004. Based on the applicable restrictions, $384.9 million will be available for the payment of dividends to the Company from its top-tier domestic insurance subsidiaries during 2002. Of this amount, $121.8 million is conditional upon approval from the Maine Bureau of Insurance. The Company also has the ability to draw a dividend from its United Kingdom subsidiary, Unum Limited. Such dividends are limited based on insurance company legislation in the United Kingdom, which requires a minimum solvency margin. The amount available under current law for payment of dividends to the Company from Unum Limited during 2002 is approximately $27.5 million. Regulatory restrictions do not limit the amount of dividends available for distribution to the Company from its non-insurance subsidiaries.