-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Aw1IIC+YEY+tRGhP30CA3GGWaT09viL4opgMwvUw/TNh+vFh1cuJ9BaFp80P5jZE kU2UdUHj8oTOEizR7JnYEQ== 0000795581-98-000004.txt : 19980805 0000795581-98-000004.hdr.sgml : 19980805 ACCESSION NUMBER: 0000795581-98-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980804 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNUM CORP CENTRAL INDEX KEY: 0000795581 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 010405657 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09254 FILM NUMBER: 98676998 BUSINESS ADDRESS: STREET 1: 2211 CONGRESS ST P612 CITY: PORTLAND STATE: ME ZIP: 04122 BUSINESS PHONE: 2077704363 MAIL ADDRESS: STREET 1: 2211 CONGRESS STREET CITY: PORTLAND STATE: ME ZIP: 04122 10-Q 1 UNITED STATES 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-9254 UNUM CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 01-0405657 (State or other jurisdiction of incorporation or organization) (I.R.S. employer 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, 1998 COMMON STOCK, $0.10 PAR VALUE 138,285,779 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, 1998, and 1997 (Unaudited) 3 Consolidated Balance Sheets as of June 30, 1998, (Unaudited) and December 31, 1997 4 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1998, and 1997 (Unaudited) 5 Consolidated Statements of Comprehensive Income - Three Months and Six Months Ended June 30, 1998, and 1997 (Unaudited) 6 Notes to Consolidated Financial Statements (Unaudited) 7 Independent Accountant's Review Report 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 UNUM CORPORATION AND SUBSIDIARIES FORM 10-Q 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, ------------------ ------------------ (Unaudited - Dollars in millions, except per common share data) 1998 1997 1998 1997 - ------------------------------------------------------------------------------- REVENUES Premiums $ 962.2 $786.7 $1,880.6 $1,569.4 Investment income 165.2 165.7 328.5 331.2 Net realized investment gains (losses) 2.3 (3.0) 5.4 (5.2) Fees and other income 29.9 43.0 66.6 156.1 - ------------------------------------------------------------------------------- Total revenues 1,159.6 992.4 2,281.1 2,051.5 BENEFITS AND EXPENSES Benefits to policyholders 710.0 585.0 1,389.1 1,173.5 Interest credited 11.3 18.9 23.4 52.3 Operating expenses 213.5 191.4 434.9 376.8 Commissions 123.8 100.1 266.5 212.0 Increase in deferred policy acquisition costs (52.7) (40.0) (132.6) (82.0) Interest expense 12.3 10.6 24.0 20.8 - ------------------------------------------------------------------------------- Total benefits and expenses 1,018.2 866.0 2,005.3 1,753.4 - ------------------------------------------------------------------------------- Income before income taxes 141.4 126.4 275.8 298.1 INCOME TAXES Current 15.0 17.0 27.5 35.6 Deferred 27.7 21.8 56.1 59.9 - ------------------------------------------------------------------------------- Total income taxes 42.7 38.8 83.6 95.5 - ------------------------------------------------------------------------------- NET INCOME $ 98.7 $ 87.6 $ 192.2 $ 202.6 =============================================================================== NET INCOME PER COMMON SHARE: Basic $ 0.71 $ 0.63 $ 1.39 $ 1.44 Diluted $ 0.70 $ 0.62 $ 1.36 $ 1.41 =============================================================================== See notes to consolidated financial statements.
UNUM CORPORATION AND SUBSIDIARIES FORM 10-Q 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, 1998 December 31, (Dollars in millions) (Unaudited) 1997 - -------------------------------------------------------------------------------- ASSETS Investments Fixed maturities available for sale-at fair value (amortized cost: 1998-$7,129.1; 1997-$6,893.0) $ 7,576.3 $ 7,310.9 Equity securities available for sale-at fair value (cost: 1998-$22.8; 1997-$21.1) 34.8 30.7 Mortgage loans 1,128.4 1,131.0 Real estate, net 221.7 231.5 Policy loans 127.5 128.5 Other long-term investments 1.8 1.8 Short-term investments 158.5 124.5 - -------------------------------------------------------------------------------- Total investments 9,249.0 8,958.9 Cash 52.8 56.8 Accrued investment income 156.8 160.3 Premiums due 570.2 390.9 Deferred policy acquisition costs 1,163.7 1,031.7 Property and equipment, net 219.6 196.2 Reinsurance receivables 1,640.0 1,441.2 Deposit assets 715.3 688.3 Other assets 509.5 486.2 Separate account assets 33.6 29.6 - -------------------------------------------------------------------------------- Total assets $14,310.5 $13,440.1 ================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Future policy benefits $ 2,383.6 $ 2,108.4 Unpaid claims and claim expenses 6,283.2 5,944.4 Other policyholder funds 923.7 1,004.9 Income taxes Current 16.7 20.7 Deferred 555.4 496.2 Notes payable 717.8 635.8 Other liabilities 812.2 765.3 Separate account liabilities 33.6 29.6 - -------------------------------------------------------------------------------- Total liabilities 11,726.2 11,005.3 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 240,000,000 shares, issued 199,975,916 shares) 20.0 20.0 Additional paid-in capital 1,142.8 1,123.0 Unrealized gains, net 234.3 211.4 Unrealized foreign currency translation adjustment (16.8) (16.0) Retained earnings 2,314.6 2,162.5 - -------------------------------------------------------------------------------- 3,694.9 3,500.9 Less: Treasury stock, at cost (1998-61,690,137 shares; 1997-61,703,924 shares) 1,092.1 1,050.3 Restricted stock deferred compensation 18.5 15.8 - -------------------------------------------------------------------------------- Total stockholders' equity 2,584.3 2,434.8 - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $14,310.5 $13,440.1 ================================================================================ See notes to consolidated financial statements.
UNUM CORPORATION AND SUBSIDIARIES FORM 10-Q 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) 1998 1997 - ------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $192.2 $202.6 Adjustments to reconcile net income to net cash provided by operating activities: Increase in future policy benefits and unpaid claims and claim expenses 558.7 342.4 Increase in amounts receivable under reinsurance agreements (198.1) (97.0) Increase in premiums due (179.1) (70.9) Increase in income tax liability 42.8 45.9 Increase in deferred policy acquisition costs (131.4) (82.5) Decrease in deposit assets 0.7 29.8 Recognition of deferred gain on sale of tax-sheltered annuities (1.9) (67.4) Other 65.0 (60.5) - ------------------------------------------------------------------------------- Net cash provided by operating activities 348.9 242.4 - ------------------------------------------------------------------------------- INVESTING ACTIVITIES: Maturities of fixed maturities available for sale 222.7 172.7 Sales of fixed maturities available for sale 244.3 426.4 Sales and maturities of other investments 55.0 111.9 Purchases of fixed maturities available for sale (686.3) (599.1) Purchases of other investments (57.1) (89.9) Net increase in short-term investments (33.8) (82.8) Net additions to property and equipment (26.2) (23.2) - ------------------------------------------------------------------------------- Net cash used in investing activities (281.4) (84.0) - ------------------------------------------------------------------------------- FINANCING ACTIVITIES: Deposits and interest credited to investment contracts 102.8 221.3 Maturities and withdrawals from investment contracts (172.2) (213.4) Dividends to stockholders (40.1) (39.5) Treasury stock acquired (63.1) (197.1) Proceeds from notes payable 50.0 -- Repayment of notes payable (38.0) (15.0) Net increase in short-term debt 70.4 32.4 Other 19.1 16.9 - ------------------------------------------------------------------------------- Net cash used in financing activities (71.1) (194.4) - ------------------------------------------------------------------------------- Effect of exchange rate changes on cash (0.4) (0.5) - ------------------------------------------------------------------------------- Net decrease in cash (4.0) (36.5) Cash at beginning of year 56.8 77.9 - ------------------------------------------------------------------------------- Cash at end of period $ 52.8 $ 41.4 =============================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes $ 33.4 $ 46.8 Interest $ 30.1 $ 20.9
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: During the six months ended June 30, 1997, in connection with contractholder and participant consents for assumption reinsurance related to the tax-sheltered annuity business UNUM sold in 1996, UNUM reduced its deposit assets by $2,110.4 million, policy loan assets by $99.4 million, other policyholder fund liabilities by $2,266.5 million, and separate account assets and liabilities by $485.1 million. =============================================================================== See notes to consolidated financial statements. UNUM CORPORATION AND SUBSIDIARIES FORM 10-Q 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 O M P R E H E N S I V E I N C O M E Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- (Unaudited - Dollars in millions) 1998 1997 1998 1997 - -------------------------------------------------------------------------------- Net income $ 98.7 $ 87.6 $192.2 $202.6 Other comprehensive income: Unrealized holding gains (losses) arising during the period 42.0 43.1 25.8 (7.4) Reclassification adjustment for realized (gains) losses included in net income (1.1) 1.0 (2.9) 0.6 - -------------------------------------------------------------------------------- Changes in unrealized gains (losses), net 40.9 44.1 22.9 (6.8) Foreign currency translation adjustments (4.6) 1.8 (0.8) (8.9) - -------------------------------------------------------------------------------- Total other comprehensive income (loss) 36.3 45.9 22.1 (15.7) - -------------------------------------------------------------------------------- Comprehensive income $135.0 $133.5 $214.3 $186.9 ================================================================================ SUPPLEMENTAL DISCLOSURES OF COMPREHENSIVE INCOME INFORMATION: Tax expense (benefit) related to unrealized holding gains (losses) $ 20.9 $ 21.4 $ 12.5 $ (2.9) Tax (expense) benefit related to reclassification adjustment for realized (gains) losses $ (0.5) $ 0.5 $ (1.5) $ 0.3 ================================================================================ See notes to consolidated financial statements. UNUM Corporation and Subsidiaries Form 10-Q Notes to Consolidated Financial Statements (Unaudited) June 30, 1998 NOTE 1. BASIS OF PRESENTATION - ------------------------------ The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 for complete financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included in the financial statements. Interim results for the three month and six month periods ended June 30, 1998, are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. This report should be read in conjunction with the 1997 Form 10-K included in the 1997 Annual Report to stockholders of UNUM Corporation and subsidiaries ("UNUM") and Form 10-Q for the quarterly period ended March 31, 1998. NOTE 2. ACCOUNTING CHANGE - -------------------------- In March 1998, the American Institute of Certified Public Accountant's Accounting Standards Executive Committee issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on accounting for the costs of developing or obtaining computer software for internal use. In the second quarter of 1998, UNUM implemented SOP 98-1, effective January 1, 1998; the adoption of SOP 98-1 did not have a material effect on UNUM's first or second quarter results of operations or financial position. NOTE 3. EARNINGS PER SHARE - --------------------------- The approximate number of shares used to calculate earnings per share ("EPS") was as follows: Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- (Shares in thousands) 1998 1997 1998 1997 - -------------------------------------------------------------------------------- Weighted average shares outstanding for basic EPS 138,367 139,399 138,240 140,885 Effect of dilutive securities 3,270 2,700 3,282 2,727 - -------------------------------------------------------------------------------- Weighted average shares outstanding for diluted EPS 141,637 142,099 141,522 143,612 ================================================================================ NOTE 4. STOCKHOLDERS' EQUITY - ----------------------------- On July 10, 1998, UNUM's Board of Directors declared a fourteen and three quarters cents per share cash dividend. The dividend is payable on August 21, 1998, to common stockholders of record at the close of business on July 27, 1998. During the first six months of 1998, a fourteen and one quarter cents per share cash dividend was paid on February 20, 1998, and a fourteen and three quarters cents per share cash dividend was paid on May 15, 1998. Effective February 13, 1998, UNUM's Board of Directors approved an expansion of the Company's stock repurchase program by authorizing an additional 4.6 million shares. At June 30, 1998, approximately 5.3 million shares of common stock remained authorized for repurchase. Through the first six months of 1998, UNUM acquired approximately 1.2 million shares of its common stock in the open market at an aggregate cost of $63.1 million. NOTE 5. 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, 1998. In some instances, these proceedings include claims for punitive damages and similar types of relief in unspecified or substantial amounts, in addition to amounts for alleged contractual liability or other compensatory damages. 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. On December 29, 1993, UNUM filed a suit in the United States District Court for the District of Maine, seeking a federal income tax refund. The suit was based on a claim for a deduction in certain prior tax years, for $652 million in cash and stock distributed to policyholders in connection with the 1986 conversion of Union Mutual Life Insurance Company to a stock company. UNUM has fully paid, and provided for in prior years' financial statements, the tax at issue in this litigation. On May 23, 1996, the District Court issued its decision that the distribution in question was not a deductible expenditure. On December 2, 1997, the United States Court of Appeals affirmed the decision of the District Court denying UNUM's claim for refund. UNUM has filed a petition requesting that the United States Supreme Court review the decision of the United States Court of Appeals. NOTE 6. NEW ACCOUNTING PRONOUNCEMENTS - -------------------------------------- In June 1998, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standard ("FAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts, and for hedging activities. FAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative under FAS 133 depends on the intended use of the derivative and its hedging designation. UNUM is required to adopt FAS 133 effective January 1, 2000. UNUM has not yet determined the impact FAS 133 will have on its results of operations, liquidity or financial position. NOTE 7. SEGMENT INFORMATION - ---------------------------- Summarized financial information for the four business segments and Corporate is as follows:
Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- (Dollars in millions) 1998 1997 1998 1997 - ------------------------------------------------------------------------------ REVENUES Disability Insurance $ 667.6 $570.4 $1,307.4 $1,134.1 Special Risk Insurance 319.9 236.7 628.1 484.9 Colonial Products 154.3 148.0 309.1 290.6 Retirement Products 17.0 35.7 34.9 138.5 Corporate 0.8 1.6 1.6 3.4 - ------------------------------------------------------------------------------ Total revenues $1,159.6 $992.4 $2,281.1 $2,051.5 ============================================================================== INCOME (LOSS) BEFORE INCOME TAXES Disability Insurance $ 89.8 $ 75.5 $ 177.9 $ 151.1 Special Risk Insurance 40.2 28.4 76.4 55.8 Colonial Products 26.5 24.8 50.9 46.7 Retirement Products 0.3 10.2 0.2 69.9 Corporate (15.4) (12.5) (29.6) (25.4) - ------------------------------------------------------------------------------ Total income before income taxes 141.4 126.4 275.8 298.1 Income taxes 42.7 38.8 83.6 95.5 - ------------------------------------------------------------------------------ Net income $ 98.7 $ 87.6 $ 192.2 $ 202.6 ==============================================================================
June 30, December 31, (Dollars in millions) 1998 1997 - ------------------------------------------------------------------------------ IDENTIFIABLE ASSETS Disability Insurance $ 8,995.9 $ 8,546.6 Special Risk Insurance 2,232.6 1,821.6 Colonial Products 1,410.3 1,334.7 Retirement Products 1,000.7 1,115.9 Corporate 301.9 254.0 Individual Participating Life and Annuity 369.1 367.3 - ------------------------------------------------------------------------------ Total assets $14,310.5 $13,440.1 ==============================================================================
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, 1998, and the related consolidated statements of income and comprehensive income for the three month and six month periods ended June 30, 1998, and 1997, and consolidated statements of cash flows for the six month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our reviews 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 referred to above for them to be in conformity with generally accepted accounting principles. /s/ PRICEWATERHOUSECOOPERS LLP Portland, Maine July 22, 1998 UNUM Corporation and Subsidiaries Form 10-Q June 30, 1998 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 and the 1997 Form 10-K included in the 1997 Annual Report to stockholders of UNUM Corporation and subsidiaries ("UNUM"). CONSOLIDATED OVERVIEW Net income for the quarter ended June 30, 1998, was $98.7 million, or $0.70 per diluted share, as compared with net income of $87.6 million, or $0.62 per diluted share, for the same quarter in 1997. For the six months ended June 30, 1998, net income was $192.2 million, or $1.36 per diluted share, as compared with $202.6 million, or $1.41 per diluted share, for the same period in 1997. Total revenue for second quarter 1998 and 1997 was $1,159.6 million and $992.4 million, respectively. For the six months ended June 30, 1998, total revenue was $2,281.1 million compared with $2,051.5 million for the same period in 1997. A comparison of net income is impacted by the inclusion of realized investment gains or losses and a special item that occurred in both first and second quarter of 1997. This management's discussion and analysis discusses the results of operations on a pretax operating income basis, which is defined as income (loss) before income taxes exclusive of realized investment gains (losses) and special items. Special items are excluded from pretax operating income as management considers them to be unusual, and also believes a discussion of the results on a pretax operating income basis provides a better understanding of the results of operations. The following table summarizes pretax operating income (loss) for the four business segments and Corporate for the three months and six months ended June 30, 1998, and 1997, and is followed by a discussion of the 1997 special item and a reconciliation of income (loss) before income taxes to pretax operating income (loss).
Three Months Ended Six Months Ended June 30, June 30, --------------------- ---------------------- (Dollars in millions) 1998 1997 Change 1998 1997 Change - -------------------------------------------------------------------------------- SUMMARY OF PRETAX OPERATING INCOME (LOSS) Disability Insurance Segment $ 88.0 $ 77.8 13.1% $172.9 $154.6 11.8% Special Risk Insurance Segment 39.7 28.5 39.3 75.8 55.5 36.6 Colonial Products Segment 26.5 25.0 6.0 50.5 47.3 6.8 Retirement Products Segment 0.3 1.2 (75.0) 0.8 3.2 (75.0) Corporate (15.4) (12.5) 23.2 (29.6) (24.7) 19.8 - -------------------------------------------------------------------------------- Total pretax operating income $139.1 $120.0 15.9% $270.4 $235.9 14.6% ================================================================================
UNUM reported increased pretax operating income for the three months and six months ended June 30, 1998, as compared with the same periods in 1997. The increase was primarily attributable to improved pretax operating income for the Special Risk Insurance and Disability Insurance segments, largely the result of solid premium growth in each segment's major product lines. See the segment discussions that follow for a more detailed analysis of operating results. SPECIAL ITEM IN FIRST AND SECOND QUARTER 1997 - --------------------------------------------- UNUM Life Insurance Company of America and First UNUM Life Insurance Company closed the sale of their respective tax-sheltered annuity businesses to The Lincoln National Life Insurance Company and Lincoln Life & Annuity Company of New York, both subsidiaries of Lincoln National Corporation, on October 1, 1996. The sale resulted in a deferred pretax gain, of which $9.4 million and $67.4 million, respectively, were recognized in income during the three months and six months ended June 30, 1997. These gains were reflected as fees and other income in the Retirement Products segment. RECONCILIATION OF INCOME (LOSS) BEFORE INCOME TAXES TO PRETAX OPERATING INCOME (LOSS) - ------------------------------------------------------------------------------ The following table reconciles income (loss) before income taxes to pretax operating income (loss) for the four business segments and Corporate for the three months and six months ended June 30, 1998, and 1997: Disability Special Risk Colonial Retirement Consolidated (Dollars in millions) Insurance Insurance Products Products Corporate UNUM - -------------------------------------------------------------------------------------------------- Three Months Ended June 30, 1998: - --------------------------------- Income (loss) before income taxes $ 89.8 $40.2 $26.5 $ 0.3 $(15.4) $141.4 Exclude realized investment gains (1.8) (0.5) -- -- -- (2.3) - -------------------------------------------------------------------------------------------------- PRETAX OPERATING INCOME (LOSS) $ 88.0 $39.7 $26.5 $ 0.3 $(15.4) $139.1 ================================================================================================== Three Months Ended June 30, 1997: - --------------------------------- Income (loss) before income taxes $ 75.5 $28.4 $24.8 $10.2 $(12.5) $126.4 Exclude realized investment losses 2.3 0.1 0.2 0.4 -- 3.0 - -------------------------------------------------------------------------------------------------- 77.8 28.5 25.0 10.6 (12.5) 129.4 Special item: TSA deferred gain recognition -- -- -- (9.4) -- (9.4) - -------------------------------------------------------------------------------------------------- PRETAX OPERATING INCOME (LOSS) $ 77.8 $28.5 $25.0 $ 1.2 $(12.5) $120.0 ================================================================================================== Six Months Ended June 30, 1998: - ------------------------------- Income (loss) before income taxes $177.9 $76.4 $50.9 $ 0.2 $(29.6) $275.8 Exclude realized investment (gains) losses (5.0) (0.6) (0.4) 0.6 -- (5.4) - -------------------------------------------------------------------------------------------------- PRETAX OPERATING INCOME (LOSS) $172.9 $75.8 $50.5 $ 0.8 $(29.6) $270.4 ================================================================================================== Six Months Ended June 30, 1997: - ------------------------------- Income (loss) before income taxes $151.1 $55.8 $46.7 $69.9 $(25.4) $298.1 Exclude realized investment (gains) losses 3.5 (0.3) 0.6 0.7 0.7 5.2 - -------------------------------------------------------------------------------------------------- 154.6 55.5 47.3 70.6 (24.7) 303.3 Special item: TSA deferred gain recognition -- -- -- (67.4) -- (67.4) - -------------------------------------------------------------------------------------------------- PRETAX OPERATING INCOME (LOSS) $154.6 $55.5 $47.3 $ 3.2 $(24.7) $235.9 ==================================================================================================
PREMIUMS: - --------- Premiums for the three months and six months ended June 30, 1998, and 1997, are summarized by segment in the following table.
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ----------------------------- (Dollars in millions) 1998 1997 Change 1998 1997 Change - -------------------------------------------------------------------------------- Disability Insurance Group Long Term Disability $334.5 $295.2 13.3% $ 676.9 $ 586.6 15.4% Group Short Term Disability 66.8 49.4 35.2 129.8 96.8 34.1 UNUM Limited 39.5 36.9 7.1 78.4 73.6 6.5 Individual Products 30.8 23.5 31.1 60.2 45.0 33.8 Other Disability Insurance 62.7 35.3 77.6 95.7 71.6 33.7 - -------------------------------------------------------------------------------- Total 534.3 440.3 21.3 1,041.0 873.6 19.2 Special Risk Insurance Group Life 159.2 126.4 25.9 313.6 252.1 24.4 Other Special Risk Products 129.7 85.6 51.5 248.5 177.6 39.9 - -------------------------------------------------------------------------------- Total 288.9 212.0 36.3 562.1 429.7 30.8 Colonial Products 138.0 132.7 4.0 275.5 261.4 5.4 Retirement Products 1.0 1.7 (41.2) 2.0 4.7 (57.4) - -------------------------------------------------------------------------------- Total premiums $962.2 $786.7 22.3% $1,880.6 $1,569.4 19.8% ================================================================================
A new product grouping, Individual Products, as shown in the above table, was reported in the Disability Insurance segment effective June 30, 1998, and prior year amounts have been reclassified for comparative purposes. Those products reported as Individual Products include long term care, guaranteed renewable individual disability (Lifelong Disability Protection) and certain other individual disability products. Additionally, the traditional, fixed price, non-cancellable individual disability ("non- cancellable ID") business is now reported in the Other Disability Insurance line. Claim block acquisitions, which generated one-time premium in the Disability Insurance and Special Risk Insurance segments for the periods presented, are summarized in the table below. Management intends to pursue additional claim block acquisitions in the future. Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- (Dollars in millions) 1998 1997 1998 1997 - ----------------------------------------------------------------------- Disability Insurance Group Long Term Disability $ 0.6 $2.9 $13.4 $3.8 UNUM Limited -- 0.3 0.2 1.2 Disability Reinsurance Operations 29.8 -- 29.8 -- Special Risk Insurance Reinsurance Operations 5.1 -- 5.1 -- - ----------------------------------------------------------------------- Total $35.5 $3.2 $48.5 $5.0 ======================================================================= PRETAX OPERATING INCOME (LOSS) BY SEGMENT: - ------------------------------------------ The following sections discuss the results of the four business segments and Corporate for the three months and six months ended June 30, 1998, and 1997. Within these business segment discussions, reference is made to pretax operating income (loss), which excludes realized investment gains (losses) and the special item previously defined. DISABILITY INSURANCE SEGMENT The Disability Insurance segment reported increased pretax operating income for the three months and six months ended June 30, 1998, as compared with the same periods in 1997. The increase was primarily attributable to solid premium growth in group long term disability ("group LTD") and group short term disability ("group STD"), favorable expense growth for the segment and a lower benefit ratio for the non-cancellable ID business. Partially offsetting the increase were higher benefit ratios in several other product lines and reduced fees and other income for the segment. Pretax operating income for group LTD increased for the three months and six months ended June 30, 1998, as compared with the same periods in 1997, primarily driven by solid premium growth and favorable expense growth. The premium growth improvement was primarily the result of favorable persistency trends, reflecting positive results from customer service actions, and the impact from strong sales in recent quarters, as compared with the same periods in 1997. Partially offsetting the increase was a higher benefit ratio, largely the result of increased levels of claims incidence and an increase in the average size of claims, compared with the same periods in 1997. Management continues to monitor claim trends in group LTD and responds to changes by periodically adjusting prices, refining underwriting guidelines, changing product features and strengthening risk management policies and procedures. For the three months and six months ended June 30, 1998, pretax operating income for group STD increased as compared with the same periods in 1997. Additional premium growth resulting from record sales and improved persistency continues to be the major contributor of the improved pretax operating income, as compared with the same periods in 1997. These strong sales levels reflect management's continuing efforts to cross-sell group STD products with other group products sold by UNUM, as well as an increase in large case sales during second quarter 1998. UNUM Limited's pretax operating income remained flat for the three months ended June 30, 1998, and declined for the six months ended June 30, 1998, as compared with the same periods in 1997. The decline was primarily due to unfavorable claims experience largely resulting from a longer duration of claims. Favorable expense growth partially offset this decline. The non-cancellable ID business contributed favorably to the Disability Insurance segment's pretax operating earnings for the three months and six months ended June 30, 1998. The improvement was primarily due to favorable claims experience when compared with the same periods in 1997, during which the non-cancellable block of business incurred higher levels of claims incidence and increased severity. This favorable factor was partially offset by a decline in the operating results of the reinsured block of the non-cancellable ID business reported in fees and other income. SPECIAL RISK INSURANCE SEGMENT The Special Risk Insurance segment reported increased pretax operating income for the second quarter 1998, as compared with the same quarter in 1997. Continuing premium growth across most major product lines, resulting from strong sales and favorable persistency, and a lower benefit ratio in the group life product were the primary forces behind the improvement. In addition, the increase was attributable to lower expense ratios in most product lines, additional fee income from the reinsurance underwriting management operations, and increased investment income for the segment. Favorable factors were partially offset by increased benefit ratios in several other product lines. During the six months ended June 30, 1998, pretax operating income for the segment was favorably affected by premium growth for the segment, increased income from the reinsurance underwriting management operations and additional investment income across most product lines, as compared with the same period in 1997. Also contributing to the favorable results were lower benefit and expense ratios in group life, partially offset by increased benefit ratios in certain other product lines. COLONIAL PRODUCTS SEGMENT During second quarter 1998, pretax operating income increased in the Colonial Products segment as compared with second quarter of 1997. The primary contributors to the increase were a lower benefit ratio in the accident, sickness and disability product lines and increased investment income across all products. These favorable factors were partially offset by higher expense ratios for the segment, a higher benefit ratio in the cancer product line and an increase in interest credited. For the six months ended June 30, 1998, the Colonial Products segment's pretax operating income was favorably affected by lower benefit ratios across most product lines and increased investment income, as compared with the same period in 1997. A higher benefit ratio in the cancer product line and increased interest credited partially offset these favorable items. During the three month and six month periods ended June 30, 1998, sales in this segment declined in comparison with 1997, which may negatively affect future premium growth. In its efforts to improve sales and premium, Colonial's management continues to focus on rebuilding the distribution system through recruiting, training and strengthening sales management. RETIREMENT PRODUCTS SEGMENT The Retirement Products segment includes products no longer actively marketed by UNUM. For the three months and six months ended June 30, 1998, the Retirement Products segment reported decreased pretax operating income as compared with the same periods in 1997. UNUM expects these blocks of business to continue to decline in size over several years and experience earnings volatility, reflecting their run-off nature. CORPORATE For the three month and six month periods ended June 30, 1998, as compared with the same periods in 1997, the increased pretax operating loss in Corporate was due primarily to higher interest expense and decreased investment income. LIQUIDITY AND CAPITAL RESOURCES UNUM's businesses produce positive cash flows which are invested primarily in intermediate term, fixed maturity investments intended to reflect the anticipated cash obligations of insurance benefit payments and insurance contract maturities and to optimize investment returns at appropriate risk levels. Unexpected cash requirements and liquidity needs can be met through UNUM's investment portfolio of fixed maturities, equity securities, cash and short-term investments. At June 30, 1998, UNUM had $174.0 million and $543.8 million of short-term and long-term debt, respectively. Approximately $378 million was available for additional financing under the existing revolving credit facility and $450 million of investment grade debt instruments was available for issuance under the shelf registration. Contingent upon market conditions and corporate needs, management may issue additional debt or refinance short-term notes payable for longer term securities. In the normal course of business, UNUM enters into letters of credit, primarily to satisfy capital requirements related to certain subsidiary transactions. At June 30, 1998, UNUM had outstanding letters of credit of $150.2 million. Effective February 13, 1998, UNUM's Board of Directors approved an expansion of the Company's stock repurchase program by authorizing an additional 4.6 million shares. At June 30, 1998, approximately 5.3 million shares of common stock remained authorized for repurchase. Through the first six months of 1998, UNUM acquired approximately 1.2 million shares of its common stock in the open market at an aggregate cost of $63.1 million. YEAR 2000 ISSUE The year 2000 issue relates to whether computer systems will properly recognize date-sensitive information when the year changes to 2000. UNUM has determined that it is required to modify or replace significant portions of its software so its computer systems will properly function using dates beyond December 31, 1999. Management is utilizing both internal and external resources to reprogram, or replace, and test the software for year 2000 modifications and believes it will have its computer systems compliant by year 2000. The financial impact of rectifying UNUM's internal computer systems has not had, and is not anticipated to have, a material adverse impact on UNUM's results of operations, liquidity or capital resources. The costs of the project and the date on which UNUM plans to complete year 2000 modifications are based on management's best estimates, derived using numerous assumptions about future events. In addition, UNUM is assessing its critical external dependencies, including suppliers, business partners and customers to determine the extent to which it is vulnerable to the possibility of third parties' failing to remediate their own year 2000 issues. There can be no guarantee that the computer systems of third parties will be year 2000 compliant. Risk avoidance and contingency plans are therefore being developed in order to attempt to mitigate the extent of this potential impact. Failure by third parties to successfully address year 2000 issues could have a material adverse effect on UNUM's results of operations, liquidity or capital resources; however, the potential impact and related costs, if any, are not known at this time. LITIGATION Refer to Note 5 "Litigation" for information. NEW ACCOUNTING PRONOUNCEMENTS Refer to Note 6 "New Accounting Pronouncements" for information. UNUM Corporation and Subsidiaries Form 10-Q June 30, 1998 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Stockholders of UNUM Corporation held on May 8, 1998, the following proposals were approved: Votes Votes Votes Withheld/ For Against Abstentions ----------- --------- ----------- 1. Ratification of the appointment of 117,672,772 88,782 197,714 PricewaterhouseCoopers LLP, formerly Coopers & Lybrand L.L.P., as the Corporation's independent auditors for the year 1998. UNUM Corporation and Subsidiaries Form 10-Q June 30, 1998 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Page (a) Exhibit Index 12. Statement re: Computation of ratio of earnings to fixed charges. 19 15. Letter re: Unaudited interim financial information. 20 27. Financial Data Schedules (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant with the United States Securities and Exchange Commission during the quarter ended June 30, 1998. UNUM Corporation and Subsidiaries Form 10-Q June 30, 1998 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 4, 1998 /s/ ROBERT E. BROATCH -------------------- ----------------------------- Robert E. Broatch Senior Vice President and Chief Financial Officer Date August 4, 1998 /s/ JOHN M. LANG, JR. -------------------- ----------------------------- John M. Lang, Jr. Vice President and Corporate Controller EX-12 2 UNUM Corporation and Subsidiaries Form 10-Q June 30, 1998 EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- (Unaudited - Dollars in millions) 1998 1997 1998 1997 - -------------------------------------------------------------------------------- Earnings: Income before income taxes $141.4 $126.4 $275.8 $298.1 Add: Fixed charges 14.7 13.3 29.0 26.0 - -------------------------------------------------------------------------------- Earnings as adjusted $156.1 $139.7 $304.8 $324.1 ================================================================================ Fixed charges: Interest expense $ 12.3 $ 10.6 $ 24.0 $ 20.8 Interest portion of rent expense 2.4 2.7 5.0 5.2 - -------------------------------------------------------------------------------- Total fixed charges $ 14.7 $ 13.3 $ 29.0 $ 26.0 ================================================================================ Ratio of earnings to fixed charges 10.6 10.5 10.5 12.5 ================================================================================
For purposes of computing the ratio of earnings to fixed charges, earnings as adjusted consist of income before income taxes and fixed charges. Fixed charges consist of interest expense and the estimated interest portion of rent expense. EX-15 3 UNUM Corporation and Subsidiaries Form 10-Q June 30, 1998 EXHIBIT 15 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 We are aware that our report dated July 22, 1998, on our review of interim financial information of UNUM Corporation for the three month and six month periods ended June 30, 1998, and 1997, and included in the Company's quarterly report on Form 10-Q for the quarters then ended is incorporated by reference in the following Registration Statements: o Form S-8 No. 33-31270 pertaining to the UNUM Employees 401(k) Plan (formerly the UNUM Employees Retirement Savings Plan and Trust) o Form S-8 No. 33-19090 pertaining to the 1987 Executive Stock Option Plan o Form S-8 No. 33-38225 pertaining to the 1990 Long-Term Stock Incentive Plan o Form S-8 No. 33-52741 pertaining to the 1990 Long-Term Stock Incentive Plan (additional shares) o Form S-3 No. 33-36873 pertaining to the 1990 Debt Securities o Form S-3 No. 33-69132 pertaining to the 1993 Debt Securities, Preferred Stock, Common Stock and Warrants o Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 No. 33-55870 pertaining to the issuance of UNUM Corporation shares upon the exercise of stock options granted under the Colonial plans as defined therein o Form S-3 No. 333-08187 pertaining to the 1996 Debt Securities, Preferred Stock, Common Stock and Warrants o Form S-8 No. 333-41917 pertaining to the 1998 Goals Stock Option Plan o Form S-8 No. 333-41897 pertaining to the 1996 Long-Term Stock Incentive Plan 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/ PRICEWATERHOUSECOOPERS LLP EX-27 4
7 This schedule contains summary financial information extracted from the quarterly consolidated financial statements of UNUM Corporation and subsidiaries and is qualified in its entirety by reference to such contained in UNUM Corporation's SEC Form 10-Q for the period ended June 30, 1998. 1,000 6-MOS DEC-31-1998 JUN-30-1998 7,576,300 0 0 34,800 1,128,400 221,700 9,249,000 52,800 1,640,000 1,163,700 14,310,500 8,666,800 0 0 923,700 717,800 0 0 20,000 2,564,300 14,310,500 1,880,600 328,500 5,400 66,600 1,389,100 (132,600) 0 275,800 83,600 192,200 0 0 0 192,200 1.39 1.36 0 0 0 0 0 0 0 This item contains the amounts of deferred and amortized policy acquisition costs for the period presented.
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