S E L E C T E D C O N S O L I D A T E D F I N A N C I A L D A T A
(Dollars in millions, except per share amounts, and percentage increase (decrease) over prior year) 1993 1992 1991 Revenues Premiums $2,474.1 15.5% $2,142.4 10.5% $1,938.9 Investment income 790.4 (2.3) 809.2 2.9 786.6 Net realized investment gains 49.4 19.0 41.5 66.0 25.0 Fees and other income 83.1 50.0 55.4 62.9 34.0 Total revenues 3,397.0 11.4 3,048.5 9.5 2,784.5
Income taxes 148.3 38.2 107.3 44.4 74.3 Income before cumulative effects of accounting changes 312.0 7.1 291.2 18.7 245.3
Cumulative effects of accounting changes Income taxes 20.0 nm -- -- Postretirement benefits other than pensions, net of tax (32.1) nm -- -- Net income $ 299.9 3.0% $ 291.2 18.7% $ 245.3
Per common share Income before cumulative effects of accounting changes $ 3.96 $ 3.71 $ 3.15 Cumulative effects of accounting changes Income taxes 0.25 -- -- Postretirement benefits other than pensions, net of tax (0.40) -- -- Net income $ 3.81 $ 3.71 $ 3.15
Included in 1993 net income were the cumulative and incremental effects of the adoption of Financial Accounting Standards ("FAS") No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," and No. 109, "Accounting for Income Taxes."
Effective January 1, 1993, UNUM adopted FAS 106, which changed the method for recognition of the cost of postretirement benefits other than pensions from a cash basis to an accrual basis over the years in which employees render the related services. UNUM elected to recognize the FAS 106 liability at January 1, 1993, of $48.8 million as a cumulative effect of an accounting change which decreased net income by $32.1 million, or $0.40 per share, in 1993. The incremental effect of FAS 106 for 1993 was increased operating expenses of approximately $6.0 million.
Also effective January 1, 1993, UNUM adopted FAS 109, which changed the method for calculating and reporting deferred income taxes in the financial statements from the deferred method to the liability method. The cumulative effect of this accounting change amounted to a $20.0 million increase, or $0.25 per share, in 1993 net income.
UNUM also adopted FAS 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," effective January 1, 1993, which resulted in an increase in other assets of $80.0 million and a corresponding increase in future policy benefits and unpaid claims and claim expenses, but did not affect 1993 net income.
1993 Compared With 1992 Continued successful expense management, favorable claims experience in the Individual Disability segment and unusually favorable interest spread margins on tax sheltered annuities in the Retirement Security segment were primary factors in the increase in income before income taxes in 1993. Expenses incurred in connection with the merger of UNUM and Colonial Companies, Inc., included in Corporate, and unfavorable group life claims experience in the Employee Benefits segment partially offset these results. Net realized investment gains increased by $7.9 million in 1993 to $49.4 million from $41.5 million in 1992.
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 ("OBRA") was enacted. OBRA increased the federal income tax rate of 34% to 35%, retroactive to January 1, 1993, and generally serves to limit corporate tax deductions for years after 1993. The change in tax rates resulted in increased 1993 income tax expense of $3.6 million related to 1993 pretax income and an additional $7.8 million related to the adjustment of deferred tax liabilities, for a total charge of $11.4 million, or $0.15 per share.
The majority of UNUM's businesses have been affected by the economic conditions that have existed in the United States during the past two years. The United States has experienced reduced salary growth due to low inflation, the elimination of jobs due to corporate restructurings, depressed real estate markets and lower interest rates. Due to these economic conditions, UNUM's disability businesses have experienced higher incidence of new claims and lower recovery rates which management believes are linked to the recessionary pressures experienced by UNUM's insureds. Additionally, UNUM's United Kingdom affiliate, UNUM Limited, has been affected by the United Kingdom's depressed economic conditions, lower interest rates and the decline in the value of the British pound sterling against the U.S. dollar.
The current interest rate environment has decreased the average rate used to discount claim reserves, which is expected to increase claim reserve liabilities. To mitigate the potential impact of increasing reserve requirements due to a declining discount rate, UNUM proactively reviews and adjusts investment strategies, increases prices on both existing and new business, and implements new risk management programs and underwriting guidelines. Conversely, the impact of a declining interest rate environment on UNUM's tax sheltered annuity business is decreased amounts of interest credited to funds on deposit.
During the past two years, new additions to the allowance for probable losses on invested assets and real estate held for sale have declined. Additions to the allowance for probable losses were $19.8 million, $32.7 million and $53.2 million for the years ended December 31, 1993, 1992 and 1991, respectively. UNUM's incidence of new problem mortgage loans and foreclosure activity declined in 1993 as overall economic activity improved modestly, and many of the real estate markets in which UNUM has mortgage loans stabilized.
Economic indicators at the end of 1993 and early 1994 were predicting modest growth for the United States in 1994. In February 1994, the Federal Reserve Board tightened credit policy, due to market concerns about rising inflation, by raising the federal-funds rate for the first time in nearly five years to 3.25% from 3.0%. Since long-term yields are based on market dynamics, management cannot predict the impact of a higher short-term rate on long-term yields.
The United States spends close to one trillion dollars, more than 14 percent of its Gross Domestic Product and more than any other industrialized nation, on health care. In September 1993, President Clinton's Administration proposed comprehensive changes to overhaul the U.S. health care system under the Health Security Act of 1993. While final legislation cannot be predicted, all U.S. citizens and legal residents would be guaranteed access to a federally mandated standard health package by January 1, 1998, under the Administration's proposal. Health care would be provided through "managed competition," which uses a balance of government regulation and free market competition to control costs and provide access to quality services.
President Clinton's plan defines two types of coverage -- "basic" and "supplemental." Basic coverage would provide core health benefits; supplemental coverage would include additional medical benefits. This proposed plan will permit purchasing alliances to offer only basic or supplementary health insurance benefits. Voluntary types of coverage such as those offered by the UNUM enterprise are outside the scope of the President's proposal and would not be subject to regulation by the national health board. The purchasing alliances and a national health board would be created as intermediaries under the President's plan.
Benefits and expenses Benefits to policyholders 1,018.3 26.0 808.0 10.7 729.9 Operating expenses 284.6 9.7 259.5 13.6 228.5 Commissions 97.9 10.7 88.4 13.3 78.0 Increase in unamortized deferred policy acquisition costs (42.6) 53.2 (27.8) (18.7) (34.2) Total benefits and expenses 1,358.2 20.4 1,128.1 12.6 1,002.2
Record sales were reported in all of the Employee Benefits segment's product lines in 1993, which contributed to a 22.1% growth in premiums. Premium growth also reflected selected price increases and slight growth of the employment and salary levels for group LTD's existing customer base. Renewal rate actions for group LTD had a minimal impact on the premium persistency rate for 1993. In 1993, group LTD was active in acquiring closed blocks of claims which generated one-time premiums totaling $58.3 million. Management intends to pursue additional claim block acquisitions in the future.
The 11.5% premium increase in 1992 reflected improved persistency, which was partially offset by slower sales for group LTD. Sales in the first half of 1992 were affected by economic conditions in North America which also contributed to sluggish salary and employment growth of existing customers.
In 1993, the group life business experienced unfavorable claims results which contributed to the increased benefit ratio for the Employee Benefits segment from 1992. Management attributes group life's 1993 claims experience to antiselection and adverse mortality. Mortality risk has a random element, and it is not uncommon to experience adverse or favorable mortality swings. To address the antiselection experienced during 1993, management has imposed more stringent underwriting requirements and has targeted specific business segments to pursue risk and pricing actions. In 1993, group LTD experienced a slightly higher incidence of new claims which was expected by management due to a changing mix in the customer base, and lower claim terminations.
The discount rate used to determine group LTD reserves decreased from 9.7% at December 31, 1992, to 9.3% at December 31, 1993. The rate is a composite yield of assets backing the group LTD reserves and has decreased since cash flows are invested in high quality assets at current yields, which are below the yields of existing assets. If the current interest rate environment persists and the level of growth of the group LTD product continues, management anticipates that the overall rate used to discount group LTD reserves will continue to decline, which is expected to increase current reserve requirements. To mitigate the potential impact of increasing reserve requirements due to a declining discount rate, UNUM proactively reviews and adjusts investment strategies, increases prices on both existing and new business, and implements new risk management programs and underwriting guidelines.
The ratio of operating expenses to premiums was 21.0%, 23.4% and 23.0% in 1993, 1992 and 1991, respectively. The decrease in 1993 is attributable to increased premium from claim block purchases which do not have proportionally higher expenses, and continued efforts to manage expense growth. The increase in operating expenses in 1992 was attributable to increased claims management activity, significant investments in new strategic and administrative systems and increased marketing costs to support higher sales. Unamortized deferred policy acquisition costs increased in 1993 due primarily to higher sales. The increase in unamortized deferred policy acquisition costs was lower in 1992 than in 1991 primarily due to higher amortization as a result of the timing and characteristics of policy terminations and lower deferrals of marketing costs.
Benefits and expenses Benefits to policyholders 268.7 2.3 262.7 3.4 254.0 Operating expenses 122.9 30.1 94.5 29.3 73.1 Commissions 46.8 9.1 42.9 13.5 37.8 Increase in unamortized deferred policy acquisition costs (7.9) 3.9 (7.6) 16.9 (6.5) Interest expense 0.2 nm 0.1 nm -- Total benefits and expenses 430.7 9.7 392.6 9.5 358.4
UNUM Limited The United Kingdom has experienced depressed economic conditions during the last two years that have affected UNUM Limited's ability to sell employee benefits to a stagnant workforce. UNUM reallocated capital from UNUM Limited in 1992, which resulted in decreased investment income for the Related Businesses segment in 1993 and 1992. The decreasing interest rate environment further pressured UNUM Limited's investment income. UNUM Limited, which experienced favorable claims levels in 1991, experienced more normal claims levels in 1992 and 1993. Collaborative efforts between UNUM's U.S. and U.K. group long term disability specialists have provided UNUM the opportunity to leverage expertise among the companies. Operating expenses increased during 1993 and 1992 primarily due to continued investment in administrative procedures and systems.
Commercial Life Premiums increased during 1993 and 1992 due to modest growth in Commercial Life's major product lines. During 1993, the benefit ratio decreased from 1992, due primarily to more favorable claims experience in the franchise disability business. The benefit ratio improvement in 1992 from 1991 was primarily due to unusually favorable claims experience in the specialty group accident product line, which was partially offset by unfavorable claims experience in the franchise disability business. Due to the nature of the risks underwritten, the specialty group accident product line exhibits claims variability.
Reinsurance Operations Acquired in third quarter 1992, Duncanson & Holt, Inc. ("D&H"), is a leading accident and health reinsurance underwriting manager which provides pool management services to client companies but does not bear insurance risk. In return for services provided, D&H collects a management fee which is primarily based on the level of pool insurance business and is intended to offset expenses incurred as a result of providing pool management services. Due to the full year and half-year inclusion of D&H, fee income and operating expenses increased in the Related Businesses segment for both 1993 and 1992. The benefit ratio for the reinsured disability business decreased in 1993 and increased in 1992, which reflects the underlying claims experience of the insureds.
Summary The principal reason for the increase in income before income taxes for the Related Businesses segment in 1993 is the inclusion of D&H results for a full year, which was partially offset by less favorable earnings for UNUM Limited due to a lower weighted average exchange rate. Income before income taxes decreased in the Related Businesses segment for 1992 compared with 1991 primarily due to increased claims levels in the disability businesses, investment in administrative procedures and systems at UNUM Limited and decreased investment income, which were partially offset by unusually favorable claims experience in Commercial Life's specialty group accident product line.
Revenues Premiums $ 403.9 10.8% $ 364.6 12.9% $ 322.8 Investment income 29.8 (0.3) 29.9 10.7 27.0 Net realized investment gains 11.6 nm 5.5 (52.2) 11.5 Fees and other income 3.5 (52.1) 7.3 nm 2.6 Total revenues 448.8 10.2 407.3 11.9 363.9
Benefits and expenses Benefits to policyholders 207.5 10.4 187.9 16.6 161.2 Interest credited 4.2 16.7 3.6 20.0 3.0 Operating expenses 94.2 1.0 93.3 2.5 91.0 Commissions 92.7 8.0 85.8 12.9 76.0 Increase in unamortized deferred policy acquisition costs (20.3) (15.1) (23.9) (4.0) (24.9) Interest expense 0.1 -- 0.1 -- 0.1 Total benefits and expenses 378.4 9.1 346.8 13.2 306.4
The weaker level of sales for the past two years has slowed the rate of growth in premiums. However, premium growth was supplemented by improved persistency through enhanced customer conservation programs. Management is focusing on strategies to improve sales, which include increasing the sales force and offering a number of new products.
During 1993, investment income declined primarily due to the realignment of Colonial's investment portfolio to reflect UNUM's investment philosophy. As a result, Colonial sold higher yielding but callable investments, which resulted in increased realized investment gains. Fees and other income for 1992 reflect $4.0 million received from the settlement of a lawsuit that was initiated against a competitor.
Colonial's benefit ratio increased to 51.5% in 1992 from 49.9% in 1991 and has remained relatively flat at 51.4% during 1993. For the past several years, Colonial has shifted its product mix toward products with higher benefit ratios, lower expense ratios and better policyholder retention. In addition, the decline in the expense ratio for 1993 and 1992 reflects management's efforts to control expenditures and improve operational efficiencies.
Revenues Premiums $ 312.0 10.6% $ 282.2 16.2% $ 242.9 Investment income 74.6 5.5 70.7 8.4 65.2 Net realized investment gains 7.9 83.7 4.3 87.0 2.3 Fees and other income 10.5 (1.9) 10.7 1.9 10.5 Total revenues 405.0 10.1 367.9 14.6 320.9
Benefits and expenses Benefits to policyholders 212.0 3.7 204.4 17.6 173.8 Operating expenses 103.5 3.5 100.0 4.0 96.2 Commissions 75.6 6.0 71.3 19.6 59.6 Increase in unamortized deferred policy acquisition costs (55.1) 5.2 (52.4) 15.4 (45.4) Total benefits and expenses 336.0 3.9 323.3 13.8 284.2
Sales (annualized new premiums) $ 63.2 $ 60.1 $ 58.1 Persistency (premiums) 92.1% 91.7% 91.9% Benefit ratio (% of premiums) 67.9% 72.4% 71.6% Operating expense ratio (% of premiums) 33.2% 35.4% 39.6%
The Individual Disability segment has reported a decreasing expense ratio for the past two years, which management attributes to focused expense management and productivity gains, as premium growth outpaced expense growth. Management expects to invest for future growth, which may reduce the current rate of reduction of the expense ratio.
Benefits and expenses Benefits to policyholders 31.7 -- 31.7 13.6 27.9 Interest credited 164.9 (8.4) 180.0 (8.3) 196.2 Operating expenses 53.2 43.4 37.1 26.6 29.3 Commissions 12.6 41.6 8.9 53.4 5.8 Increase in unamortized deferred policy acquisition costs (11.7) nm (3.3) nm (1.3) Total benefits and expenses 250.7 (1.5) 254.4 (1.4) 257.9
Income (loss) before income taxes $ 21.1 nm% $ 6.7 nm% $ (2.1)
Invested assets under management, at end of period $3,033.0 $2,929.9 $2,713.0
The declining interest rate environment during the past two years has reduced the investment yields on TSA assets. As a result, net investment income increased by only $6.7 million and $1.0 million, during 1993 and 1992, respectively. If the current interest rate environment persists, management anticipates that the average investment yield will further decline since UNUM invests its cash flows in high quality assets that currently have yields below the existing average investment portfolio yields. As interest rates have declined, the rate and level of interest credited to TSA contractholders have declined as well, and in 1993 resulted in unusually favorable interest spread margins. In 1993, 1992 and 1991, the amount of interest credited to funds on deposit amounted to 70.5%, 77.3% and 86.2% of investment income, respectively.
The reduced invested asset base under management for GICs, DAs and 401(k) plans resulted in lower revenues from investment income and reduced amounts of interest credited. Management expects continued decreases in the amounts of investment income and interest credited as the related GIC, DA and 401(k) contracts mature or terminate. Revenues also decreased due to reduced premiums from group medical business, which UNUM announced its exit from in 1990. Management expects future earnings in the Other Operations segment to decline, reflecting the run-off nature of these closed blocks of businesses.
During 1992, UNUM released the restructuring reserve for the costs of withdrawal from the 401(k) business since actual costs were less than expected, resulting in increased pretax income of $5.3 million. The gain associated with the release of this restructuring reserve reduced operating expenses in the 1992 Consolidated Statement of Income. UNUM has transferred 401(k) service responsibilities to its formerly whollyowned subsidiary, Preferred Benefits Corporation, which was sold in the second quarter of 1992.
Corporate includes transactions that are generally non-insurance related, expenses incurred in conjunction with UNUM's long-term strategic investment in Japan and interest expense on corporate borrowings. In September 1992, UNUM opened a representative office in Tokyo to prepare for licensing of a disability product for this market.
UNUM's investments are reported in the consolidated financial statements net of any allowances for probable losses. Allowances 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 collectibility is doubtful. Management closely monitors the risk associated with the invested asset portfolio and regularly reviews and adjusts the allowance for probable losses appropriately.
At December 31, 1993, the composition of UNUM's $10,095.9 million of invested assets was 73.6% fixed maturities, 14.1% mortgage loans, 1.9% real estate, 7.2% equity securities and 3.2% other invested assets. Gross realized investment gains were $85.2 million, $94.4 million and $97.9 million, and gross realized investment losses were $35.8 million, $52.9 million and $72.9 million for the years ended December 31, 1993, 1992 and 1991, respectively.
At December 31, 1993, and December 31, 1992, fixed maturities, which include bonds, notes and redeemable preferred stock, had an amortized cost of $7,432.7 million and $7,104.7 million, respectively. Market values of $8,079.8 million and $7,566.7 million at December 31, 1993, and December 31, 1992, respectively, were 109% and 107% of amortized cost. Market values of fixed maturities are generally obtained by external quoted market sources, and if not externally quoted, are determined by UNUM primarily by using discounted cash flow models.
At December 31, 1993, and December 31, 1992, the fixed maturity portfolio included $263.3 million and $164.1 million of below investment grade bonds (below "Baa"), which represented 3.5% and 2.3% of the fixed maturity portfolio, respectively. These bonds had associated market values of $279.1 million and $168.6 million, respectively. Virtually all of the nonconvertible, below investment grade bonds were purchased at investment grade, but were subsequently downgraded. UNUM's investment policy is to invest in fixed maturities of investment grade quality. Selected purchases of convertible subordinated debentures, which UNUM considers to be part of its investment strategy for equity securities, have contributed to the amount of below investment grade bonds. Ratings are obtained from external rating agencies, and if not externally rated, are rated by UNUM internally using similar methods. Management does not expect any risks or uncertainties associated with below investment grade bonds to have a significant impact on UNUM's consolidated financial position or results of operations. The percentage of fixed maturities delinquent sixty days or more compared to total fixed maturities was 0.24% at December 31, 1993, and 0.47% at December 31, 1992.
At December 31, 1993, and December 31, 1992, UNUM's mortgage loans were $1,423.2 million and $1,649.9 million, respectively. The percentage of mortgage loans to total invested assets has decreased to 14.1% as of December 31, 1993, from 16.5% as of December 31, 1992, and is not anticipated to change significantly since prepayments and scheduled maturities are expected to exceed the amount of new investments. 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.
UNUM has identified other problem loans and potential problem loans in the amount of $10.0 million and $87.6 million, respectively, at December 31, 1993, and $58.7 million and $55.7 million, respectively, at December 31, 1992. UNUM defines other problem loans as those which are not delinquent over 60 days and not restructured, but which are being accounted for on a nonaccrual basis. Potential problem loans are defined by UNUM as current and performing loans which management has doubts as to the ability of the borrower to comply with present loan terms and whose book value exceeds the market value of the underlying collateral. Interest lost on problem loans was not material in 1993, 1992 and 1991.
During 1993, UNUM realized investment losses related to delinquent, restructured and problem mortgage loans of $4.8 million, compared with $26.5 million and $39.0 million for 1992 and 1991, respectively. Delinquent and problem mortgage loans as of December 31, 1993, are not expected to have a significant impact on UNUM's liquidity and capital resources.
Cash flow requirements are also supported by committed revolving credit facilities of $100 million and $200 million, which expire on March 11, 1994, and June 1, 1996, respectively. UNUM anticipates renewing the $100 million revolving credit facility with a committed revolving credit facility of a similar amount. The commercial paper program is supported by the revolving credit facilities and is available for general liquidity needs, capital expansion, acquisitions and stock repurchase. The committed revolving credit facilities contain certain covenants which, among other provisions, require maintenance of certain levels of stockholders' equity and limits on level of debt.
In September 1993, UNUM announced the filing of an omnibus shelf registration statement with the Securities and Exchange Commission which became effective on October 8, 1993, relating to $450 million of securities (including debt securities, preferred stock, common stock and other securities). UNUM has no current intention of issuing equity securities pursuant to this registration statement. On October 8, 1993, UNUM filed a prospectus supplement to establish a $250 million medium term note program under the shelf registration. The medium-term note program and the unsold portion of the shelf registration carry ratings of "Aa3" (Excellent) and "(P)Aa3" (Excellent), respectively, from Moody's Investors Service, and "AA" (Excellent) from Standard & Poor's.
UNUM was committed at December 31, 1993, to purchase fixed maturities and other invested assets in the amount of $32.9 million. Management anticipates that the cash flows of UNUM will be sufficient to meet its planned investment commitments, benefit obligations and operational needs.
Standard & Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's") and A.M. Best Company ("Best's") are among the third parties that provide UNUM independent assessments of overall financial position. Ratings from these agencies for financial strength and claims-paying ability are available for the United States domiciled insurance company subsidiaries rather than on a consolidated basis, since the financial information used to develop the ratings is based on statutory accounting practices in the United States.
Colonial Life & Accident Insurance Company ("Colonial Life") had its financial strength rating confirmed as "A+" (Superior) by Best's in July 1993. In April 1993, Moody's assigned a financial strength rating of "Aa2" (Excellent).
UNUM has the following debt ratings based on consolidated financial information under generally accepted accounting principles. The senior debt ratings from S&P and Moody's are "AA" (Excellent) and Aa3"(Excellent), respectively. UNUM also has commercial paper ratings from S&P and Moody's of "A1+" (Highest Quality) and "P1" (Superior), respectively.
In May 1993, the FASB issued FAS No. 114, which defines the principles to measure and record a loan when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Adoption of FAS 114 is not expected to have a material effect on UNUM's results of operations or financial position. UNUM is required to adopt FAS 114 by January 1, 1995.
Year Ended December 31, (Dollars in millions, except per common share data) 1993 1992 1991 (Note 2)
C O N S O L I D A T E D B A L A N C E S H E E T S
C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S
Fixed maturities available for sale are valued at lower of aggregate amortized cost less an allowance for probable losses, or fair value, as they may be sold in response to changes in interest rates, resultant prepayment risk, liquidity and capital needs and other similar economic factors.
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 accounted for as a realized investment loss.
Realized investment gains or losses, which are determined on the basis of specific identification and include adjustments for allowances for probable losses, are reported separately in the Consolidated Statements of Income. Unrealized investment gains or losses on equity securities, adjusted for related deferred income taxes, are reported directly in stockholders' equity.
Recognition of Premium Revenues and Policy Benefits for Life and Health Insurance Products
The interest rates used to discount the disability reserves are a composite of the yields on assets specifically matched with these blocks of business. The composite yield decreased in 1993, since current cash flows are invested in high quality assets at current yields, which are below the yields of existing assets purchased in prior years.
The interest rates used in the calculation of reserves for future benefits at December 31, 1993, and 1992, principally ranged from: 1993 1992 Individual disability 7.0% to 9.5% 8.5% to 9.5% Individual life 5.0% to 9.0% 5.0% to 9.0% Individual accident and health 6.0% to 11.8% 7.0% to 11.8% Individual and group annuities 5.0% to 9.0% 5.0% to 9.0%
Certain assets of UNUM's defined benefit pension plans, 401(k) contracts and tax sheltered annuity contracts are in separate accounts that are pooled investment funds of securities. Assets carried at market value and liabilities of the separate account are shown separately in the Consolidated Balance Sheets.
Subsequent to the November 1986 conversion of UNUM Life Insurance Company (formerly Union Mutual Life Insurance Company) to a stock life insurance company, selected assets of UNUM Life Insurance Company ("UNUM Life") were designated as a Participation Fund Account. Effective December 31, 1991, UNUM Life and UNUM Pension and Insurance Company ("UPIC") were merged with UNUM Life Insurance Company of America ("UNUM America"), with UNUM America remaining as the surviving company. UNUM Life, UPIC and UNUM America were all wholly-owned subsidiaries of UNUM Corporation. As a result of the merger, the assets of the Participation Fund Account were transferred to UNUM America.
The assets of the Participation Fund Account 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 Participation Fund Account and its operations have been excluded from the Consolidated Statements of Income. Included in the Consolidated Balance Sheets are statutory-basis assets and liabilities for this line of business, which approximate amounts calculated on the basis of generally accepted accounting principles for stock life insurance companies, and represent approximately 3.0% of total assets and 3.5% of total liabilities at December 31, 1993, and 1992.
The provision for federal income taxes includes amounts currently payable and deferred income taxes computed under the provisions of Financial Accounting Standard No. 109, "Accounting for Income Taxes." Deferred U.S. income taxes have not been provided on the accumulated earnings of UNUM's foreign subsidiaries, as it is UNUM's intention to reinvest those earnings in the growth of the business outside the United States.
Fixed maturities: Fair values for fixed maturities are based on quoted market prices, where available. For fixed maturities not actively traded in the market, 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.
Mortgage loans: Fair values for mortgage loans are estimated based on discounted cash flow analyses using interest rates currently being offered for similar mortgage loans to borrowers with similar credit ratings and maturities. Mortgage loans with similar characteristics are aggregated for purposes of the calculations.
Policy loans: The carrying amounts reported in the balance sheet for policy loans approximate their fair values.
Investment-type insurance contracts: Fair values for UNUM's liabilities under investment-type insurance contracts with no defined maturities are the amounts payable on demand after surrender charges at the balance sheet date. Fair values for UNUM's liabilities under investment-type insurance contracts with defined maturities are estimated using discounted cash flow calculations based on interest rates that would be offered currently for similar contracts with maturities consistent with those remaining for the contracts being valued.
Individual annuities and supplementary contracts not involving life contingencies: The carrying amounts included in other policyholder funds for these financial instruments approximate their fair values.
Commencing December 31, 1991, UNUM began classifying fixed maturities as held to maturity, which are valued principally at amortized cost, and available for sale, which are currently reported at the lower of aggregate amortized cost or fair value. Equity securities are currently reported using the same provisions of the "available for sale" category of FAS 115.
UNUM is required to adopt this standard effective January 1, 1994, and estimates that the impact of valuing its fixed maturities available for sale at fair value will result in an increase to stockholders' equity of approximately $38.0 million. The adoption of FAS 115 will not affect UNUM's results of operations. UNUM continues to monitor the emerging implementation guidance offered by the SEC and the accounting profession, which could change the estimated impact of adopting FAS 115.
The merger has been accounted for as a pooling of interests and, accordingly, UNUM's consolidated financial statements have been restated to include the accounts of Colonial for all periods presented.
Net income UNUM $ 248.8 $ 205.0 Colonial 42.4 40.3 Total $ 291.2 $ 245.3
On July 30, 1992, UNUM purchased Duncanson & Holt, Inc. ("D&H"), a leading accident and health reinsurance underwriting manager. As a reinsurance manager, D&H provides pool management as well as marketing, underwriting, administration, claims payment and actuarial services for client companies, but does not bear any insurance risk.
Investment Income Year Ended December 31, (Dollars in millions) 1993 1992 1991 Fixed maturities: Held to maturity $570.1 $568.2 $575.2 Available for sale 59.5 56.9 -- Equity securities 12.6 14.7 16.9 Mortgage loans 165.2 187.2 201.0 Real estate 12.8 14.1 13.0 Policy loans 10.4 10.6 11.2 Other long-term investments 4.5 2.1 5.2 Short-term investments 7.1 7.1 16.4 Gross investment income 842.2 860.9 838.9 Less investment expenses (26.6) (25.8) (25.7) Less investment income on participating individual life insurance policies and annuity contracts (25.2) (25.9) (26.6) Investment income $790.4 $809.2 $786.6
Fixed maturities: Held to maturity $154.2 $ 14.2 $364.9 Available for sale 30.9 (1.3) 28.3 Total $185.1 $ 12.9 $393.2
Equity securities $ 43.2 $ 34.0 $ 87.5 Deferred federal income taxes 15.2 11.6 32.3 Change in unrealized investment gains on equity securities $ 28.0 $ 22.4 $ 55.2
Gross Gross Estimated Amortized Unrealized Unrealized Fair (Dollars in millions) Cost Gains Losses Value
Held to maturity: Due in one year or less $ 481.4 $ 494.1 Due after one year through five years 2,612.0 2,798.8 Due after five years through ten years 2,346.5 2,574.6 Due after ten years 1,105.6 1,264.6 6,545.5 7,132.1 Mortgage-backed securities (primarily due after 10 years) 15.2 17.8 Total held to maturity $6,560.7 $7,149.9
Available for sale: Due in one year or less $ 11.7 $ 11.9 Due after one year through five years 468.7 500.9 Due after five years through ten years 133.4 140.1 Due after ten years 241.4 258.8 855.2 911.7 Mortgage-backed securities (primarily due after 10 years) 16.8 18.2 Total available for sale $ 872.0 $ 929.9
Gross gains and losses realized in 1993, 1992 and 1991 on sales of fixed maturities are as follows:
Market (Dollars in millions) Cost Value Common stocks: Public utilities $ 72.2 $ 78.5 Industrial, miscellaneous and all other 436.1 651.5 Total $508.3 $730.0
At December 31, 1993, cumulative gross unrealized investment gains on equity securities totaled $238.4 million and losses totaled $16.7 million.
The carrying amount and estimated fair value of mortgage loans at December 31, 1993, and 1992, are as follows:
Fair values were determined using methods discussed in the Fair Values of Financial Instruments section of Note 1 "Summary of Significant Accounting Policies."
Restructured mortgage loans at amortized cost amounted to $65.9 million and $80.9 million at December 31, 1993, and 1992, respectively. Troubled debt restructurings represent loans that are refinanced with terms more favorable to the borrower. Interest foregone on these loans was not significant for the years ended December 31, 1993, 1992 and 1991.
At December 31, 1993, bonds with an amortized cost of $16.1 million, real estate with a depreciated cost of $5.2 million and mortgage loans with an amortized cost of $2.7 million were nonincome producing for the twelve months ended December 31, 1993.
UNUM had interest rate futures contracts with commitments to purchase treasury securities with total par values of $207.0 million and $140.0 million at December 31, 1993, and 1992, respectively. UNUM uses these contracts to hedge the interest rate risk on future investments that match certain insurance liabilities. UNUM is subject to the risk that the counterparties to such contracts would fail to deliver the securities to UNUM on settlement date, if UNUM were to hold the contract on that date. Actual future cash flow required due to these contracts is not significant to UNUM's total cash flow because UNUM intends to sell these contracts prior to their settlement dates.
UNUM was committed at December 31, 1993, to purchase fixed maturities and other invested assets in the amount of $32.9 million.
UNUM, through its life insurance subsidiaries, is involved in both the cession and assumption of reinsurance with other companies. Risks are reinsured with other companies to reduce UNUM's exposure to large losses and permit recovery of a portion of direct losses. UNUM remains liable to the insured for the payment of policy benefits if the reinsurers cannot meet their obligations under the reinsurance agreements. Deferred policy acquisition costs, premiums and expenses are stated net of reinsurance ceded to other companies. Reinsurance premiums ceded were $51.5 million and $49.8 million for 1992 and 1991, respectively. Reinsurance premiums assumed were $136.2 million and $146.6 million for 1992 and 1991, respectively.
The effect of reinsurance on premiums earned and written for the year ended December 31, 1993, is as follows:
(Dollars in millions) Earned Written Direct $2,331.5 $2,335.6 Assumed 192.6 196.2 Ceded (50.0) (50.5) Premiums $2,474.1 $2,481.3
In the fourth quarter of 1991, UNUM announced plans to withdraw from the 401(k) market by the end of 1992, and recorded a $16.0 million pretax charge to establish a restructuring reserve to provide for the costs of withdrawal and reassignment of employees and to write off deferred acquisition costs associated with the 401(k) business. The $16.0 million provision was charged to the 1991 Consolidated Statement of Income as deferred policy acquisition costs expense and operating expenses of $4.1 million and $11.9 million, respectively.
Projected benefit obligation for service rendered to date $(147.6) $(132.7) Plan assets at fair value 156.7 137.6 Projected benefit obligation less than plan assets 9.1 4.9 Unrecognized net gain (21.6) (22.5) Unrecognized prior service cost (6.1) (0.5) Unamortized net obligation 3.1 3.5 Accrued pension cost $ (15.5) $ (14.6)
UNUM also administers certain supplemental retirement plans for eligible employees and officers and certain other pension plans. The cost of these plans was not significant in the years ended December 31, 1993, 1992 and 1991.
UNUM has several retirement savings and profit sharing plans for substantially all full-time and part-time employees who work 40 or more hours bi-weekly and have been employed for at least one year. Dependent upon which plan the employee participates in, eligible employees may contribute up to 10% of their annual 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 1993, 1992 and 1991, expense for these plans amounted to $8.3 million, $6.5 million and $5.5 million, respectively.
The 1990 Long-Term Stock Incentive Plan ("Incentive Plan") provides for granting of restricted shares of UNUM Corporation common stock to key officers. The Incentive Plan also provides for granting of options to officers, non-employee directors of UNUM Corporation and key employees, to purchase UNUM Corporation common stock over ten years at a price not less than 100% of the fair market value on the date of grant. The maximum number of shares reserved for issuance under the Incentive Plan is 6,800,000 in 1993 and 3,500,000 in 1992 and 1991. At December 31, 1993, 1992 and 1991, 3,316,734 shares, 1,006,684 shares, and 1,998,452 shares, respectively, were available for grant under the Incentive Plan.
The restriction period for each restricted stock award under the Incentive Plan is in excess of three years, with the restrictions lapsing as a result of the achievement of prescribed financial performance objectives during each three year period. Plan participants are entitled to cash dividends and voting rights on their respective shares. At December 31, 1993, 1992 and 1991, all restricted stock shares issued remained subject to restrictions.
The following is a summary of stock options, SARs and restricted stock information: Restricted Options SARs Stock Outstanding at January 1, 1991 4,047,602 707,674 80,800
1991 Activity: Granted at $28.73 to $47.88 per share 86,758 -- -- Exercised at $6.28 to $40.00 per share (704,272) (290,350) -- Cancelled/reissued (345,074) (417,324) -- Outstanding at December 31, 1991 3,085,014 -- 80,800
1993 Activity: Granted at $52.88 to $57.75 per share 1,031,650 -- -- Granted for restricted stock -- -- 32,525 Exercised at $9.03 to $36.75 per share (655,300) -- -- Cancelled/reissued (100,278) -- (1,500) Outstanding at December 31, 1993 3,402,954 -- 146,425
The number of exercisable shares as of December 31, 1993, 1992 and 1991, were 1,396,182 shares, 1,305,720 shares, and 1,481,948 shares, respectively.
In connection with the March 26, 1993, merger with Colonial Companies, Inc. ("Colonial"), outstanding options to acquire shares of Colonial Class B common stock were converted into options to acquire shares of UNUM common stock, and are included in the preceding summary of stock options. Pursuant to the merger, no further options will be granted under the Colonial stock option plans.
A 1% increase in the trend rate for health care costs would increase the accumulated postretirement benefits obligation by $9.4 million and postretirement benefits expense by $1.5 million.
On August 10, 1993, legislation was enacted to increase the federal income tax rate of 34% to 35%, retroactive to January 1, 1993. The tax rate increase resulted in a charge to net income totaling $11.4 million, or $0.15 per share, which includes $3.6 million, or $0.05 per share, related to 1993 pretax income, and a $7.8 million, or $0.10 per share, adjustment to the deferred income tax liability.
Deferred income tax liabilities and assets are comprised of the following at December 31, 1993, and January 1, 1993:
Prior to the Tax Reform Act of 1984 ("1984 Act"), half the excess of the tax basis gain from operations of a life insurance company, over its taxable investment income, was currently taxable. The other half was set aside in a Policyholders Surplus Account, together with certain special life insurance company deductions. The cumulative amount in the Policyholders Surplus Account as of December 31, 1983, was frozen by the 1984 Act and amounted to $31.8 million at December 31, 1993. Any direct or indirect distributions from this account would be taxed at current tax rates, however, no provision has been made for related taxes. If the amount set aside in this account were taxed at the current rate at December 31, 1993, for all life insurance subsidiaries, the tax would have amounted to $11.1 million.
UNUM's Consolidated Statements of Income for 1993, 1992 and 1991, include the following amounts of foreign income and related income tax expense:
Income tax expense (credit): Current $(12.5) $ 1.6 $ 9.0 Deferred 20.2 10.4 8.6 Total $ 7.7 $ 12.0 $ 17.6
UNUM subsidiaries had operating loss carryforwards totalling $24.0 million and alternative minimum tax ("AMT") credit carryforwards totalling $20.2 million as of December 31, 1993. Substantially all of the operating loss carryforwards relate to foreign operations and can be carried forward indefinitely. The AMT credits can be carried forward indefinitely.
Deferred taxes for years prior to the adoption of FAS 109 resulted primarily from deferred policy acquisition costs, policy reserve adjustments, alternative minimum tax or credit and net realized losses.
The carrying amounts and estimated fair values of short-term and long-term debt consist of the following at December 31, 1993, and 1992:
As of December 31, 1993, UNUM Corporation has committed revolving credit facilities of $100 million and $200 million, which expire on March 11, 1994, and June 1, 1996, respectively. UNUM anticipates renewing the $100 million revolving credit facility with a committed revolving credit facility of a similar amount. The commercial paper program is supported by the revolving credit facilities and is available for general liquidity needs, capital expansion, acquisitions or stock repurchase. The committed revolving credit facilities contain certain covenants which, among other provisions, require maintenance of certain levels of stockholders' equity and limits on level of debt. The commercial paper outstanding at December 31, 1993, and 1992, had a weighted average rate of approximately 3.41% and 3.81%, respectively.
In September 1993, UNUM announced the resumption of its repurchase program and during 1993 acquired 3,704,600 shares of its common stock in the open market at an aggregate cost of $192.5 million. No shares were acquired in the open market during 1992 or 1991.
On March 13, 1992, UNUM's Board of Directors ordered redemption of the 1988 Rights Agreement and adopted a new Shareholder Rights Plan. Shareholders of record on March 23, 1992, received $0.05 for every two shares of common stock held, which was distributed April 2, 1992. The total amount of the redemption was $1.7 million.
The Rights become exercisable at a specified time after (1) a person or group acquires 10% or more of UNUM's Common Stock or (2) a tender or exchange offer for 10% or more of UNUM's Common Stock.
December 31, (Dollars in millions) 1993 1992 1991 Identifiable Assets: Employee Benefits $ 3,294.5 $ 2,936.4 $ 2,610.2 Related Businesses 1,269.0 1,113.2 1,134.8 Colonial Companies 819.2 745.9 642.8 Individual Disability 1,516.3 1,349.1 1,206.7 Retirement Security 3,249.3 3,051.7 2,799.5 Other Operations 1,493.9 1,982.7 2,167.5 Corporate 452.3 442.8 394.4 Individual Participating Life and Annuity 342.8 338.0 355.0 Total assets $12,437.3 $11,959.8 $11,310.9
The following is a summary of unaudited quarterly results of operations for 1993 and 1992:
Premiums $647.7 $622.9 $624.6 $578.9 Investment income 193.2 196.4 200.3 200.5 Net realized investment gains 8.5 10.6 9.8 20.5 Benefits to policyholders 460.5 446.9 449.8 418.5 Net income $ 83.1 $ 72.1 $ 80.8 $ 63.9
Net income per common share $ 0.89 $ 0.95 $ 0.94 $ 0.93