The September 11, 2001 tragedy resulted in a 2001 before-tax charge of $24.0 million, or $15.6 million after tax. This charge included estimated gross ultimate losses from reported and unreported claims of $65.0 million less an estimated $41.0 million recoverable from the Company's reinsurers. The charge did not include any indirect costs which the Company incurred in developing specialized procedures for filing claims resulting from the attacks and in providing additional support to impacted policyholders and group clients. The Company's reinsurance program provides a significant layer of catastrophic coverage for its individual disability and its group life, accidental death and dismemberment, travel accident, long-term disability, and short-term disability lines of business through a group of highly rated major national and international reinsurance organizations. Because of the quality and level of the Company's various reinsurance coverages, the Company does not anticipate that any of its reinsurers will be unable to cover the claims incurred as a result of the events. Should this occur, however, all of the Company's insurance subsidiaries are sufficiently capitalized such that each insurance subsidiary will be able to satisfy these claims and will face no liquidity or risk-based capital issues. The effects on each line of business are disclosed in the following discussions of segment operating results.
Also in 2000, the Company increased reserves $65.6 million in the Company's long-term disability business and $21.9 million in the reinsurance operations, wrote off assets and established loss provisions of $15.5 million in the reinsurance operations, and accrued consolidation and benefit expenses of $9.4 million. See the discussions of segment operating results contained herein for further information.
In the following financial statements and discussions of operating results by segment, "revenue" includes premium income, net investment income, and other income. "Income" or "loss" excludes federal income tax, net realized investment gains and losses, and extraordinary losses.
As discussed under "Cautionary Statement Regarding Forward-Looking Statements," certain risks and uncertainties are inherent in the Company's business. Components of claims experience, including but not limited to, incidence levels and claims duration, may be worse than expected. Management monitors claims experience in group disability and responds to changes by periodically adjusting prices, refining underwriting guidelines, changing product features, and strengthening risk management policies and procedures. The Company expects to price new business and re-price existing business, at contract renewal dates, in an attempt to mitigate the effect of these and other factors, including interest rates, on new claim liabilities. Given the competitive market conditions for the Company's disability products, it is uncertain whether pricing actions can entirely mitigate the effect.
The Individual segment includes results from the individual disability and individual long-term care lines of business.
During 2001, the Company entered into an agreement to limit its liabilities pertaining to the Lloyd's syndicate participations. Separately, the Company also reinsured 100 percent of the group disability reinsurance reserves and all future business underwritten and managed by Duncanson and Holt Services, Inc., a subsidiary of D&H. The transaction, in which reserves of approximately $323.8 million were ceded to the reinsurer, had an effective date of January 1, 2001. In a separate but related transaction, the Company also sold the reinsurance management operations of Duncanson and Holt Services, Inc. and divested the remaining assets of that facility during 2001. See Note 13 of the "Notes to Consolidated Financial Statements" for further discussion of the reinsurance operations.
Exit activities related to duplicate facilities/asset abandonments consist of closing of duplicate offices and write-off of redundant computer hardware and software. The cost associated with these office closures was approximately $25.6 million, which represents the cost of future minimum lease payments less any estimated amounts recovered under subleases. Also, certain physical assets, primarily computer equipment, redundant systems, and systems incapable of supporting the combined entity, were abandoned as a result of the merger, resulting in a write-down of the assets' book values by approximately $41.8 million.
Effective January 1, 2001, the Company adopted the provisions SFAS 133 and SFAS 138. SFAS 133 and SFAS 138 establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. The provisions of SFAS 133 and SFAS 138 require that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. SFAS 133 and SFAS 138 specify a special method of accounting for certain hedging transactions, prescribe the type of items and transactions that may be hedged, and provide the criteria which must be met in order to qualify for hedge accounting.
The Company will adopt the provisions of SFAS 142 effective January 1, 2002. In accordance with SFAS 142, goodwill will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives.
For most of the Company's subsidiaries, tax years through 1995 are closed to further assessment by the Internal Revenue Service (IRS). During 2001, the IRS continued its examination of subsequent tax years. Management believes any future adjustments that may result from IRS examinations of tax returns will not have a material impact on the financial position, liquidity, or results of operations of the Company.
Interest paid on short-term and long-term debt during 2001, 2000, and 1999 was $137.1 million, $156.9 million, and $115.2 million, respectively.
At December 31, 2001, the plan assets include 448,784 shares of the Company's common stock with a fair value of $11.9 million. The amount of dividends paid during 2001 was immaterial.
Summaries of the Company's stock options issued under the various plans are as follows:
The following discloses the various layers in the agreement at December 31, 2001 (in millions of dollars):
In addition, the same plaintiffs' attorney who had initially filed the class action lawsuits has filed 50 individual lawsuits on behalf of current and former Paul Revere sales managers (including the career class action representatives) alleging various breach of contract claims. UnumProvident and affiliates filed a motion in federal court to compel arbitration for 17 of the plaintiffs who are licensed by the National Association of Securities Dealers (NASD) and have executed the Uniform Application for Registration or Transfer in the Securities Industry (Form U-4). The federal court denied 15 of those motions and granted two. In June 2001, the first arbitration was heard before a NASD panel and the arbitration panel awarded the plaintiffs $190,000 in compensatory damages with no award for punitive damages, attorney's fees, or interest. The second arbitration has now been delayed three times at plaintiff's request, and plans are being made for a new date. Eight of the other cases are tentatively set to begin trials in 2002, but at this late date it is highly unlikely that more than two could start. UnumProvident and affiliates believe that they have strong defenses and plan to vigorously defend their position in these cases. Although the individual lawsuits described above are in the early stages, management does not expect these suits to materially affect the financial position or results of operations of the Company.
The Company's insurance subsidiaries' statutory combined net income (loss), as reported in conformity with statutory accounting practices, for the years ended December 31, 2001, 2000, and 1999, was $221.1 million, $353.5 million, and $(233.7) million, respectively. Statutory combined net gain (loss) from operations was $353.2 million, $414.8 million, and $(220.7) million for the years ended December 31, 2001, 2000, and 1999, respectively. Excluding the expenses related to the merger and early retirement offer and the changes in reserves as discussed in Note 2, the federal income tax refund activity, and the reinsurance operations charges, the Company's insurance subsidiaries' statutory net gain from operations was $21.0 million for the year ended 1999. Statutory capital and surplus at December 31, 2001 and 2000, was $3,378.7 million and $3,263.0 million, respectively.