UNUM reported increased pretax operating income for the year ended December 31, 1996, as compared with the same period in 1995. The increase was primarily attributable to improved claims experience and management's continued focus on risk management programs, both of which lowered the benefit ratios for certain product lines. In particular, group long term disability ("group LTD") and UNUM Limited, reported in the Disability Insurance segment, and the group life business, reported in the Special Risk Insurance segment, were favorably affected by lower benefit ratios. Increased investment income also favorably affected pretax operating income in the Disability Insurance and Special Risk Insurance segments. Partially offsetting these favorable items were increased operating expenses in the Disability Insurance segment, in the group life business reported in the Special Risk Insurance segment and in Corporate. In addition, certain other disability products were negatively affected by higher benefit ratios.
In 1995, the Association Group disability business was negatively affected by unfavorable claims experience, which management attributed to certain geographical and occupational segments, particularly dentists and physicians. During the fourth quarter of 1995, UNUM increased reserves for unpaid claims related to the Association Group disability business by $15.0 million reported in the Disability Insurance segment. These increased reserves were based on management's expectations of slower than expected claim recoveries.
To strengthen its focus on its core products, UNUM recognized a charge in the third quarter of 1995 for costs associated with the sale of its dental business reported in the Special Risk Insurance segment. The charge, which primarily consisted of the write-off of deferred acquisition costs, reduced income before income taxes by $2.8 million.
Increased investment income in the Disability Insurance segment for 1996 and 1995 was primarily a result of the reinvestment of the proceeds from the sale of the common stock portfolio into investment grade fixed income assets. During second quarter 1995, UNUM sold virtually all of the common stock portfolio of its United States subsidiaries, primarily due to consideration of statutory capital requirements associated with investment in common stocks and to increase future investment income. As a result of the sale of the common stock portfolio and the subsequent reinvestment of the proceeds, certain reserve discount rates were lowered during the second quarter 1995. The discount rate used to determine group LTD reserves was reduced to 8.00% at June 30, 1995, as compared with 9.18% at December 31, 1994. Since that time the reserve discount rates for certain disability products have continued to decline. Management expects further declines, since current cash flows are invested in high quality assets at current yields, which are below the composite yield of the existing assets purchased in prior years. The group LTD discount rate was 7.88% and 7.94% at December 31, 1996, and 1995, respectively. The impact of increased investment income was partially offset by the effects of these lower discount rates for certain disability products in 1996 and 1995. UNUM periodically adjusts prices on both existing and new business in an effort to mitigate the impact of the current interest rate environment.
Year Ended December 31, ----------------------------- (Dollars in millions) 1996 1995 1994 - ----------------------------------------- -------- -------- ------- Group LTD .............................. $10.0 $63.8 $17.4 UNUM Limited ........................... 1.3 -- 40.2 Long Term Care Insurance ............... -- 4.9 14.7 Disability Reinsurance Operations ...... -- 3.6 -- ------ ------ ------ Total ................................. $11.3 $72.3 $72.3 ====== ====== ======
Excluding the effects of claim block acquisitions, group LTD reported premium growth of 5.8% in 1996, reflecting increased new sales and selected price increases. Group LTD experienced improved sales and persistency in 1996, as compared with 1995, when prices were significantly increased in certain segments of the business resulting in a high level of case terminations for 1995. In general, case terminations from price increases have occurred in less profitable segments of the business. Management continues to take actions to increase premium and sales growth, including a focus on improving premium persistency and strengthening the product distribution channel.
(a) For the definition of pretax operating loss and a detailed description of special items see the Consolidated Overview.
The fair values, which also represent carrying amounts, and the cost of equity securities available for sale were as follows at December 31, 1996:
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, 1996, 1995 and 1994.
Deferred income taxes relating to cumulative net unrealized gains on available for sale fixed maturity and equity securities were $101.7 million, $174.0 million and $27.1 million at December 31, 1996, 1995 and 1994, respectively.