-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, PkRpWV1dxyx5u78rW9qNN38nUK3avswrLOoc6woDbK25vBwA3hBjgaGRYRa/6ku+ kPqe421Lwukj6fnHdQV7pQ== 0000795581-94-000024.txt : 19940816 0000795581-94-000024.hdr.sgml : 19940816 ACCESSION NUMBER: 0000795581-94-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNUM CORP CENTRAL INDEX KEY: 0000795581 STANDARD INDUSTRIAL CLASSIFICATION: 6321 IRS NUMBER: 010405657 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09254 FILM NUMBER: 94543004 BUSINESS ADDRESS: STREET 1: 2211 CONGRESS ST CITY: PORTLAND STATE: ME ZIP: 04122 BUSINESS PHONE: 2077702211 MAIL ADDRESS: STREET 1: 2211 CONGRESS STREET CITY: PORTLAND STATE: ME ZIP: 04122 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1994 Commission File Number 1-9254 UNUM Corporation (Exact name of registrant as specified in its charter) Delaware 01-0405657 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 2211 Congress Street, Portland, Maine 04122 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (207) 770-2211 NONE (Former name, former address, and former fiscal year, if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes___ No ___ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at June 30, 1994 Common stock, $0.10 par value 73,878,387 shares UNUM Corporation and Subsidiaries Form 10-Q INDEX Page Part I. Financial Information Item 1. Financial Statements Consolidated Statements of Income - Three Months and Six Months Ended June 30, 1994, and 1993 (Unaudited) 3 Consolidated Balance Sheets as of June 30, 1994, (Unaudited) and December 31, 1993 4 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1994, and 1993 (Unaudited) 6 Notes to Consolidated Financial Statements (Unaudited) 8 Independent Accountant's Review Report 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 24 Signatures 25 UNUM Corporation and Subsidiaries C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E Three Months Ended Six Months Ended June 30, June 30, 1994 1993 1994 1993 (Unaudited - Dollars in millions, except per common share data) Revenues Premiums $701.4 $624.6 $1,356.4 $1,203.5 Investment income 192.4 200.3 383.5 400.8 Net realized investment gains 12.5 9.8 24.4 30.3 Fees and other income 21.7 19.9 41.1 42.6 Total revenues 928.0 854.6 1,805.4 1,677.2 Benefits and expenses Benefits to policyholders 518.7 449.8 1,000.1 868.3 Interest credited 60.9 71.7 121.9 145.7 Operating expenses 176.3 167.0 339.9 332.8 Commissions 86.9 80.4 174.8 158.6 Increase in unamortized deferred policy acquisition costs (42.2) (31.6) (72.8) (59.5) Interest expense 4.2 3.1 7.5 6.1 Total benefits and expenses 804.8 740.4 1,571.4 1,452.0 Income before income taxes and cumulative effects of accounting changes 123.2 114.2 234.0 225.2 Income taxes Current 16.6 28.3 32.2 55.1 Deferred 21.3 5.1 39.4 13.3 Total income taxes 37.9 33.4 71.6 68.4 Income before cumulative effects of accounting changes 85.3 80.8 162.4 156.8 Cumulative effects of accounting changes Income taxes -- -- -- 20.0 Postretirement benefits other than pensions, net of tax -- -- -- (32.1) Net income $ 85.3 $ 80.8 $ 162.4 $ 144.7 Per common share Income before cumulative effects of accounting changes $ 1.14 $ 1.02 $ 2.16 $ 1.98 Cumulative effects of accounting changes Income taxes -- -- -- 0.25 Postretirement benefits other than pensions, net of tax -- -- -- (0.41) Net income $ 1.14 $ 1.02 $ 2.16 $ 1.82 See notes to consolidated financial statements. 3 UNUM Corporation and Subsidiaries 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 June 30, 1994 December 31, (Dollars in millions) (Unaudited) 1993 Assets Investments Fixed maturities: Held to maturity-principally at amortized cost (fair value: 1994-$6,405.9; 1993-$7,149.9) $ 6,262.4 $ 6,560.7 Available for sale-at fair value (amortized cost: $1,464.3) 1,433.3 -- Available for sale-principally at amortized cost (fair value: $929.9) -- 872.0 Equity securities available for sale-at fair value (cost: 1994-$491.0; 1993-$508.3) 631.0 730.0 Mortgage loans 1,274.3 1,423.2 Real estate, net 197.5 193.5 Policy loans 194.6 187.9 Other long-term investments 55.6 59.0 Short-term investments 164.2 69.6 Total investments 10,212.9 10,095.9 Cash 91.4 20.8 Accrued investment income 186.0 184.0 Premiums due 171.5 165.5 Unamortized deferred policy acquisition costs 952.5 879.1 Property and equipment, net 143.9 143.5 Other assets 693.0 681.8 Separate account assets 297.6 266.7 Total assets $12,748.8 $12,437.3 (Continued on next page) 4 UNUM Corporation and Subsidiaries C O N S O L I D A T E D B A L A NC E S H E E T S June 30, 1994 December 31, (Dollars in millions) (Unaudited) 1993 Liabilities and Stockholders' Equity Liabilities Future policy benefits $ 4,227.2 $ 4,009.6 Unpaid claims and claim expenses 725.5 676.3 Other policyholder funds 4,126.2 4,268.8 Federal income taxes Current 30.9 31.5 Deferred 377.3 376.7 Notes payable 397.1 238.6 Other liabilities 514.3 466.4 Separate account liabilities 297.6 266.7 Total liabilities 10,696.1 10,334.6 Stockholders' Equity Preferred stock, par value $0.10 per share, authorized 10,000,000 shares, none issued Common stock, par value $0.10 per share, authorized 120,000,000 shares, issued 99,987,958 shares 10.0 10.0 Additional paid-in capital 1,080.7 1,078.4 Unrealized gains on available for sale securities, net of deferred taxes 75.8 149.1 Unrealized foreign currency translation adjustment (25.3) (24.1) Retained earnings 1,550.0 1,420.8 2,691.2 2,634.2 Less: Treasury stock, at cost (1994-26,109,571 shares; 1993-24,006,816 shares) 636.1 529.8 Restricted stock deferred compensation 2.4 1.7 Total stockholders' equity 2,052.7 2,102.7 Total liabilities and stockholders' equity $12,748.8 $12,437.3 See notes to consolidated financial statements. 5 UNUM Corporation and Subsidiaries 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 Six Months Ended June 30, (Unaudited - Dollars in millions) 1994 1993 Operating activities: Net income $ 162.4 $ 144.7 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effects of accounting changes, net of tax -- 12.1 Increase in future policy benefits and unpaid claims and claim expenses 250.9 202.8 Increase in federal income tax liability 39.4 42.8 Increase in unamortized deferred policy acquisition costs (72.8) (59.5) Other 25.9 (18.5) Net cash provided by operating activities 405.8 324.4 Investing activities: Maturities of fixed maturities -- 447.0 Maturities of fixed maturities held to maturity 326.0 -- Maturities of fixed maturities available for sale 27.4 -- Sales of fixed maturities held to maturity -- 38.8 Sales of fixed maturities available for sale 193.4 132.5 Sales of equity securities available for sale 166.1 -- Sales of other investments 162.3 293.7 Purchases of investments -- (1,001.2) Purchases of fixed maturities held to maturity (348.3) -- Purchases of fixed maturities available for sale (458.7) -- Purchases of equity securities available for sale (118.9) -- Purchases of other investments (50.7) -- Net increase in short-term investments (93.6) (63.7) Net additions to property and equipment (9.9) (12.5) Net cash used in investing activities (204.9) (165.4) Financing activities: Deposits and interest credited to investment contracts 313.8 417.3 Maturities and withdrawals from investment contracts (456.4) (549.9) Dividends to stockholders (33.2) (29.9) Treasury stock acquired (110.4) -- Proceeds from notes payable 54.5 -- Net increase in short-term debt 104.0 12.3 Other (2.6) 5.4 Net cash used in financing activities $(130.3) $ (144.8) (Continued on next page) 6 UNUM Corporation and Subsidiaries 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 Six Months Ended June 30, (Unaudited - Dollars in millions) 1994 1993 Effect of exchange rate changes on cash $ -- $ 1.4 Net increase in cash 70.6 15.6 Cash at beginning of year 20.8 20.4 Cash at end of period $ 91.4 $ 36.0 Supplemental disclosures of cash flow information: Cash paid during the period for: Income taxes $ 39.3 $ 39.1 Interest $ 7.4 $ 6.5 See notes to consolidated financial statements. 7 UNUM Corporation and Subsidiaries Form 10-Q Notes to Consolidated Financial Statements (Unaudited) June 30, 1994 Note 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to stock life insurance companies for interim financial information and with the requirements of Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles applicable to stock life insurance companies for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Interim results for the three month and six month periods ended June 30, 1994, are not necessarily indicative of the results that may be expected for the year ending December 31, 1994. For further information, refer to the audited consolidated financial statements and footnotes included in the 1993 annual report to stockholders of UNUM Corporation and subsidiaries ("UNUM"). Note 2. Accounting Changes 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, which are classified and accounted for as follows: - 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. - Fixed maturities and equity securities classified as "available for sale" are reported at fair value. Related unrealized holding gains and losses, net of deferred taxes, are reported in a separate component of stockholders' equity. 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. 8 UNUM Corporation and Subsidiaries Note 2. Accounting Changes (Continued) Effective January 1, 1993, UNUM adopted FAS No. 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 cumulative effect of this accounting change as of January 1, 1993, amounted to a $20.0 million increase in net income, or $0.25 per share, for the six months ended June 30, 1993. Effective January 1, 1993, UNUM adopted FAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," which changed the method for recognition of the cost of these benefits 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. This charge decreased net income by $32.1 million, or $0.41 per share, for the six months ended June 30, 1993. Note 3. Income Taxes The effective tax rate for the three months ended June 30, 1994, was 30.8% as compared with 29.2% for the same period in 1993. For the six months ended June 30, 1994, and 1993, the effective tax rates were 30.6% and 30.4%, respectively. In both periods the effective tax rates were lower than the federal income tax rate of 35% and 34% in 1994 and 1993, respectively, primarily due to UNUM's investments in tax-exempt securities. 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 third quarter net income totaling $9.7 million or $0.12 per share, which included $1.9 million or $0.02 per share for first and second quarter 1993 net income and a $7.8 million or $0.10 per share adjustment to the deferred income tax liability. Note 4. Earnings Per Share The weighted average number of shares outstanding used to calculate earnings per share was 74,834,098 and 79,401,781 for second quarter 1994 and 1993, respectively. Weighted average shares outstanding for the six months ended June 30, 1994, and 1993, were 75,218,897 and 79,305,704, respectively. The assumed exercise of outstanding stock options would not result in a material dilution of earnings per share. Note 5. Dividends to Stockholders On July 8, 1994, UNUM's Board of Directors declared a twenty-four cents per share cash dividend. The dividend is payable on August 19, 1994, to common stockholders of record at the close of business on July 25, 1994. During the first six months of 1994, cash dividends of twenty-four cents per share and twenty cents per share were paid on May 20, 1994, and February 18, 1994, respectively. 9 UNUM Corporation and Subsidiaries Note 6. Litigation 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 June 30, 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. Note 7. Segment Information UNUM reports its operations principally in six business segments: Employee Benefits, Related Businesses, Colonial Companies, Individual Disability, Retirement Security and Other Operations. The Employee Benefits segment includes group long term disability, group life and other employee benefits products, including short term disability, accidental death and dismemberment, and dental insurance. The Related Businesses segment includes UNUM Limited in the United Kingdom, Commercial Life Insurance Company, and reinsurance operations including Duncanson & Holt, Inc. The Colonial Companies segment includes Colonial Companies, Inc. and subsidiaries ("Colonial"), which offer payroll-deducted, voluntary employee benefits to employees at their worksites. The Individual Disability segment includes disability income products. The Retirement Security segment includes tax sheltered annuities, long term care insurance and lifestyle security protection products. The Other Operations segment includes individual life insurance business of UNUM Life Insurance Company of America, group medical operations, guaranteed investment contracts, deposit administration accounts, and 401(k) plans, all of which are no longer actively marketed by UNUM. Corporate includes transactions which are generally non-insurance related and expenses incurred to effect the March 26, 1993, merger of UNUM and Colonial. 10 UNUM Corporation and Subsidiaries Note 7. Segment Information (continued) Summarized financial information for the six business segments and Corporate is as follows: Three Months Ended Six Months Ended June 30, June 30, (Dollars in millions) 1994 1993 1994 1993 Revenues Employee Benefits $ 422.0 $ 411.6 $ 838.6 $ 782.5 Related Businesses 158.1 120.3 288.5 237.7 Colonial Companies 118.0 110.2 234.4 227.8 Individual Disability 107.2 97.6 214.0 196.7 Retirement Security 84.9 67.6 152.7 137.7 Other Operations 36.9 45.0 73.7 93.9 Corporate 0.9 2.3 3.5 0.9 Total revenues $ 928.0 $ 854.6 $1,805.4 $1,677.2 Income (loss) before income taxes and cumulative effects of accounting changes Employee Benefits $ 65.3 $ 58.6 $ 129.4 $ 118.1 Related Businesses 22.6 16.5 35.2 26.9 Colonial Companies 16.3 15.1 32.1 38.9 Individual Disability 8.6 14.5 18.9 30.7 Retirement Security 8.6 5.0 17.6 12.2 Other Operations 4.4 5.9 7.1 12.5 Corporate (2.6) (1.4) (6.3) (14.1) Total income before income taxes and cumulative effects of accounting changes 123.2 114.2 234.0 225.2 Income taxes 37.9 33.4 71.6 68.4 Income before cumulative effects of accounting changes 85.3 80.8 162.4 156.8 Cumulative effects of accounting changes -- -- -- (12.1) Net income $ 85.3 $ 80.8 $ 162.4 $ 144.7 June 30, December 31, (Dollars in millions) 1994 1993 Identifiable Assets Employee Benefits $ 3,426.5 $ 3,294.5 Related Businesses 1,408.8 1,269.0 Colonial Companies 1,574.7 819.2 Individual Disability 3,306.6 1,516.3 Retirement Security 1,340.4 3,249.3 Other Operations 830.0 1,493.9 Corporate 515.8 452.3 Individual Participating Life and Annuity 346.0 342.8 Total assets $12,748.8 $12,437.3 11 INDEPENDENT ACCOUNTANT'S REVIEW REPORT To the Board of Directors and Stockholders UNUM Corporation We have reviewed the accompanying consolidated balance sheet of UNUM Corporation and subsidiaries as of June 30, 1994, and the related consolidated statements of income for the three-month and six-month periods then ended and the consolidated statement of cash flows for the six-month period then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements of UNUM Corporation and subsidiaries as of June 30, 1994, and for the three-month and six-month periods then ended for them to be in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND Portland, Maine July 22, 1994 12 UNUM Corporation and Subsidiaries Form 10-Q June 30, 1994 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements (Unaudited) and Notes to Consolidated Financial Statements (Unaudited) included elsewhere in the Form 10-Q. Revenues for UNUM for second quarter 1994 were $928.0 million as compared with $854.6 million for second quarter 1993. Net income for the quarter ended June 30, 1994, was $85.3 million or $1.14 per share as compared with $80.8 million or $1.02 per share for the same quarter in 1993. Revenues for the six months ended June 30, 1994, were $1,805.4 million as compared with $1,677.2 million for the same period in 1993. Net income for the six months ended June 30, 1994, was $162.4 million or $2.16 per share as compared with $144.7 million or $1.82 per share for the same period in 1992. Net income for the six months ended June 30, 1993, included one time net charges totaling $12.1 million or $0.16 per share for the cumulative effects of the adoption of Financial Accounting Standards ("FAS") No. 106 and No. 109 relating to postretirement benefits other than pensions and income taxes, respectively, as described in Note 2. Also included in net income for the six months ended June 30, 1993, is a one time charge of $9.5 million or $0.12 per share for expenses associated with the March 26, 1993, merger of UNUM and Colonial Companies, Inc. Excluding these one time charges, net income for the six months ended June 30, 1993, would have been $166.3 million or $2.10 per share. As further described in the Employee Benefits and Individual Disability segments, UNUM's North American disability results were adversely affected in the first and second quarters of 1994 through a combination of increased incidence of new claims, an increased number of large claims and low interest rates. Management is analyzing the nature of the claims received in first and second quarter 1994, and has noted the continued prevalence of emerging and often subjective types of disabilities. To address the current claims environment, management is taking remedial actions which include implementing new risk management programs and underwriting guidelines, as well as selective price increases on new and existing business. Management continually reviews and updates reserve estimates and assumptions with any resulting adjustments reflected in current operating results. It is uncertain if the adverse claims experience seen in the first and second quarters of 1994 will continue or how long it will take for the remedial actions to take effect. The interest rate environment during the past two years has resulted in reduced investment yields on new fixed income purchases and has decreased levels of investment income, despite a continued growth in invested assets. UNUM proactively reviews and adjusts investment strategies to mitigate the potential impact of increasing reserve requirements due to a declining discount rate. 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. 13 UNUM Corporation and Subsidiaries Premiums: Premiums for the three months and six months ended June 30, 1994, and 1993, are summarized by segment in the table below. Second quarter 1994 claim block acquisitions generated one-time premium of $25.8 million for UNUM Limited, included in the Related Businesses segment, and $15.0 million for long term care included in the Retirement Security segment. In second quarter 1993, group long term disability ("group LTD"), included in the Employee Benefits segment, acquired a closed block of claims which generated one-time premium totaling $32.6 million. Management may pursue additional claim block acquisitions in the future. Three Months Ended Six Months Ended June 30, June 30, (Dollars in millions) 1994 1993 Change 1994 1993 Change Employee Benefits Group LTD $ 237.7 $ 248.4 (4.3)% $ 471.7 $ 459.5 2.7% Group life 79.1 65.7 20.4 153.5 128.9 19.1 Other 37.4 35.9 4.2 78.9 72.3 9.1 Total 354.2 350.0 1.2 704.1 660.7 6.6 Related Businesses 124.5 87.6 42.1 222.3 168.9 31.6 Colonial Companies 109.4 101.3 8.0 217.7 201.1 8.3 Individual Disability 83.3 75.2 10.8 166.8 149.4 11.6 Retirement Security 24.9 6.8 nm 34.7 15.4 nm Other Operations 5.1 3.7 37.8 10.8 8.0 35.0 Total premiums $ 701.4 $ 624.6 12.3% $1,356.4 $1,203.5 12.7% nm = not meaningful or in excess of 100% Income Before Income Taxes and Cumulative Effects of Accounting Changes: Income before income taxes and cumulative effects of accounting changes for the six business segments and Corporate for the three months and six months ended June 30, 1994, and 1993, was as follows: Three Months Ended Six Months Ended June 30, June 30, (Dollars in millions) 1994 1993 Change 1994 1993 Change Employee Benefits $ 65.3 $ 58.6 $ 6.7 $129.4 $118.1 $ 11.3 Related Businesses 22.6 16.5 6.1 35.2 26.9 8.3 Colonial Companies 16.3 15.1 1.2 32.1 38.9 (6.8) Individual Disability 8.6 14.5 (5.9) 18.9 30.7 (11.8) Retirement Security 8.6 5.0 3.6 17.6 12.2 5.4 Other Operations 4.4 5.9 (1.5) 7.1 12.5 (5.4) Corporate (2.6) (1.4) (1.2) (6.3) (14.1) 7.8 Total $ 123.2 $ 114.2 $ 9.0 $234.0 $225.2 $ 8.8 14 UNUM Corporation and Subsidiaries Employee Benefits Segment: The Employee Benefits segment reported increased income before income taxes for the three months and six months ended June 30, 1994, as compared with the same periods in 1993. The increases were attributable to improved claims experience in the group life business and continued expense control, which were partially offset by adverse claims experience in the group LTD business. The group LTD business has experienced a higher incidence of new claims in the first and second quarters of 1994, which has resulted in a significant increase to benefits to policyholders. Unlike the first quarter of 1994, the group LTD business did not experience a disproportionate number of large claims in second quarter 1994. Management has identified certain geographical and occupational portions of the group LTD business which are experiencing higher than expected claims. Management continues to pursue these portions of the business for underwriting and pricing actions and is addressing the increased incidence rates and more subjective nature of the types of disability claims by implementing new and enhancing existing risk management programs. Compounding this unfavorable claims experience was a decrease in the discount rate used to determine group LTD reserves, which resulted in an increase to current claim reserves. Although the group life business reported more favorable claims experience in the first and second quarters of 1994, certain portions of the business continue to experience unfavorable claims results, which management attributes to antiselection and adverse mortality. Management continues to address the antiselection that developed during 1993 by imposing more stringent underwriting requirements and by targeting specific portions of the business to pursue risk and pricing actions. Related Businesses Segment: The increase in income before income taxes for the three months and six months ended June 30, 1994, as compared with the same periods in 1993, is primarily due to favorable claims experience and premium growth at UNUM Limited, in the United Kingdom. Unlike previous periods, the effect of the exchange rate has had a negligible effect on UNUM Limited's earnings as reported in U.S. dollars, since the U.S. dollar has remained relatively steady against the British pound sterling throughout 1993 and into 1994. Also contributing to the increase in income before income taxes for the three months ended June 30, 1994, as compared with the same period in 1993, were favorable claims experience in Commercial Life's franchise disability business. Favorable claims experience in Commercial Life's specialty group accident product line and continued earnings growth in the reinsurance operations contributed to the increase in income before income taxes for the six months ended June 30, 1994, as compared with the same period in 1993. Due to the nature of the risks underwritten, the specialty group accident product line can exhibit claims variability. 15 UNUM Corporation and Subsidiaries Colonial Companies Segment: The Colonial Companies segment reported an increase in income before income taxes for second quarter 1994, as compared with the same quarter in 1993, which is primarily attributable to favorable claims experience. The segment reported decreased income before income taxes for the six months ended June 30, 1994, as compared with the same period in 1993, primarily due to decreased realized investment gains. During 1993, Colonial's investment portfolio was realigned to reflect UNUM's investment philosophy. As a result, Colonial sold higher yielding but callable investments, which resulted in more than $8.5 million in realized investment gains for the six months ended June 30, 1993. For the three months and six months ended June 30, 1994, Colonial reported favorable claims experience and improved incidence rates, especially in the cancer product line. Colonial continues to shift its product mix toward products that are designed to have higher benefit ratios, lower expense ratios and better policyholder retention. Premium growth in 1994 has continued to benefit from improved persistency through enhanced customer conservation programs that have offset the impact of the weaker level of sales for the past two years. Individual Disability Segment: An increase in the cost for new claims combined with lower investment returns has resulted in decreased income before income taxes for the Individual Disability segment for the three months and six months ended June 30, 1994, as compared with the same periods in 1993. In the first and second quarters of 1994, the Individual Disability segment experienced a higher incidence of new claims and a disproportionate number of large claims that management has attributed to certain occupational and geographical portions of the business. Management believes that the uncertainty in the medical industry due to Health Care Reform and the increased prevalence of emerging and often subjective types of disabilities have contributed to increased benefit costs. Management continually develops risk and underwriting tools and sales strategies to deal with these emerging issues. The unfavorable claims experience of the first and second quarters of 1994 was partially offset by a continued decrease in the segment's expense ratio and increased deferral of policy acquisition costs, which reflects improved persistency and higher customer acquisition costs associated with new business. Additionally, management attributes the decrease in the expense ratio to focused expense management and productivity gains as premium growth outpaced expense growth. Management is evaluating the structure of the individual disability products to determine if changes can be made to improve future product performance. 16 UNUM Corporation and Subsidiaries Retirement Security Segment: Unusually favorable interest spread margins on tax sheltered annuities have contributed to the level of income before income taxes for the three months and six months ended June 30, 1994, and 1993. Management does not expect interest spread margins on tax sheltered annuities to continue at the same level, which may reduce future earnings for the Retirement Security segment. Continued premium growth and expense reductions in the long term care insurance products contributed to the increase in income before income taxes for the three months and six months ended June 30, 1994, as compared with the same periods in 1993. Other Operations Segment: The reduced invested asset base under management for guaranteed investment contracts ("GICs"), deposit administration contracts ("DAs") and 401(k) plans resulted in lower revenues from investment and fee 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. Management expects future earnings in the Other Operations segment to decline, reflecting the run-off nature of these closed blocks of businesses. Also contributing to the decrease in income before income taxes was lower realized investment gains for the six months ended June 30, 1994, as compared with the same period in 1993. Corporate: Decreased expenses for the six months ended June 30, 1994, as compared with the same period in 1993, contributed to the decreased loss before income taxes in Corporate. Included in expenses for the six months ended June 30, 1993, were the expenses incurred in connection with the March 26, 1993, merger of UNUM Corporation and Colonial Companies, Inc. Income Taxes: The effective tax rates for the three months and six months ended June 30, 1994, were 30.8% and 30.6%, respectively. This compares with 29.2% and 30.4% for the same periods in 1993. The effective tax rates were lower than the federal income tax rate of 35% and 34% in 1994 and 1993, respectively, primarily due to UNUM's investments in tax-exempt securities. On August 10, 1993, legislation was enacted to increase the federal income tax rate of 34% to 35%, retroactive to January 1, 1993. FAS 109 required that deferred tax balances be adjusted for the effect of a change in tax laws or rates, and that the effect of such adjustment be recognized in income from continuing operations in the period the new legislation is enacted. The cumulative effect of this change was an increase to income tax expense in the third quarter 1993 of $9.7 million or $0.12 per share, which included $1.9 million, or $0.02 per share, for first and second quarter 1993 net income and $7.8 million, or $0.10 per share, adjustment to the deferred income tax liability. 17 UNUM Corporation and Subsidiaries Investments: UNUM's investment philosophy is to optimize "risk adjusted total return," which 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 the 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 complies 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 collectibility is doubtful. Management monitors the risk associated with the invested asset portfolio and regularly reviews and adjusts the allowance for probable losses. At June 30, 1994, the composition of UNUM's $10,212.9 million of invested assets was 75.3% fixed maturities, 12.5% mortgage loans, 1.9% real estate, 6.2% equity securities and 4.1% other invested assets. 18 UNUM Corporation and Subsidiaries Fixed Maturities: 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, which are classified and accounted for as follows: - 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. Sales of such assets are infrequent and are generally in response to significant deterioration in the issuers' credit worthiness. The majority of UNUM's insurance reserve liabilities are generally longer term in nature and not subject to withdrawal. Since UNUM purchases assets whose maturities, expected cash flows and prepayment conditions will complement the business risks by meeting the liquidity and solvency requirements of each product, the majority of UNUM's fixed maturities have been classified as "held to maturity" to match the longer term nature of UNUM's products. - Fixed maturities and equity securities classified as "available for sale" are reported at fair value. Related unrealized holding gains and losses, net of deferred taxes, are reported in a separate component of stockholders' equity. Fair 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. 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. 19 UNUM Corporation and Subsidiaries Fixed Maturities: (continued) At June 30, 1994, and December 31, 1993, the fixed maturity portfolio included $260.0 million and $263.3 million of below investment grade bonds (below "Baa"), which represented 3.4% and 3.5% of the fixed maturity portfolio, respectively. These bonds had associated market values of $262.9 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 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 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 0.26% at June 30, 1994, and 0.24% at December 31, 1993. Mortgages: At June 30, 1994, and December 31, 1993, UNUM's mortgage loans were $1,274.3 million and $1,423.2 million, respectively. The mortgage loan portfolio, as a percentage of invested assets, has decreased to 12.5% as of June 30, 1994, from 14.1% as of December 31, 1993. This trend is anticipated to continue since prepayments and scheduled maturities for mortgages 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. The percentage of mortgage loans delinquent sixty days or more on a contract delinquency basis was 1.8% at both June 30, 1994, and December 31, 1993. Overall, management believes that its mortgage loan portfolio is well diversified geographically and among property types. UNUM's incidence of new problem mortgage loans has recently declined as overall economic activity has improved modestly, and many of the real estate markets in which UNUM has mortgage loans stabilized. Foreclosure activity and new reserve additions declined in 1993 and have continued to decline in 1994 from the higher levels of recent years; however, management continues to expect additional delinquencies and problem loans in the future. Management believes the allowance provided on mortgage loans is adequate to cover probable losses as of June 30, 1994. 20 UNUM Corporation and Subsidiaries Mortgages: (continued) During the first six months of 1994, UNUM realized investment losses related to delinquent, restructured and problem mortgage loans of $7.8 million, as compared with $1.7 million for the same period in 1993. Delinquent and problem mortgage loans as of June 30, 1994, are not expected to have a significant impact on UNUM's liquidity and capital resources. Real Estate: At June 30, 1994, investment real estate and real estate held for sale amounted to $197.5 million and $26.2 million, respectively. This compares with $193.5 million of investment real estate and $24.7 million of real estate held for sale at December 31, 1993. UNUM continues to limit its real estate exposure as a percentage of invested assets through an active sales program. Real estate which meets certain investment criteria and is intended to be held long term is carried at cost less accumulated depreciation. Real estate that has been acquired through foreclosure is valued at fair value at the date of foreclosure. Real estate held for sale is included in other assets in the Consolidated Balance Sheets and is valued net of an allowance which reduces the carrying value to the lower of fair value less estimated costs to sell, or cost. Occasionally, investment real estate is reclassified and revalued as real estate held for sale when it no longer meets UNUM's investment criteria. Additions to the allowance for probable losses related to real estate held for sale resulted in a realized investment gain of $0.1 million and a realized investment loss of $15.8 million for the six months ended June 30, 1994, and 1993, respectively. Additions to the allowance for probable losses represent charges to net realized investment gains less recoveries. Given the current real estate environment, additional foreclosures are anticipated, but at a reduced level from the early 1990s. Current and anticipated real estate acquired through foreclosure is not expected to have a significant impact on UNUM's investment income, liquidity and capital resources. Financial Instruments with Off-Balance-Sheet Risk: UNUM periodically uses common derivative financial instruments such as options, futures and forward contracts to hedge interest rate risk on future investments and certain payments denominated in foreign currencies. These derivative financial instruments are used to protect UNUM from the impact of market fluctuations in interest and exchange rates. UNUM does not intend to hold or issue derivative financial instruments for the purpose of trading activities. UNUM's exposure to derivative financial instruments was not significant to the consolidated financial statements at June 30, 1994. 21 UNUM Corporation and Subsidiaries Liquidity and Capital Resources: UNUM's businesses produce positive cash flows which are invested primarily in intermediate, fixed maturity investments intended to reflect the nature of anticipated cash obligations of insurance benefit payments and insurance contract maturities and to optimize investment returns at appropriate risk levels. To meet unexpected cash requirements and liquidity needs, UNUM maintains part of its investment portfolio in fixed maturities classified as available for sale, equity securities, cash and short-term investments. Cash flow requirements are also supported by committed revolving credit facilities of $100 million and $200 million, which expire on February 17, 1995, and June 1, 1996, respectively. 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. At June 30, 1994, UNUM had short-term and long-term debt totaling $214.0 million and $183.1 million, respectively, and had $116.5 million available for additional financing under existing revolving credit facilities. Management may decide to refinance the short-term notes payable in the future. 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. In September 1993, UNUM announced the resumption of a program to repurchase its common stock pursuant to an existing Board of Directors' resolution. On February 11, 1994, UNUM's Board of Directors voted to expand UNUM's authorization to repurchase an additional 5.0 million shares. Since the resumption of the stock repurchase program, UNUM has acquired approximately 6.0 million shares of its common stock through June 30, 1994, in the open market at an aggregate cost of $302.9 million that was primarily funded through additional borrowings. 22 UNUM Corporation and Subsidiaries Ratings: In March 1994, Standard & Poor's Corporation assigned Colonial Life & Accident Insurance Company's claims-paying ability rating as "AA-" (Excellent). In June 1994, A.M. Best Company ("Best's") affirmed UNUM Life Insurance Company of America's financial strength rating at "A++" (Superior), the highest rating assigned by Best's. Additionally, Best's affirmed First UNUM Life Insurance Company at "A+" (Superior); Colonial Life & Accident Insurance Company at "A+" (Superior) and upgraded Commercial Life & Accident Insurance Company at "A" (Excellent) from "A-" (Excellent). UNUM Japan: On June 20, 1994, the Japanese Ministry of Finance granted UNUM a provisional operating license which allows UNUM to establish a non-life insurance company, UNUM Japan Accident Insurance Company Limited ("UNUM Japan"), to market disability products in Japan. UNUM Japan has subsequently received an official license and plans to begin marketing long term disability and accident insurance products this fall. UNUM Japan anticipates receiving licenses to sell a variety of existing short term disability, personal accident and disability-type coverages. UNUM Japan has formed a cooperative relationship with Japan's leading short term disability insurer, Yasuda Fire & Marine Insurance Co., Ltd., to introduce UNUM Japan's long term disability products in Japan. The two companies plan to continue to work together on market and product development and will also market their own separate long term disability products. 23 UNUM Corporation and Subsidiaries Form 10-Q June 30, 1994 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K Page (a) Exhibit Index 12. Statement re: Computation of ratio of earnings to fixed charges. 26 15. Letter re: Unaudited interim financial information. 27 (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant with the Securities and Exchange Commission during the quarter ended June 30, 1994. 24 UNUM Corporation and Subsidiaries Form 10-Q June 30, 1994 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date August 10, 1994 /s/ RODNEY N. HOOK Rodney N. Hook Senior Vice President and Chief Financial Officer Date August 10, 1994 /s/ STEPHEN D. ROBERTS Stephen D. Roberts Vice President and Corporate Controller 25 EX-12 2 UNUM Corporation and Subsidiaries Form 10-Q June 30, 1994 Exhibit 12 Computation of Ratio of Earnings to Fixed Charges Three Months Ended Six Months Ended June 30, June 30, (Unaudited - Dollars in millions) 1994 1993 1994 1993 Earnings: Income from continuing operations before income taxes $123.2 $114.2 $234.0 $225.2 Add: Fixed charges 7.0 5.6 12.9 11.4 Earnings as adjusted $130.2 $119.8 $246.9 $236.6 Fixed charges: Interest expense $ 4.2 $ 3.1 $ 7.5 $ 6.1 Interest portion of rent expense 2.8 2.5 5.4 5.3 Total fixed charges $ 7.0 $ 5.6 $ 12.9 $ 11.4 Ratio of earnings to fixed charges 18.6 21.4 19.1 20.8 For purposes of computing the ratio of earnings to fixed charges, earnings as adjusted consist of net income plus income taxes and fixed charges. Fixed charges consist of interest expense and the estimated interest portion of rent expense. 26 EX-15 3 Exhibit 15 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 We are aware that our report dated July 22,1994, on our review of interim financial information of UNUM Corporation for the three-month and six-month periods ended June 30, 1994, and included in the Company's quarterly report on Form 10-Q for the quarter then ended is incorporated by reference in the following Registration Statements: - Form S-8 No. 33-31270 pertaining to the UNUM Employees Retirement Savings Plan and Trust - Form S-8 No. 33-19090 pertaining to the 1987 Executive Stock Option Plan - Form S-8 No. 33-38225 pertaining to the 1990 Long-Term Stock Incentive Plan - Form S-8 No. 33-52741 pertaining to the 1990 Long-Term Stock Incentive Plan - Form S-3 No. 33-36873 - Form S-3 No. 33-69132 - Form S-8 No. 33-60124 pertaining to the Colonial Companies, Inc. Security Saver Plan - Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 No. 33-55870 Pursuant to Rule 436 (c) under the Securities Act of 1933, this report should not be considered a part of the registration statements prepared or certified by accountants within the meaning of Sections 7 and 11 of that Act. /s/ COOPERS & LYBRAND L.L.P. 27 -----END PRIVACY-ENHANCED MESSAGE-----