The ambiguity surrounding health care reform did impact UNUM's business growth for certain products in 1993. While President Clinton's reform plan is unlikely to affect UNUM's core disability and special risk businesses, which would be considered voluntary coverages, the proposed plan still leaves uncertainty surrounding long term care insurance.
Income before income taxes for Colonial increased in 1993 primarily through continued expense control and a higher level of realized investment gains attributed to the investment portfolio realignment. For 1992, the increase in income before income taxes resulted primarily from the reduced expense ratio, which was partially offset by an increased benefit ratio.
Income before income taxes increased in 1993 primarily due to unusually favorable interest spread margins on tax sheltered annuities. Management does not expect interest spread margins experienced in 1993 on tax sheltered annuities to continue at the same level, which may reduce future earnings for the Retirement Security segment. Favorable interest spread margins on tax sheltered annuities were the primary reason for increased income before income taxes in 1992.
Benefits and expenses Benefits to policyholders 37.5 (1.1) 37.9 (6.0) 40.3 Interest credited 111.9 (22.7) 144.8 (8.6) 158.5 Operating expenses 6.0 (11.8) 6.8 (80.8) 35.4 Commissions 1.2 (25.0) 1.6 -- 1.6 Decrease in unamortized deferred policy acquisition costs 2.5 (24.2) 3.3 (56.0) 7.5 Total benefits and expenses 159.1 (18.2) 194.4 (20.1) 243.3
Fixed maturities that are classified as held to maturity are carried at amortized cost because UNUM has the ability and intent to hold these assets to maturity. Sales of such assets are infrequent and are generally in response to significant deterioration in the issuers' credit worthiness. Fixed maturities not intended to be held to maturity are considered to be available for sale and are carried at the lower of aggregate cost or fair value as of the balance sheet date, and any temporary reduction in value is reported as an unrealized loss in stockholders' equity. Approximately 11.7% and 9.4% of the fixed maturity portfolio was considered to be available for sale at December 31, 1993, and December 31, 1992, respectively.
At December 31, 1993, UNUM had short-term and long-term debt totaling $110.0 million and $128.6 million, respectively, and approximately $190 million available for additional financing under existing revolving credit facilities. Management may decide to refinance the short-term notes payable in the future.
Changing interest rates, which are traditionally linked to changes in inflation, affect UNUM's level of discounted reserves. In addition, lower interest rates can lead to early payoffs and refinancing of some of UNUM's fixed rate investments. Management generally invests in fixed rate instruments that are structured to limit the exposure to such reinvestment risk.
UNUM's largest affiliate, UNUM Life Insurance Company of America ("UNUM America"), had its financial strength rating upgraded to "A++" (Superior), the highest rating assigned by Best's, in July 1993. In November 1993, UNUM America's financial strength rating was confirmed by Moody's as "Aa1" (Excellent). S&P confirmed UNUM America's claims-paying ability rating as "AA+" (Excellent), in December 1993.
Assets Investments Fixed maturities: Held to maturity-principally at amortized cost (market: 1993-$7,149.9; 1992-$6,872.6) $ 6,560.7 $ 6,437.6 Available for sale-principally at amortized cost (market: 1993-$929.9; 1992-$694.1) 872.0 667.1 Equity securities-at market (cost: 1993-$508.3; 1992-$466.7) 730.0 645.2 Mortgage loans 1,423.2 1,649.9 Real estate, net 193.5 214.6 Policy loans 187.9 191.2 Other long-term investments 59.0 73.1 Short-term investments 69.6 107.4 Total investments 10,095.9 9,986.1 Cash 20.8 20.4 Accrued investment income 184.0 185.0 Premiums due 165.5 153.3 Unamortized deferred policy acquisition costs 879.1 753.8 Property and equipment, net 143.5 126.4 Other assets 681.8 472.9 Separate account assets 266.7 261.9 Total assets $12,437.3 $11,959.8
Recognition of Revenues, Contract Benefits and Expenses for Investment- Type and Universal Life Products
The carrying amount and estimated fair value of liabilities for investment- type insurance contracts included in other policyholder funds in the Consolidated Balance Sheets at December 31, 1993, and 1992, were as follows: Carrying Estimated (Dollars in millions) Amount Fair Value 1993 1992 1993 1992 Liabilities with defined maturities $ 847 $1,105 $ 956 $1,227 Liabilities with no defined maturities 3,044 3,092 2,952 2,972 $3,891 $4,197 $3,908 $4,199
Realized Investment Gains (Losses) Year Ended December 31, (Dollars in millions) 1993 1992 1991 Fixed maturities: Held to maturity $ 9.5 $ 7.6 $ 20.8 Available for sale 7.8 9.1 -- Equity securities 48.3 38.3 48.3 Mortgage loans, real estate and other (16.2) (13.5) (44.1) Net realized investment gains $ 49.4 $ 41.5 $ 25.0
Available for sale: United States Government and government agencies and authorities $ 327.8 $ 16.6 $ (0.1) $ 344.3 States, municipalities and political subdivisions 144.8 7.4 (0.4) 151.8 Public utilities 2.7 -- (0.4) 2.3 Corporate bonds 106.3 2.4 (3.4) 105.3 Redeemable preferred stocks 40.4 4.8 -- 45.2 Mortgage-backed securities 45.1 0.2 (0.1) 45.2 Total available for sale $ 667.1 $ 31.4 $ (4.4) $ 694.1
(Dollars in millions) 1993 1992 Carrying amount $1,423.2 $1,649.9 Fair value $1,558.4 $1,782.9
Year Ended December 31, 1992 Fixed maturities held to maturity $ 5.5 $(1.0) $ (0.4) $ 4.1 Mortgage loans 43.1 26.5 (18.1) 51.5 Real estate held for sale 15.9 7.2 (9.5) 13.6 Total $64.5 $32.7 $(28.0) $69.2
Service cost - benefits earned during the year $ 8.6 $ 7.5 $ 6.4 Interest cost on projected benefit obligation 10.9 9.4 7.6 Actual return on plan assets (16.5) (14.5) (29.5) Net amortization and deferral 5.2 4.1 22.4 Net pension cost $ 8.2 $ 6.5 $ 6.9
Retirees $19.6 Active employees fully eligible 6.5 Other active participants 29.7 Accumulated postretirement benefits obligation 55.8 Unrecognized other amounts 1.2 Accrued postretirement benefits cost $57.0
Effective January 1, 1993, UNUM adopted Financial Accounting Standard No. 109 ("FAS 109"), "Accounting for Income Taxes," which changed the method for calculating and reporting deferred income taxes in the financial statements from the deferred method to the liability method. The liability method of accounting for income taxes, as prescribed in FAS No. 109, requires that deferred tax liabilities or assets at the end of each period be determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Under this method, income tax will increase or decrease in the same period in which a change in tax rate is enacted. The cumulative effect of this accounting change amounted to a $20.0 million increase in net income, or $0.25 per share, for the year ended December 31, 1993.
Tax at federal statutory rate (35% for 1993,34% for other years) $161.1 $135.5 $108.7 Tax-exempt income (29.4) (31.8) (34.7) Prior years' taxes (2.0) (2.0) (7.6) State income tax 3.9 3.7 1.5 Tax on foreign operations 0.1 0.1 2.8 Adjustment to deferred tax liability due to tax rate increase 7.8 -- -- Other 6.8 1.8 3.6 Income taxes $148.3 $107.3 $ 74.3
Long-term debt: Medium term notes payable due 1997 to 2023 with interest rates ranging from 5.1% to 7.5% 126.1 74.6 129.4 74.7 Other notes payable 2.5 2.6 2.5 2.6 Total long-term debt 128.6 77.2 131.9 77.3 Total notes payable $238.6 $199.9 $241.9 $202.1
Under the Long-Term Stock Incentive Plan and Executive Stock Option Plan and the plans of Colonial Companies, Inc. (see Note 8 "Employee Benefit Plans"), 687,825 shares, 894,747 shares and 732,030 shares were issued in 1993, 1992 and 1991, respectively.