UNUM owns home office property consisting of five office buildings and four service buildings located throughout the Portland, Maine area. UNUM also owns an office building in the United Kingdom, which is the home office of UNUM
During 1994, UNUM reported decreased income before income taxes, which was primarily attributable to unfavorable claims experience in two of UNUM's largest product lines, individual disability as reported in the Individual Disability segment, and group long term disability, as reported in the Employee Benefits segment.
As further described in the Individual Disability segment, throughout 1994 UNUM's individual disability business in the United States experienced a higher incidence of new claims and a disproportionate number of larger claims that management has attributed to certain geographical and occupational segments, particularly physicians. As a result, in 1994 UNUM increased reserves for existing claims by $83.3 million and established a reserve for future estimated losses of $109.1 million. These increased reserves reflect management's current expectations for morbidity trends for the existing individual disability business, as reported in the Individual Disability segment. This reserve strengthening resulted in an increase to benefits to policyholders in the Consolidated Statement of Income of $192.4 million and a decrease to net income of $125.1 million, or $1.69 per share, for the year ended December 31, 1994. It is not possible to predict whether morbidity trends will be consistent with UNUM's current assumptions.
During 1994, UNUM's North American group long term disability results, as reported in the Employee Benefits segment, were adversely affected through a combination of increased incidence of new claims and an increased number of large claims. Management continues to address these unfavorable claim trends by increasing prices on selected new and inforce business, implementing more stringent underwriting guidelines, and strengthening risk management programs. Management believes these actions will strengthen UNUM's ability to deal with these disability claims trends into the future, and that the level of future earnings of the group long term disability product will be a function of the effectiveness of these continuing actions and the time required for these actions to take effect.
The interest rate environment changed dramatically during 1994, as long-term interest rates rose from a more than twenty-year low experienced in 1993, along with increases in the prime lending rates and short-term rates. However, average investment yields on new fixed maturity purchases for the past two years remain below the existing average portfolio yield, which has decreased the average rate used to discount disability claim reserve liabilities and decreased levels of investment income in 1994 and 1993, despite continued growth in invested assets. Management anticipates that the average investment portfolio yield will further decline, since UNUM invests its cash flows in high quality assets that currently have yields below the existing average portfolio yields.
The increase in income before income taxes in 1993 was primarily due to 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. Expenses of $9.6 million, or $0.12 per share, 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.
Effective January 1, 1994, UNUM adopted Financial Accounting Standard ("FAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which specified the accounting and reporting for certain investments in equity securities and for all investments in debt securities. UNUM adopted the provisions of FAS 115 for these investments held as of or acquired after January 1, 1994. Upon the adoption of FAS 115, UNUM increased unrealized gains on available for sale securities included in stockholders' equity on January 1, 1994, by $41.8 million (net of deferred taxes of $22.5 million) to reflect the unrealized holding gains on fixed maturities classified as available for sale which were previously carried at amortized cost. In accordance with FAS 115, prior year consolidated financial statements have not been restated to reflect the change in accounting principle. The adoption of FAS 115 did not affect 1994 net income.
Included in 1993 net income were the cumulative and incremental effects of the adoption of FAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," and FAS No. 109, "Accounting for Income Taxes."
Effective tax rates, which reflect income tax expense as a percentage of pretax income, were 22.1%, 32.2% and 26.9% for 1994, 1993 and 1992, respectively. The significant reduction in the effective tax rate for 1994 resulted primarily from reduced pretax earnings. Reported income tax expense was below the federal statutory tax rate of 35% for 1994 and 1993, and 34% for 1992, primarily due to tax savings from investments in tax-exempt securities. Although investments in tax-exempt securities result in increased consolidated net income, these investments reduce UNUM's business segments' income before income taxes.
In 1993, UNUM's growth in pretax income outpaced the growth of income from tax- exempt securities, which resulted in an increased effective tax rate. On August 10, 1993, legislation was enacted to increase the federal corporate income tax rate of 34% to 35%, retroactive to January 1, 1993. The change in tax rates resulted in a $7.8 million, or $0.10 per share, charge related to the adjustment of deferred tax liabilities. Excluding the adjustment to deferred income tax expense of $7.8 million for the enacted tax rate change, the 1993 effective tax rate would have been 30.5%.
The 22.1% premium growth in 1993 reflected record sales in all of the Employee Benefits segment's product lines. Premium growth also reflected selected price increases, acquisitions of closed blocks of claims, 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.
During 1994, the group LTD business experienced a higher incidence of new claims and an increased number of large claims, which were the primary causes of the increased benefit ratio for the Employee Benefits segment from 1993. Management has identified a number of geographical and occupational segments of the group LTD business which are experiencing higher than expected claims. Management continues to pursue these segments of the business for underwriting and pricing actions, and is addressing increased incidence rates, lower recovery rates, and the more subjective nature of the types of disability claims by implementing new, and enhancing existing, risk management programs.
Management believes these underwriting, pricing and risk management actions will strengthen UNUM's ability to deal with these disability claims trends into the future, and that the level of future earnings of the group LTD product will be a function of the effectiveness of these continuing actions and the time required for these actions to take effect.
The group life business reported favorable claims experience in 1994. Management continues to address higher than expected claims in certain portions of the business by imposing more stringent underwriting requirements and increasing prices. Management believes these actions improved overall claims experience for group life products in 1994.
UNUM Limited experienced favorable claims levels for most of 1994, which improved the benefit ratio from 1993. However, in late 1994, UNUM Limited incurred unfavorable claims experience, which management is evaluating to determine the need for pricing actions, changes in underwriting standards or risk management programs. If the unfavorable claims experience that developed in late 1994 were to continue, UNUM Limited's earnings could be negatively affected. Due to the nature of the risks insured and the relative size of the U.K. block of business, UNUM Limited's operating results can exhibit claims variability. Investment in administrative procedures and systems was the primary reason for increased operating expenses in 1993.
COMMERCIAL Increased sales across all lines of Commercial's businesses in 1994 benefited premium growth, which was partially offset by higher than expected case terminations. The 1994 benefit ratio was driven by favorable experience in the special risk product line, offset by unfavorable claims experience in the association group disability business within certain occupational groups and geographical areas. Management is implementing rate increases and stronger underwriting policies to mitigate this unfavorable claims experience. The decrease in the benefit ratio in 1993 was primarily due to more favorable claims experience in the association group disability business. Due to the nature of the risks underwritten and relative size of the block of business, Commercial's special risk products can exhibit claims variability.
In 1994, Colonial experienced an increase in sales, which was attributed to increased productivity from the sales organization and the offering of a number of new products. In 1993, Colonial experienced a slight decrease in sales, which management attributed to uncertainty in the marketplace as to the types of coverage that would be included in health care reform proposals. Management does not feel that 1994 sales were as negatively affected by health care reform fears, as the focus shifted away from legislative health care restructuring toward private market restructuring. Additionally, management views health care reform as an opportunity for UNUM by allowing Colonial to leverage its expertise in worksite marketing, since the workplace is considered to be a primary means of access to insurance benefits in the developing healthcare environment. While premium growth slowed in 1994, enhanced customer conservation programs have partially offset the weaker sales levels in 1993 and 1992 by improving persistency.
Realized investment gains for 1993 include approximately $8.5 million of gains associated with Colonial's sales of higher yielding but callable investments to realign its investment portfolio with UNUM's investment philosophy. Fees and other income for 1992 reflect $4.0 million received from the settlement of a lawsuit against a competitor.
Colonial's benefit ratio improved to 50.4% in 1994 from 51.4% in 1993. The lower 1994 benefit ratio was driven by favorable claims experience and improved incidence rates in most product lines, particularly in the cancer product line. Management expects the benefit ratio to increase in the future as Colonial continues to shift its product mix toward products with higher benefit ratios, lower expense ratios and better persistency.
During 1994, the expense ratio increased because of higher than expected costs associated with a sales organization realignment and litigation expenses, which were partially offset by continued expense control efforts. The decline in 1993's expense ratio reflected management's efforts to control expenditures and improve operational efficiencies.
UNUM announced in November 1994 that it will discontinue sales of the traditional, fixed price, non-cancellable product in the United States upon introduction of new disability products in each state. Subject to state regulatory approval, UNUM expects to introduce the new disability products to most states during the second quarter of 1995. In connection with these product changes, management expects to incur costs during 1995 to develop and market the new individual disability products.
The Retirement Security segment includes tax sheltered annuities ("TSAs"), long term care insurance, and beginning in 1993, lifestyle security protection products, all of which are marketed by UNUM America and First UNUM.
As interest rates declined in 1993, the rate and level of interest credited to TSA contractholders declined as well. Despite a rising interest rate environment in 1994, the level of interest credited to TSA contractholders continued to decline. As a result, the TSA business experienced unusually favorable interest spread margins in 1994 and 1993. In 1994, 1993 and 1992, the amount of interest credited to funds on deposit amounted to 70.3%, 70.5%, and 77.3% of investment income, respectively. Management does not expect interest spread margins experienced by TSAs in 1994 and 1993 to continue at the same level, which may reduce future earnings for the Retirement Security segment.
The Other Operations segment includes individual life insurance business of UNUM Life Insurance Company of America, group medical insurance, guaranteed investment contracts ("GICs"), deposit administration accounts ("DAs"), and 401(k) plans, all of which are no longer actively marketed by UNUM.
UNUM has a fairly conservative investment philosophy, with a portfolio that is concentrated in investment grade bonds. UNUM evaluates total expected return after consideration of all associated expenses and losses, within criteria established for each product line. Product line investment strategies are developed to complement business risks by meeting the liquidity and solvency requirements of each product. UNUM purchases assets whose maturities, expected cash flows and prepayment conditions are consistent with these strategies. The nature and quality of the types of investments comply with policies established by management, which are more stringent overall than the statutes and regulations imposed by the jurisdictions in which UNUM's insurance subsidiaries are licensed.
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 collectability is doubtful. Management monitors the risk associated with the invested asset portfolio and regularly reviews and adjusts the allowance for probable losses.
At December 31, 1994, the composition of UNUM's $10,433.8 million of invested assets was 75.4% fixed maturities, 11.7% mortgage loans, 6.0% equity securities, 1.8% real estate and 5.1% other invested assets. Gross realized investment gains were $117.0 million, $85.2 million and $94.4 million, and gross realized investment losses were $71.4 million, $35.8 million and $52.9 million for the years ended December 31, 1994, 1993 and 1992, respectively.
- Fixed maturities that UNUM has the positive intent and ability to hold to maturity are classified as "held to maturity" and are reported at amortized cost, less an allowance for probable losses. The majority of UNUM's insurance reserve liabilities are generally long-term in nature and not subject to withdrawal. Since UNUM purchases assets whose maturities, expected cash flows, and prepayment conditions complement business risks by meeting the liquidity and solvency requirements of each product, the
Upon the adoption of FAS 115, UNUM increased unrealized gains on available for sale securities included in stockholders' equity on January 1, 1994, by $41.8 million (net of deferred taxes of $22.5 million) to reflect the unrealized holding gains on fixed maturities classified as available for sale which were previously carried at amortized cost. In accordance with FAS 115, prior year consolidated financial statements have not been restated to reflect the change in accounting principle. UNUM reclassified certain fixed maturities from held to maturity to available for sale on January 1, 1994, in connection with the adoption of FAS 115. The increasing interest rate environment during 1994 resulted in depressed fair values for available for sale fixed maturities, which has decreased the initial $41.8 million increase in stockholders' equity to an unrealized loss of $42.8 million at December 31, 1994.
At December 31, 1994, and 1993, the fixed maturity portfolio included $193.8 million and $263.3 million of below investment grade bonds (below "Baa"), which represented 2.5% and 3.5% of the fixed maturity portfolio, respectively. These bonds had associated market values of $193.4 million and $279.1 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 primarily 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. Fixed maturity 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 affect on UNUM's consolidated financial position or results of operations. The percentage of fixed maturities delinquent 60 days or more compared to total fixed maturities was 0.25% at December 31, 1994, and 0.24% at December 31, 1993.
At December 31, 1994, and 1993, UNUM's mortgage loans were $1,216.3 million and $1,432.2 million, respectively. The mortgage loan portfolio, as a percentage of total invested assets, has decreased to 11.7% as of December 31, 1994, from 14.1% as of December 31, 1993. It is anticipated that mortgages as a percentage of total invested assets will decline further, but at a slower rate, as new mortgage investments and refinances in selected markets will partially offset prepayments and scheduled maturities. 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.
Overall, management believes that its mortgage loan portfolio is well diversified geographically and among property types. UNUM's incidence of new problem mortgage loans declined in 1994 as overall economic activity improved modestly, and many of the real estate markets in which UNUM has mortgage loans stabilized. Foreclosure activity and new reserve additions remained modest in 1994; however, management continues to expect additional delinquencies and problem loans in the future. Management believes the allowance provided on mortgage loans as of December 31, 1994, is adequate to cover probable losses.
Problem loans are defined as mortgage loans that were delinquent 60 days or more on a contract delinquency basis. Mortgage loans in the amount of $22.3 million and $26.1 million, both representing 1.8% of the mortgage loan portfolio, were delinquent 60 days or more on a contract delinquency basis, and were accounted for on a nonaccrual basis at December 31, 1994, and 1993, respectively. Interest lost on problem loans was not material in 1994, 1993 or 1992.
In 1994, UNUM America's disability businesses were adversely affected by unfavorable claims experience as discussed in the Employee Benefits and Individual Disability segments. As described in the Individual Disability segment, UNUM America strengthened reserves for existing claims related to the traditional non-cancellable individual disability products. As a result, UNUM America recognized a statutory after-tax charge of $69.6 million in third quarter 1994. These factors caused the 1994 statutory income of UNUM America to be significantly reduced to $39.2 million, as compared with $165.2 million in 1993.
As a result of this reduction in UNUM America's statutory earnings, the amount available under current law for payment of dividends to UNUM Corporation from all U.S. domiciled insurance subsidiaries during 1995, without state insurance regulatory approval, decreased to approximately $81.3 million, as compared with $176.8 million for 1994. UNUM Corporation also has the ability to draw a dividend of approximately $30 million from its United Kingdom based affiliate, UNUM Limited, subject to certain U.S. tax consequences.
Effective December 13, 1994, management expanded UNUM Corporation's lines of credit with a new committed revolving credit facility totaling $500 million, expiring on October 1, 1999, which replaced previously existing facilities totaling $300 million. UNUM Corporation's commercial paper program is supported by the revolving credit facility, and is available for general liquidity needs, capital expansion, acquisitions and stock repurchase. The committed revolving credit facility contains certain covenants which, among other provisions, require maintenance of certain levels of stockholders' equity and limits on level of debt.
At December 31, 1994, UNUM had short-term and long-term debt totaling $246.6 million and $182.1 million, respectively. At December 31, 1994, approximately $280 million was available for additional financing under the existing revolving credit facility and approximately $390 million of investment grade debt instruments was available for issuance under the shelf registration. On February 28, 1995, UNUM borrowed $100 million under the revolving credit facility, which was infused into UNUM America in exchange for surplus debentures. Repayment of principal and interest on the surplus debentures is subject to state insurance regulatory approval. Contingent upon market conditions and corporate needs, management may refinance short-term notes payable with longer term securities.
UNUM's largest affiliate, UNUM Life Insurance Company of America ("UNUM America"), had its Best's financial strength rating affirmed at "A++" (Superior), the highest rating assigned by Best's, in May 1994. Best's again affirmed UNUM America's "A++" rating in November 1994. In January 1995, S&P completed its review of UNUM America and lowered its claims-paying ability rating to "AA" (Excellent) from "AA+" (Excellent). According to S&P, the downgrade was a result of pressures on risk-adjusted capitalization and higher financial leverage, due in part to lower profitability. In March 1995, Moody's completed its review of UNUM America and lowered its financial strength
Colonial Life & Accident Insurance Company ("Colonial Life") had its Best's financial strength rating affirmed as "A+" (Superior) in May 1994. In March 1994, S&P assigned an "AA-" (Excellent) claims-paying ability rating to Colonial. Subsequently, in January 1995, S&P affirmed Colonial's "AA-" (Excellent) rating. In March 1995, Moody's lowered Colonial's financial strength rating to "Aa3" (Excellent) from "Aa2" (Excellent).
At December 31, 1994, the ACL ratios for UNUM America, First UNUM, Colonial Life and Commercial Life were approximately 305%, 355%, 440% and 380%, respectively. This compares with ACL ratios at December 31, 1993, of approximately 350%, 390%, 450% and 380%, respectively.
Fixed maturities that UNUM has the positive intent and ability to hold to maturity are classified as held to maturity.
Real estate held for sale, which is included in other assets in the Consolidated Balance Sheets, is valued at the lower of fair value less estimated costs to sell, or cost. UNUM has provided an allowance for probable losses on real estate held for sale which reduces the carrying value of the asset to fair value.
If a decline in fair value of an invested asset is considered to be other than temporary, the investment is reduced to its net realizable value and the reduction is accounted for as a realized investment loss. Subsequent increases and decreases in fair value, if not an other than temporary impairment, of available for sale securities are reported in a separate component of stockholders' equity, net of deferred taxes.
UNUM discontinues the accrual of investment income on invested assets when it is determined that collectability is doubtful.
Unpaid claims and claim expense reserves represent the amount estimated to fund claims that have been reported but not settled and claims incurred but not reported. Reserves for unpaid claims are estimated based on UNUM's historical experience and other actuarial assumptions which consider the effects of current developments, anticipated trends, risk management programs and renewal actions. Many factors affect actuarial calculations of claim reserves, including but not limited to interest rates, and current and anticipated incidence rates, recovery rates, and economic and societal conditions. Reserve estimates and assumptions are periodically reviewed and updated with any resulting adjustments to reserves reflected in current operating results. Given the complexity of the reserving process, the ultimate liability may be more or less than such estimates indicate.
The increase in incurrals related to prior years was $436.0 million, $238.0 million, and $126.8 million (net of reinsurance), for 1994, 1993 and 1992, respectively. These increases were primarily the result of interest accrued on reserves, changes in reserve estimates and assumptions, and changes in foreign exchange rates. Due to the long-term claims payment pattern of some of UNUM's businesses, certain reserves, particularly disability, are discounted for interest.
Effective January 1, 1993, UNUM adopted Financial Accounting Standard ("FAS") No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," which eliminated the practice by insurance enterprises of reporting assets and liabilities relating to reinsured contracts net of the effects of reinsurance. Since UNUM did not restate its financial statements upon adoption of FAS 113, reserve balances prior to December 31, 1993, are shown net of reinsurance recoverables.
Certain assets of UNUM's defined benefit plans, 401(k) contracts and tax sheltered annuity contracts are in separate accounts that are pooled investment funds of securities. Investment income and realized gains and losses on these accounts accrue directly to the contractholders. Assets, carried at market value, and liabilities of the separate accounts are shown separately in the Consolidated Balance Sheets. The assets of the separate accounts are legally segregated and are not subject to claims which arise out of any other business of UNUM.
Participating policies issued by the former Union Mutual Life Insurance Company ("Union Mutual") prior to UNUM's conversion to a stock life insurance company on November 14, 1986, will remain participating as long as they remain in force. A Participation Fund Account ("PFA") has been established for the sole benefit of all of Union Mutual's individual participating life and annuity policies and contracts.
The assets of the PFA are to provide for the benefit, dividend and certain expense obligations of the participating individual life insurance policies and annuity contracts. This line of business participates in the experience of the PFA and its operations have been excluded from the Consolidated Statements of Income. The PFA represents approximately 2.5% and 3.0% of total assets and 3.0% and 3.5% of total liabilities at December 31, 1994, and 1993, respectively.
The weighted average number of shares outstanding used to calculate earnings per share was approximately 74,158,000, 78,779,000 and 78,542,000 in 1994, 1993 and 1992, respectively. The assumed exercise of outstanding stock options does not result in a material dilution of earnings per share.
The following table summarizes the carrying amounts and fair values of UNUM's financial instruments at December 31, 1994, and 1993:
EQUITY SECURITIES AVAILABLE FOR SALE: Fair values for equity securities available for sale are based on quoted market prices and are reported in the Consolidated Balance Sheets at these values.
POLICY LOANS: Fair values for policy loans approximate the carrying amounts reported in the Consolidated Balance Sheets.
INVESTMENT-TYPE INSURANCE CONTRACTS: Fair values for liabilities under investment-type insurance contracts with no defined maturities are the amounts payable on demand after surrender charges at the balance sheet date. Fair values for 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.
In October 1994, the FASB issued FAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," which amends FAS 114 to allow a creditor to use existing methods for recognizing, measuring and displaying interest income on an impaired loan. UNUM will adopt FAS 114 and FAS 118 effective January 1, 1995. Adoption of FAS 114 and FAS 118 is not expected to have a material effect on UNUM's results of operations or financial position.
Upon the adoption of FAS 115, UNUM increased unrealized gains on available for sale securities included in stockholders' equity on January 1, 1994, by $41.8 million (net of deferred taxes of $22.5 million) to reflect the unrealized holding gains on fixed maturities classified as available for sale which were previously carried at amortized cost. In accordance with FAS 115, prior year consolidated financial statements and disclosures have not been restated to reflect the change in accounting principle. UNUM reclassified certain fixed maturities from held to maturity to available for sale on January 1, 1994, in connection with the adoption of FAS 115.
The amortized cost and estimated fair values of fixed maturities at December 31, 1994, were as follows:
The amortized cost and estimated fair value of fixed maturities at December 31, 1994, by contractual maturity date, are shown below. Expected maturities will differ from contractual maturities since certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
The fair values, which also represent carrying amounts, and the cost of equity securities available for sale were as follows at December 31, 1994:
At December 31, 1994, cumulative gross unrealized investment gains on equity securities available for sale totaled $158.7 million and losses totaled $(23.0) million.
At December 31, 1994, bonds with an amortized cost of $16.1 million, real estate with a depreciated cost of $4.7 million and no mortgage loans were non-income producing for the twelve months ended December 31, 1994. Interest lost on these investments was not material in 1994, 1993 or 1992.
The effect of reinsurance on premiums earned and written for the years ended December 31, 1994, and 1993, was as follows:
In the fourth quarter of 1994, UNUM recorded pretax charges totaling $14.4 million, or $0.13 per share, which were reflected as operating expenses in the Consolidated Statement of Income. Of this total, the Individual Disability segment recorded $12.3 million related to the restructuring of the individual disability business and resulting consolidation of home office operations in UNUM America, which was comprised of $7.1 million for severance costs for 150 field and 150 home office employees and $5.2 million for exit costs of certain leased facilities and equipment, expiring through 1998. The remaining $2.1 million, recorded in the Employee Benefits segment, was for termination benefits for approximately 100 employees related to the acceleration of organizational changes within UNUM America. All employee related costs are expected to be paid by the end of 1995.
During 1992, UNUM released the restructuring reserve remaining for the costs of withdrawal and reassignment of employees associated with the 401(k) business in excess of amounts incurred, since actual costs were less than expected, which resulted in a pretax gain of $5.3 million. The gain associated with the release of this restructuring reserve reduced operating expenses in the 1992 Consolidated Statement of Income.
UNUM has a noncontributory defined benefit pension plan covering substantially all domestic employees, excluding employees of Colonial Companies, Inc., and Duncanson & Holt, Inc. The plan provides benefits based on the employee's years of service and compensation during the highest five consecutive years out of the last ten years of employment. UNUM funds the plan in accordance with the requirements of the Employee Retirement Income Security Act of 1974, as amended. Plan assets consist primarily of group annuity contracts and include approximately 224,392 shares of UNUM Corporation common stock.
The funded status of the plan and amounts recognized in UNUM's Consolidated Balance Sheets, as determined by the plan's actuaries, were as follows:
The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 8.25% and 5.20%, respectively, at December 31, 1994, and 7.25% and 4.70%, respectively, at December 31, 1993. The expected long-term rate of return on plan assets was 9.0% in 1994 and 8.25% in 1993 and 1992. Prior year service costs are being amortized on a straight-line basis over expected employment periods for active employees.
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 for the years ended December 31, 1994, 1993 and 1992.
The number of exercisable shares as of December 31, 1994, 1993 and 1992, were 1,975,219 shares, 1,396,182 shares, and 1,305,720 shares, respectively.
UNUM has several annual incentive plans for certain employees and executive officers, which provide additional compensation based on achievement of predetermined annual corporate and affiliate financial and non-financial goals. In 1994, 1993 and 1992, expense for these plans was $7.5 million, $27.9 million and $24.6 million, respectively.
On August 10, 1993, legislation was enacted to increase the federal corporate 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 included $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 taxes relating to cumulative net unrealized gains on available for sale securities were $27.1 million, $79.4 million and $57.4 million at December 31, 1994, 1993 and 1992, respectively. At December 31, 1994, $5.0 million of the $27.1 million deferred income taxes was reflected in retained earnings, while the remaining $22.1 million was netted against the unrealized gains component of stockholders' equity.
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, 1994. 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, 1994, for all life insurance subsidiaries, the tax would have amounted to $11.1 million.
UNUM's Consolidated Statements of Income for 1994, 1993 and 1992, included the following amounts of foreign income and related income tax expense:
UNUM subsidiaries had operating loss carryforwards totaling $16.5 million and alternative minimum tax ("AMT") credit carryforwards totaling $45.3 million as of December 31, 1994. Substantially all of the operating loss carryforwards relate to foreign operations and can be carried forward indefinitely. The AMT credits can also be carried forward indefinitely.
At December 31, 1994, UNUM Corporation had a $500 million committed revolving credit facility which expires on October 1, 1999. UNUM's commercial paper program is supported by the revolving credit facility and is available for general liquidity needs, capital expansion, acquisitions or stock repurchase. The committed revolving credit facility contains 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, 1994, and 1993, had a weighted average interest rate of approximately 6.34% and 3.41%, respectively.
As a result of the adoption of a new Shareholder Rights Plan, a dividend distribution was declared of one Right for each share of outstanding Common Stock to stockholders of record at the close of business on March 23, 1992. Each Right under certain specific circumstances entitles the holder to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock at a purchase price of $150.
In the normal course of its business operations, UNUM is involved in litigation from time to time with claimants, beneficiaries and others, and a number of lawsuits were pending at December 31, 1994. In the opinion of management, the ultimate liability, if any, arising from this litigation is not expected to have a material adverse effect on the consolidated financial position or the consolidated operating results of UNUM.