-----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, ETi8d1LkbTwyOD6D7+hB640zK9L/9uZ0clGtEe7Kk2Aza5ys0qticuVy+WYszWgs 7WC4ClbPMVnkkUgY+rlOtg== 0000795581-99-000007.txt : 19990603 0000795581-99-000007.hdr.sgml : 19990603 ACCESSION NUMBER: 0000795581-99-000007 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990602 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/A SEC ACT: SEC FILE NUMBER: 001-09254 FILM NUMBER: 99638814 BUSINESS ADDRESS: STREET 1: 2211 CONGRESS ST P612 CITY: PORTLAND STATE: ME ZIP: 04122 BUSINESS PHONE: 2077702211 MAIL ADDRESS: STREET 1: 2211 CONGRESS STREET CITY: PORTLAND STATE: ME ZIP: 04122 10-Q/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 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 MARCH 31, 1999 COMMON STOCK, $0.10 PAR VALUE 139,059,749 SHARES Amendment No. 1 The undersigned registrant hereby amends the following items, financial statements, exhibits or other portions of its Form 10-Q for the quarterly period ended March 31, 1999: Additional disclosures relating to the following "Notes to Consolidated Financial Statements (Unaudited)" in Item 1 "Financial Statements" have been provided: - the claim operations integration activities and the description of the discount rate used to calculate reserves in Note 2 "Reserves" and - the proposed merger with Provident Companies, Inc. in Note 9 "Proposed Merger with Provident and Pro Forma Combined Condensed Financial Statements." Also, additional disclosures in the Disability Insurance segment section to discuss the claim operations integration activities and additional financial information in the chart preceding each segment discussion have been provided in Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations." Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. Date June 1, 1999 /s/ ROBERT E. BROATCH --------------------- ------------------------- Robert E. Broatch Senior Vice President and Chief Financial Officer UNUM CORPORATION AND SUBSIDIARIES FORM 10-Q/A INDEX Page Part I. Financial Information Item 1. Financial Statements Consolidated Statements of Income - Three Months Ended March 31, 1999, and 1998 (Unaudited) 3 Consolidated Balance Sheets as of March 31, 1999, (Unaudited) and December 31, 1998 4 Consolidated Statements of Cash Flows - Three Months Ended March 31, 1999, and 1998 (Unaudited) 5 Consolidated Statements of Comprehensive Income (Loss) - Three Months Ended March 31, 1999, and 1998 (Unaudited) 6 Notes to Consolidated Financial Statements (Unaudited) 7 Independent Accountant's Review Report 20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 31 Signatures 32 UNUM CORPORATION AND SUBSIDIARIES FORM 10-Q/A 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 March 31, ------------------ (Unaudited - Dollars in millions, except per common share data) 1999 1998 - ---------------------------------------------------------------------------- REVENUES Premiums $1,085.1 $ 918.4 Investment income 172.8 163.3 Net realized investment gains 3.2 3.1 Fees and other income 42.3 36.7 - ---------------------------------------------------------------------------- Total revenues 1,303.4 1,121.5 BENEFITS AND EXPENSES Benefits to policyholders 881.2 679.1 Interest credited 10.3 12.1 Salaries and related expenses 142.0 134.1 Other operating expenses 138.2 87.3 Commissions 162.0 142.7 Increase in deferred policy acquisition costs (95.6) (79.9) Interest expense 16.8 11.7 - ---------------------------------------------------------------------------- Total benefits and expenses 1,254.9 987.1 - ---------------------------------------------------------------------------- Income before income taxes 48.5 134.4 INCOME TAXES Current (3.5) 12.5 Deferred 36.5 28.4 - ---------------------------------------------------------------------------- Total income taxes 33.0 40.9 - ---------------------------------------------------------------------------- NET INCOME $ 15.5 $ 93.5 ============================================================================ NET INCOME PER COMMON SHARE: Basic $ 0.11 $ 0.68 Diluted $ 0.11 $ 0.66 ============================================================================ Dividends declared per share $ 0.295 $ 0.290 ============================================================================ See notes to consolidated financial statements. UNUM CORPORATION AND SUBSIDIARIES FORM 10-Q/A 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 March 31, 1999 December 31, (Dollars in millions) (Unaudited) 1998 - ----------------------------------------------------------------------------- ASSETS Investments Fixed maturities available for sale-at fair value (amortized cost: 1999-$7,563.6; 1998-$7,350.0) $ 7,972.0 $ 7,896.9 Equity securities available for sale-at fair value (cost: 1999-$18.9; 1998-$21.3) 28.8 31.0 Mortgage loans 1,273.3 1,303.4 Real estate, net 140.0 250.6 Policy loans 137.1 137.6 Other long-term investments 2.1 2.0 Short-term investments 271.6 216.2 - ----------------------------------------------------------------------------- Total investments 9,824.9 9,837.7 Cash 77.0 80.5 Accrued investment income 154.4 167.4 Premiums due 636.4 518.1 Deferred policy acquisition costs 1,357.3 1,266.0 Property and equipment, net 238.8 237.9 Reinsurance receivables 1,806.5 1,770.0 Deposit assets 665.7 729.7 Other assets 584.9 540.3 Separate account assets 35.3 35.3 - ----------------------------------------------------------------------------- Total assets $15,381.2 $15,182.9 ============================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Future policy benefits $ 2,491.9 $ 2,360.2 Unpaid claims and claim expenses 6,958.0 6,841.2 Other policyholder funds 871.6 875.4 Income taxes Current 5.9 47.3 Deferred 612.8 625.8 Notes payable 961.1 881.8 Other liabilities 777.8 778.2 Separate account liabilities 35.3 35.3 - ----------------------------------------------------------------------------- Total liabilities 12,714.4 12,445.2 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 1,153.5 1,151.2 Retained earnings 2,439.9 2,444.9 Accumulated other comprehensive income: Unrealized gains, net 176.3 248.4 Unrealized foreign currency translation adjustment (25.7) (19.4) - ----------------------------------------------------------------------------- Total accumulated other comprehensive income 150.6 229.0 - ----------------------------------------------------------------------------- 3,764.0 3,845.1 Less: Treasury stock, at cost (1999-60,916,167 shares; 1998-61,266,501 shares) 1,080.1 1,085.9 Restricted stock deferred compensation 17.1 21.5 - ----------------------------------------------------------------------------- Total stockholders' equity 2,666.8 2,737.7 - ----------------------------------------------------------------------------- Total liabilities and stockholders' equity $15,381.2 $15,182.9 ============================================================================= See notes to consolidated financial statements. UNUM CORPORATION AND SUBSIDIARIES FORM 10-Q/A 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 Three Months Ended March 31, ------------------ (Unaudited - Dollars in millions) 1999 1998 - ---------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 15.5 $ 93.5 Adjustments to reconcile net income to net cash provided by operating activities: Increase in future policy benefits and unpaid claims and claim expenses 374.9 263.9 Increase in amounts receivable under reinsurance agreements (38.2) (51.0) Increase in premiums due (118.8) (110.3) Increase (decrease) in income tax liability (10.3) 38.5 Increase in deferred policy acquisition costs (92.4) (80.1) Other 52.0 25.9 - ---------------------------------------------------------------------------- Net cash provided by operating activities 182.7 180.4 - ---------------------------------------------------------------------------- INVESTING ACTIVITIES: Maturities of fixed maturities available for sale 192.5 133.5 Sales of fixed maturities available for sale 355.0 118.8 Sales and maturities of other investments 57.7 28.3 Purchases of fixed maturities available for sale (774.0) (383.8) Purchases of other investments (17.6) (16.8) Net increase in short-term investments (56.0) (12.5) Net additions to property and equipment (6.5) (25.7) - ---------------------------------------------------------------------------- Net cash used in investing activities (248.9) (158.2) - ---------------------------------------------------------------------------- FINANCING ACTIVITIES: Deposits and interest credited to investment contracts 35.5 39.4 Maturities and withdrawals from investment contracts (37.5) (72.1) Dividends to stockholders (20.5) (19.7) Treasury stock acquired -- (36.7) Proceeds from notes payable -- 49.7 Net increase in short-term debt 79.0 5.8 Other 6.8 10.7 - ---------------------------------------------------------------------------- Net cash provided by (used in) financing activities 63.3 (22.9) - ---------------------------------------------------------------------------- Effect of exchange rate changes on cash (0.6) (0.1) - ---------------------------------------------------------------------------- Net decrease in cash (3.5) (0.8) Cash at beginning of year 80.5 56.8 - ---------------------------------------------------------------------------- Cash at end of period $ 77.0 $ 56.0 ============================================================================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid (received) during the period for: Income taxes $ (10.5) $(11.2) Interest $ 7.5 $ 7.7 ============================================================================ See notes to consolidated financial statements. UNUM CORPORATION AND SUBSIDIARIES FORM 10-Q/A 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 (L O S S) Three Months Ended March 31, ---------------- (Unaudited - Dollars in millions) 1999 1998 - ----------------------------------------------------------------------------- Net income $ 15.5 $ 93.5 Other comprehensive loss: Unrealized holding losses arising during the period, net (69.9) (16.2) Reclassification adjustment for realized gains included in net income, net (2.2) (1.8) - ----------------------------------------------------------------------------- Changes in unrealized losses, net (72.1) (18.0) Foreign currency translation adjustments (6.3) 3.8 - ----------------------------------------------------------------------------- Total other comprehensive loss (78.4) (14.2) - ----------------------------------------------------------------------------- Comprehensive income (loss) $ (62.9) $ 79.3 ============================================================================= Supplemental disclosures of comprehensive income (loss) information: Tax benefit related to unrealized holding losses $ 40.1 $ 8.4 Tax expense related to reclassification adjustment for realized gains $ (1.2) $ (1.0) ============================================================================= See notes to consolidated financial statements. UNUM Corporation and Subsidiaries Form 10-Q/A Notes to Consolidated Financial Statements (Unaudited) March 31, 1999 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 period ended March 31, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. This report should be read in conjunction with the 1998 Form 10-K (as amended) of UNUM Corporation and subsidiaries ("UNUM"). NOTE 2. RESERVES - ----------------- Claim Operations Integration Activites As noted in Note 4 "Reserves" in UNUM's Form 10-K (as amended), it is UNUM's policy to estimate the ultimate cost of settling claims in each reporting period based upon the information available to management at the time. Actual claim resolution results are monitored and compared to those anticipated in claim reserve assumptions. Claim resolution rate assumptions are based on UNUM's experience as well as company actions, which would have a material impact on claim resolutions. Company actions for which plans have been established and committed to by management are factors, which would modify past experience in establishing claims reserves. Adjustments to the reserve assumptions will be made if expectations change. During the fourth quarter of 1998, UNUM recorded a $59.4 million increase in the reserve for group and individual disability claims incurred as of December 31, 1998. Incurred claims included claims known as of that date and an estimate of those claims that had been incurred but not yet reported. Claims that had been incurred but were not yet reported are considered liabilities of UNUM. These claims are expected to be reported during 1999 and will be affected by the claim operations integration activities. The $59.4 million claim reserve increase represents the estimated value of cash payments to be made to these claimants as a result of the claim operations integration activities. The cash payments will be paid over the life of the claims which is expected to average approximately six years. Management believed the reserve adjustment was required based upon the integration plan it had in place and to which it had committed, and based upon its ability to develop a reasonable estimate of the financial impact of the expected disruption to the claims management process. According to the integration plan, the planning, training, and implementation of the new claims management processes are expected to be substantially completed by the end of 1999. Claims management is an integral part of the disability operations. Disruptions in that process can create material, short-term increases in claim costs. The proposed merger of UNUM and Provident is expected to have a near term adverse impact on the efficiency and effectiveness of UNUM's claims management function resulting in some delay in claim resolutions and additional claim payments to policyholders. Claim personnel will be distracted from normal claim management activities as a result of planning and implementing the integration of the two companies' claims organizations. In addition, employee turnover and additional training will further reduce resources and productivity. An important part of the claims management process is assisting disabled policyholders with rehabilitation efforts. This complex activity is important to the policyholders because it can assist them in returning to productive work and lifestyles more quickly, and it is important to UNUM because it shortens the duration of claim payments and thereby reduces the ultimate cost of settling claims. Immediately following the announcement of the merger and continuing into December of 1998, senior management of UNUM and Provident worked to develop the strategic direction of the UNUMProvident claims organization. As part of the strategic direction, senior management committed claims management personnel to be involved developing the detailed integration plans and implementing the plans during 1999. For the first six months of 1999, the plan anticipated that 80 claims managers and benefits specialists will be involved up to 30% of their time developing the detailed integration plans. Once the merger is consummated, which was expected to be June 30, 1999, all claims personnel are expected to be involved in the process of implementing the new work processes and will require training. The implementation and training effort was estimated to require one month of productive time from each of the claims staff between June 30, 1999 and December 31, 1999. Management believes that the anticipated twelve month period is adequate to execute the integration plan. Knowing that those involved in the claim operations integration activities would not be available full time to perform their normal claims management functions, management deemed it necessary to anticipate this effect on the claim reserves at December 31, 1998. The reserving process begins with the assumptions indicated by past experience and modifies these assumptions for current trends and other known factors. UNUM anticipated the merger related developments discussed above would generate a significant change in claims department productivity, reducing claim resolution rates, a key assumption when establishing reserves. Management developed actions to mitigate the impact of the merger on claims department productivity including the hiring of additional claim staff and restricting early retirement elections by claims personnel. Where feasible, management also planned to obtain additional claims management resources through outsourcing. All such costs will be expensed in the period incurred and management does not expect these additional costs to be material in relation to results of operations. Management reviewed its integration plans and the actions intended to mitigate the impact of the integration with claim managers to determine the extent of disruption in normal activities. Considering all of the above, the revised claim resolution rates, as a percentage of the original assumptions (i.e., excluding the effect of the claim operations integration activities), were 90% for the first and second quarters of 1999, 81% for the third quarter, and 85% for the fourth quarter of 1999. The revised claim resolution rates for the third and fourth quarters are lower than the first and second quarters because all claims staff are expected to be involved in the implementation and training efforts. The integration activities as indicated in the action plans were expected to be completed by December 31, 1999. In order to evaluate the financial effect of merger-related integration activities, UNUM projected the ultimate costs of settling all claims incurred as of December 31, 1998 using the revised claim resolution rates. This projection was compared to the projection excluding the adjustment to the claim resolution rates to obtain the amount of the charge. UNUM reviewed its estimates of the financial impact of the claims operations integration activities with its actuaries and independent auditors. Claim reserves at December 31, 1998 include $59.4 million as the estimated value of projected additional claim payments resulting from these claims operations integration activities. This reserve increase was reflected as a $49.0 million increase in benefits to policyholders and a $10.4 million reduction in fee income in the Disability Insurance segment. The reduction in fee income represents increased reserves for the United States non-cancellable individual disability business that is reinsured with Centre Life Reinsurance Limited ("Centre Re"). See Note 6 "Reinsurance" in UNUM's Form 10-K (as amended) for further information on the reinsurance transaction. The effect of lower claims resolutions is expected to emerge quarterly in the amount of $14.1 million for each of the first two quarters of 1999, $18.0 million in the third quarter, and $13.2 million in the fourth quarter of 1999. If claims resolutions emerge as expected, there will be no impact to income from operations during 1999. Any variance from the assumptions noted above will be reflected in income in the current period. The adverse impact of the claim operations integation activities on resolution rates is not expected to continue beyond 1999. UNUM will report in its subsequent filings and will discuss within the Disability Insurance segment section of management's discussion and analysis, the status of the claim operations integration activities, the impact of these activites and any material variances from the revised estimate of claim resolution rates. As part of the periodic review of claim reserves, management will review the status and execution of the claim operations integration plan with the claims management on a quarterly basis. The review will consider claim operations integration activities planned for future periods and evaluate whether the future planned activities will result in claim resolution rates consistent with those considered in the reserve established at December 31, 1998. The claim reserves may require further increases or decreases as facts concerning the merger and its effect on benefits to policyholders emerges. Among the factors that could affect the reserve assumptions is the possible delay in the consummation of the merger, thus delaying implementation of integration of the companies' claim management operations. Other factors include the level of employee turnover, timing and complexity of computer system conversions, and the timing and level of training and integration activities of the claim management staff relative to the original integration plan of UNUM. During first quarter 1999, the claim operations integration activites progressed as assumed. At December 31, 1998, management assumed the revised claim resolution rates for first quarter 1999 to be 90% of assumptions, excluding the impact of the claim operations integration activities. The actual experience for the first quarter 1999 was 88% as compared with the 90% revised assumption, and the $59.4 million additional 1998 claims reserve adjustment was reduced by $14.1 million. First quarter 1999 pretax operating income was negatively impacted by $3.1 million representing the difference between the $14.1 million effect anticipated in the $59.4 million additional claims reserve adjustment and the effect of lower claim resolutions experienced during first quarter 1999. The liability remaining for claim operations integration activities at March 31, 1999, was $45.3 million. Management expects the remaining claim operations integration activities to impact claim reserves as anticipated at December 31, 1998, and its estimate of the reserve required for the remainder of 1999 is unchanged from its original estimate made at year end 1998. Management will continue to evaluate the impacts of the proposed merger with Provident on disability claims experience and the assumptions related to expected disability claims duration. NOTE 3. STOCKHOLDERS' EQUITY - ----------------------------- Dividends UNUM's Board of Directors declared a fourteen and three quarters cents per share cash dividend on January 5, 1999, which was paid February 19, 1999. On March 12, 1999, UNUM's Board of Directors declared a fourteen and three quarters cents per share cash dividend. The dividend is payable on May 21, 1999, to common stockholders of record at the close of business on April 26, 1999. Earnings Per Share The number of shares used to calculate earnings per share ("EPS") was as follows: Three Months Ended March 31, ------------------ (Shares in thousands) 1999 1998 - ----------------------------------------------------------------------------- Weighted average shares outstanding for basic EPS 138,900 138,113 Effect of dilutive securities 2,843 3,250 - ----------------------------------------------------------------------------- Weighted average shares outstanding for diluted EPS 141,743 141,363 ============================================================================= The following number of outstanding options to purchase shares were excluded from the diluted weighted average share calculation as the options' exercise prices were greater than the average market price. Three Months Ended March 31, ------------------ (Options in thousands) 1999 1998 - ----------------------------------------------------------------------------- Antidilutive options outstanding 180 1,649 ============================================================================= NOTE 4. 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 March 31, 1999. 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. NOTE 5. NOTES PAYABLE - ---------------------- On December 4, 1997, UNUM borrowed [British pound] 100 million ($168.3 million) through a private placement with an investor in the United Kingdom. Under the terms of the agreement, the investor exercised its right to redeem the private placement on April 13, 1999, at par value. UNUM issued commercial paper to meet its immediate needs and is currently evaluating various financing alternatives to replace this financing. NOTE 6. REINSURANCE BUSINESSES - ------------------------------- During first quarter 1999, UNUM recognized a pretax charge relating to reinsurance businesses of $101.1 million. The charge consisted of three components: UNUM's Risk Participation ----------------------------- Components Total Pretax Management D&H UNUM (in millions) Charge Company Underwriters America - ------------------------------------------------------------------------------- Lloyd's of London $ 45.5 $ 1.5 $44.0 $ -- Reinsurance facilities 28.6 -- -- 28.6 Goodwill impairment 27.0 27.0 -- -- - ------------------------------------------------------------------------------- Total $101.1 $28.5 $44.0 $28.6 =============================================================================== Lloyd's of London Estimated Losses - UNUM follows the periodic method of accounting for its Lloyd's of London ("Lloyd's") syndicate participation, which requires the premiums be recognized as revenue over the policy term, and claims, including the estimate of claims incurred but not reported, to be recognized as incurred. During the first quarter of 1999, UNUM received more information about the Lloyd's market from various sources, including managing agents/underwriters syndicate reports and published information from Moody's Investors Service. The information received indicated significant deterioration in the loss experience of open years of account primarily related to significant losses in certain syndicates (space and aviation, accident & health and other non-marine classes of business) and continued pressure on the pricing of insurance coverage provided by the Lloyd's market. In addition, UNUM discussed projected results of the Lloyd's market with the underwriters of the syndicates that UNUM manages through a subsidiary, which also indicated expected future deterioration of the open years of account. Using this information and recent experience with prior revisions of estimated losses in this business, UNUM performed a review of its claim reserve liabilities related to its open years of account. The review of estimates related to open years of account was performed based on UNUM's policy of periodically reviewing these estimates as information is received from the Lloyd's syndicates. The review resulted in revised best etimates of the expected ultimate profit (loss) for each open year of account, which were significantly below the levels estimated in 1998. The resulting charge to earnings in the amount of $44.0 million was reflected in income currently for the open years of account 1996 through 1999. In addition to the risk participation charge, UNUM recorded a charge of $1.5 million, which represented the reduction of previously recognized profit commissions related to the Lloyd's management company operations. Reinsurance facility losses - As a result of the review performed on the Lloyd's syndicates discussed above and other third party publicized reinsurance exposures, UNUM undertook a periodic review of certain other reinsurance facilities related to new information regarding the ultimate cost of settling claims. The reinsurance pool business consists of more than 20 different pool facilities, the majority of which are managed by UNUM's Duncanson & Holt, Inc. affiliate and a few which are managed by third parties. UNUM's policy is to periodically review reserve assumptions that support the determination of the ultimate cost of settling claims for certain reinsurance pools. During first quarter 1999, UNUM reviewed the actuarial assumptions used to set reserves for certain reinsurance facilities based on the most current information available from the reinsurance pool managers. UNUM also received new information pertaining to a reinsurance pool managed by a third party that indicated a reserve increase was required. UNUM relied primarily on the third party pool manager judgement and recorded its portion of the reserve as reflected in the reinsurance pool statement from the third party pool manager. The new information received from the managed facilities and the third party facility indicated deterioaton in loss experience, primarily related to a longer duration of claims and increased incidence of new claims in certain facilities. The result of these reviews due to all the new information referred to above, was an increase to claim reserves of $28.6 million, which was recorded in first quarter 1999. UNUM determined that the increase to reserves was needed based on revised actuarial assumptions to reflect current and expected trends in claims experience and expenses. Goodwill impairment - When an event or change in circumstance occurs that may indicate the recoverability of an asset should be assessed for impairment, UNUM performs a recoverability test using the appropriate model (held for use or held for sale) to determine if an impairment has occurred. Following the poor results of the reinsurance businesses in the first quarter of 1999, UNUM updated the goodwill recoverability test using the most current results and forecasts. The goodwill recoverability test used the held for use model that compares the undiscounted cash flows of these businesses to determine whether those cash flows can recover the unamortized goodwill. After factoring in the first quarter results and current revised forecasts due to recent poor performance for these businesses, future undiscounted cash flows were insufficient to recover the entire goodwill amount, indicating that the goodwill was impaired. Goodwill recoverability testing of these businesses performed prior to March 31, 1999, had indicated that the goodwill was not impaired. As a result of the impairment, UNUM calculated the estimated fair value of these businesses. In estimating the fair value, two valuation techniques were utilized, a discounted free cash flow model and a multiple of earnings model. UNUM believes that these valuation techniques are appropriate for this type of business as these techniques are what UNUM would use in evaluating a potential acquisition of this type of business. The results of the two valuation techniques created a range of fair values from $47 million to $64 million. UNUM evaluated the range of values produced by the valuation techniques and using internal management judgement of the potential liquidation value, UNUM determined its best estimate of fair value of its investment to be the midpoint of the range, or $55 million. The estimated fair value of $55 million was compared against $82 million of book value for the investment, resulting in a write-down of goodwill in the amount of $27 million. On April 22, 1999, UNUM decided to sell the reinsurance management operations. In future periods, management will evaluate the fair value of the reinsurance management operations using the held for sale model, which compares the carrying value of the asset with the fair value less costs to sell the asset. The March 31, 1999 goodwill impairment of $27 million does not yet reflect the estimated costs to sell the asset. It is currently estimated that the costs to sell the reinsurance management operations will be between $2 million and $3 million. This cost will be reflected in the June 30, 1999 impairment analysis and may result in an additional writedown at that time. The impact of the charge to UNUM in first quarter 1999 was a $72.6 million increase in benefits to policyholders, of which $56.1 million was reflected in the Special Risk Insurance segment and $16.5 million was reflected in the Disability Insurance segment, a $27.0 million increase in other operating expenses and a $1.5 million reduction in fee income reflected in the Special Risk Insurance segment. On an after-tax basis the charge reduced net income by $88.0 million for first quarter 1999. A portion of these losses does not receive a tax benefit, which unfavorably impacted UNUM's effective tax rate in first quarter 1999. NOTE 7. ACCOUNTING PRONOUNCEMENT ADOPTED - ----------------------------------------- Effective January 1, 1999, UNUM adopted Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments," which provided guidance on accounting for the recognition and measurement of liabilities for guaranty funds and other insurance- related assessments. The adoption of SOP 97-3 did not have a material effect on UNUM's results of operations or financial position. NOTE 8. SEGMENT INFORMATION - ---------------------------- Summarized financial information for the four reportable operating segments and Corporate is as follows: Three Months Ended March 31, ------------------ (Dollars in millions) 1999 1998 - ---------------------------------------------------------------------------- PREMIUMS Disability Insurance $ 603.2 $ 506.7 Special Risk Insurance 340.5 273.2 Colonial Products 140.7 137.5 Retirement Products 0.7 1.0 - ---------------------------------------------------------------------------- Total premiums $ 1,085.1 $ 918.4 ============================================================================ PRETAX OPERATING INCOME (LOSS) Disability Insurance $ 97.8 $ 84.9 Special Risk Insurance 39.5 36.1 Colonial Products 26.2 24.0 Retirement Products 0.3 0.5 Corporate (17.4) (14.2) - ---------------------------------------------------------------------------- Total pretax operating income 146.4 131.3 Taxes on pretax operating income 45.0 39.9 - ---------------------------------------------------------------------------- Operating income $ 101.4 $ 91.4 ============================================================================ The following is provided to reconcile certain financial information for the reportable segment totals to consolidated totals and provide a description of the reconciling items: Three Months Ended March 31, ------------------ (Dollars in millions) 1999 1998 - ---------------------------------------------------------------------------- Income before income taxes: Total pretax operating income for reportable segments and Corporate $146.4 $131.3 Realized investment gains (a) 3.2 3.1 Special item: Charge for reinsurance businesses (a) (101.1) -- - ---------------------------------------------------------------------------- Total consolidated income before income taxes $ 48.5 $134.4 ============================================================================ (a) Management's evaluation of segment performance excludes realized investment gains (losses) and special items. See Note 6 "Reinsurance Businesses" for a description of the first quarter 1999 special item. NOTE 9. PROPOSED MERGER WITH PROVIDENT AND PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS - ------------------------------------------------------------------------ On November 22, 1998, UNUM entered into an agreement with Provident Companies, Inc. ("Provident"), pursuant to which UNUM and Provident will merge under the name UNUMProvident Corporation ("UNUMProvident"). Under the merger agreement, each outstanding share of Provident common stock will be reclassified and converted into 0.73 of a share of UNUMProvident common stock and each outstanding share of UNUM common stock will be converted into one share of UNUMProvident common stock. The merger will be accounted for as a pooling of interests. The merger is subject to regulatory and UNUM stockholder and Provident stockholder approval. The following unaudited pro forma combined condensed financial statements and explanatory notes are presented to show the impact on the historical financial positions and results of operations of UNUM and Provident of the planned merger under the pooling of interests method of accounting. The unaudited pro forma combined condensed financial statements combine the historical financial information of UNUM and Provident as of March 31, 1999, and for the three- month periods ended March 31, 1999 and 1998, respectively, as well as for the three years ended December 31, 1998, 1997 and 1996, respectively. The unaudited pro forma combined condensed statements of income give effect to the merger as if it had been completed at the beginning of the earliest period presented. The unaudited pro forma combined condensed balance sheet assumes the merger was completed on March 31, 1999. The unaudited pro forma combined condensed financial statements as of March 31, 1999, and for the three-month periods ended March 31, 1999 and March 31, 1998, are based on and derived from, and should be read in conjunction with the UNUM and Provident historical consolidated financial statements and related notes. On the date the merger is completed UNUMProvident will record an expense related to the merger of approximately $139.0 million ($109.0 million net of income taxes). The estimated expenses related to the merger include amounts for severance and related costs, exit costs for duplicative facilities and asset abandonments, and investment banking, legal and accounting fees. In addition, Provident will record an expense related to the early retirement offer on the date the merger is consummated of approximately $19.0 million ($13.0 million net of income taxes). The early retirement offer to Provident's employees is subject to acceptance by the employees and the closing of the merger. Generally accepted accounting principles ("GAAP") requires both contingencies to be met before the charge is recognized. UNUM will record an expense related to the early retirement offer of approximately $75.0 million ($53.0 million net of income taxes). The UNUM early retirement offer to employees is not contingent upon the closing of the merger; therefore, under GAAP, the charge will be recorded as soon as the employees accept the offer. The employees have until June 17, 1999 to accept the offer or the offer will expire. The estimated expenses related to the merger and the early retirement offers to employees have not been reflected in the unaudited pro forma combined condensed balance sheet or statements of income and related per share calculations. The estimated expenses related to the merger and to the early retirement offers to employees increased $23.0 million from the $210.0 million estimate previously reported in UNUM's Form 10-K (as amended). The increase was primarily a result of revised estimates for the number of employees accepting the early retirement offer, which is more costly than the severance plan, and exit activities related to duplicative facilities and asset abandonments. The estimated expenses represent management's best estimates based on available information at this time. Actual charges will differ from these estimates. The unaudited pro forma combined condensed financial statements are presented for comparative purposes only and are not necessarily indicative of the results of operations that would have been realized had the merger been completed during the periods or as of the date for which the pro forma financial statements are presented, nor are they necessarily indicative of the results of operations in future periods or the future financial position of UNUMProvident. UNUM/PROVIDENT UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (a) Three Months Ended March 31, ------------------ (Dollars in millions, except per common share data) 1999 1998 - ----------------------------------------------------------------------------- REVENUES Premium income $1,704.2 $1,505.6 Net investment income 499.6 525.1 Net realized investment gains 7.2 9.3 Other income 80.8 75.1 - ----------------------------------------------------------------------------- Total revenues 2,291.8 2,115.1 BENEFITS AND EXPENSES Policyholder benefits 1,524.8 1,326.8 Commissions 242.5 233.4 Operating expenses 403.7 364.2 Increase in deferred policy acquisition costs (118.0) (100.8) Amortization of value of business acquired and goodwill 42.7 16.9 Interest and debt expense 32.9 27.3 - ----------------------------------------------------------------------------- Total benefits and expenses 2,128.6 1,867.8 - ----------------------------------------------------------------------------- Income before income taxes 163.2 247.3 Income taxes 73.9 82.7 - ----------------------------------------------------------------------------- Net income 89.3 164.6 Preferred stock dividends -- 1.9 - ----------------------------------------------------------------------------- NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 89.3 $ 162.7 ============================================================================= NET INCOME PER COMMON SHARE: Basic $ 0.38 $ 0.69 Diluted $ 0.37 $ 0.67 ============================================================================= Average shares outstanding - basic (a) 237.8 236.6 Average shares outstanding - diluted (a) 242.3 242.6 ============================================================================= UNUM/PROVIDENT UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (a) Year Ended December 31, --------------------------- (Dollars and shares in millions, except per common share data) 1998 1997 1996 - -------------------------------------------------------------------------------- REVENUES Premium income $6,189.1 $5,317.4 $4,327.2 Net investment income 2,035.4 2,015.7 1,893.4 Net realized investment gains 55.0 11.5 (5.2) Other income 299.9 357.0 148.2 - -------------------------------------------------------------------------------- Total revenues 8,579.4 7,701.6 6,363.6 BENEFITS AND EXPENSES Policyholder benefits 5,509.8 4,880.4 4,204.0 Commissions 826.5 716.2 555.2 Operating expenses 1,462.2 1,286.7 1,087.1 Increase in deferred policy acquisition costs (325.8) (236.0) (116.7) Amortization of value of business acquired and goodwill 66.6 52.7 7.7 Interest and debt expense 119.9 84.9 58.5 - -------------------------------------------------------------------------------- Total benefits and expenses 7,659.2 6,784.9 5,795.8 - -------------------------------------------------------------------------------- Income before income taxes 920.2 916.7 567.8 Income taxes 302.8 299.1 184.2 - -------------------------------------------------------------------------------- Net income 617.4 617.6 383.6 Preferred stock dividends 1.9 12.7 12.7 - -------------------------------------------------------------------------------- NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 615.5 $ 604.9 $ 370.9 ================================================================================ NET INCOME PER COMMON SHARE: Basic $ 2.60 $ 2.62 $ 1.75 Diluted $ 2.54 $ 2.57 $ 1.72 ================================================================================ Average shares outstanding - basic (a) 237.0 230.7 212.4 Average shares outstanding - diluted (a) 242.3 235.8 215.3 ================================================================================ (a) The above unaudited combined condensed pro forma consolidated statements of income reflect the combined results of the operations of UNUM and Provident for the periods presented. No adjustments have been made to arrive at net income available to common shareholders. The pro forma combined basic and diluted earnings per share for the respective periods presented are based on the combined weighted-average number of common and dilutive potential common shares and adjusted weighted-average shares of UNUM and Provident. The number of weighted-average common shares and adjusted weighted-average shares, including all dilutive potential common shares, reflect the reclassification of Provident common stock on a 0.73 to 1.0 basis and the conversation of each outstanding share of UNUM common stock into one share of UNUMProvident common stock in the merger. UNUM CORPORATION AND PROVIDENT COMPANIES, INC. UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AS OF MARCH 31, 1999 UNUM/Provident Historical Pro Forma Pro Forma UNUM Provident Adjustments Combined ---- --------- ----------- -------- (Dollars in millions) - -------------------------------------------------------------------------------- ASSETS Invested assets $ 9,824.9 $16,901.2 $ -- $26,726.1 Reinsurance receivables 1,806.5 3,057.4 -- 4,863.9 All other assets 3,714.5 2,413.2 -- 6,127.7 Separate account assets 35.3 388.2 -- 423.5 - -------------------------------------------------------------------------------- Total assets $15,381.2 $22,760.0 $ -- $38,141.2 ================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Policy liabilities, accruals and unearned premiums $ 9,449.9 $14,456.7 $ 230.0 (b) $24,136.6 Other policyholders' funds 871.6 2,980.1 -- 3,851.7 All other liabilities 2,357.6 1,411.5 (80.0) (b) 3,689.1 Separate account liabilities 35.3 388.2 -- 423.5 - -------------------------------------------------------------------------------- Total liabilities 12,714.4 19,236.5 150.0 32,100.9 Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Soley Junior Subordinated Debt Securities of the Company -- 300.0 -- 300.0 Common stock 20.0 135.9 (132.1) (c) 23.8 Additional paid-in capital 1,153.5 764.0 (948.0) (c) 969.5 Accumulated other comprehensive income 150.6 438.2 -- 588.8 Retained earnings 2,439.9 1,894.6 (150.0) (b) 4,184.5 Treasury stock (1,080.1) (9.2) 1,080.1 (c) (9.2) Restricted stock deferred compensation (17.1) -- -- (17.1) - -------------------------------------------------------------------------------- Total stockholders' equity 2,666.8 3,223.5 (150.0) 5,740.3 - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $15,381.2 $22,760.0 $ -- $38,141.2 ================================================================================ (b) UNUM and Provident are in the process of reviewing their accounting policies and financial statement classifications and as a result of this review, it may be necessary to adjust the combined financial statements to conform to those accounting policies and classifications that are determined to be most appropriate. One aspect of this preliminary review has indicated that UNUM's process and assumptions used to calculate the discount rate for claim reserves of certain disability businesses differs from that used by Provident. While UNUM and Provident's current methods for calculating the discount rate for disability claim reserves are in accordance with generally accepted accounting principles, both companies' management believe that the combined entity should have consistent discount rate accounting policies and methods for applying these policies for similar products. Anticipated in the merger was the combination of the investment functions of UNUM and Provident. UNUMProvident's investment function will be managed by Provident's personnel and the current investment strategies of Provident will be utilized by the combined entity. The current UNUM methodology uses the same investment strategy for assets backing both liabilities and surplus. The Provident methodology allows for different investment strategies for assets backing surplus than those backing product liabilities which management has determined to be the most appropriate approach for the combined entity. Accordingly, UNUM will adopt Provident's method of calculating the discount rate for claim reserves. UNUM estimated the impact of this change in method on the estimate of unpaid claims reserves and will record a pretax charge effective with the merger of approximately $230 million ($150.0 million after-tax). This estimated merger related adjustment has not been reflected in the unaudited pro forma combined condensed statements of income and related per share calculations. This estimate, which will be reported in operating earnings, was based on a projection of UNUM's investment portfolio and claim liabilities as of June 30, 1999, the expected completion date of the merger. For the discount rates affected by the change in methodology, the current interest rates used to discount claim reserves, and the projected interest rates using the Provident method as of June 30, 1999, are as follows: March 31, Projected as of 1999 June 30, 1999 ---------------------------------------------------------------------------- Group long term disability (North America) 7.74% 6.65% Group long term disability and individual disability (United Kingdom) 8.81% 7.74% Individual disability (North America) 7.37% 6.79% ---------------------------------------------------------------------------- UNUM's unpaid claim reserves for these disability lines as of June 30, 1999, were estimated to be $5,376 million using the UNUM method for determining reserve discount rates, and $5,606 million using the Provident method. (c) The pro forma adjustments to common stock, additional paid-in capital and treasury stock reflect the retirement of shares of UNUM common stock held in treasury, the reduction in par value of Provident common stock from one dollar to ten cents, and the reclassification of Provident common stock on a 0.73 to 1.0 basis that results in 98.8 million shares issued to replace the 135.4 million shares of Provident common stock held by Provident stockholders on March 31, 1999, and the issuance to UNUM stockholders of 139.1 million shares of UNUMProvident common stock pursuant to the merger (calculated by multiplying the number of shares of UNUM common stock outstanding at March 31, 1999, of 139.1 million by the exchange ratio of 1.0 to 1.0 representing the number of shares UNUM stockholders will receive for each share of UNUM common stock they own immediately prior to consummation of the merger). The number of shares of UNUMProvident common stock that will be issued after completion of the merger will be based on the actual number of shares of UNUM common stock, and Provident common stock (after reclassification on a 0.73 to 1.0 basis) outstanding at the effective time of the merger. 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 March 31, 1999, and the related consolidated statements of income, comprehensive income and cash flows for the three-month periods ended March 31, 1999 and 1998. 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 April 27, 1999 UNUM Corporation and Subsidiaries Form 10-Q/A March 31, 1999 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 ("the Act") provides a "safe harbor" for forward-looking statements which are identified as such and are accompanied by the identification of important factors which could cause a material difference from the forward-looking statements. UNUM claims the protection afforded by the safe harbor in the Act. Certain information contained in this discussion, or in any other written or oral statements made by UNUM, is or may be considered as forward-looking; for example, disclosures regarding the "Year 2000 Date Conversion" and reserves discussed in the Disability Insurance segment contain such information. Forward-looking statements are those not based on historical information, but rather, relate to future operations, strategies, financial results or other developments, and contain terms such as "may," "expects," "should," "believes," "anticipates," "intends," "estimates," "projects," "goals," "objectives" or similar expressions. Although UNUM has used appropriate care in developing forward- looking statements, such statements are based upon estimates and assumptions that are subject to significant risks, business, economic and competitive uncertainties, and other factors, many of which are beyond UNUM's control or, with respect to future business decisions, are subject to change. Certain risks and uncertainties are inherent in UNUM's business. Therefore, UNUM cautions the reader that revenues and income could differ materially from those expected to occur depending on factors which may be global or national in scope, related to the insurance industry generally, or applicable to UNUM specifically. Such factors are general economic conditions including changes in interest rates and the performance of financial markets, changes in domestic and foreign laws, regulations and taxes, competition, industry consolidation, competitor demutualization, credit risks and other factors. Insurance reserve liabilities can fluctuate as a result of changes in numerous factors, and such fluctuations can have material positive or negative effects on earnings. These factors include, but are not limited to, interest rates, incidence rates and recovery rates. Incidence and recovery rates may be influenced by many factors, including but not limited to, the emergence of new diseases, new trends and developments in medical treatments, general economic and societal conditions of the markets where UNUM has operations, and the effectiveness of risk management programs. UNUM disclaims any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise. CONSOLIDATED OVERVIEW Net income for the quarter ended March 31, 1999, was $15.5 million, as compared with net income of $93.5 million for the same quarter in 1998. Diluted earnings per share were $0.11 for first quarter 1999 versus $0.66 in first quarter 1998. Revenues for UNUM were $1,303.4 million for first quarter 1999 and $1,121.5 million for first quarter 1998. A comparison of net income is impacted by the inclusion of realized investment gains (losses) and a special item that occurred in first quarter 1999. This management's discussion and analysis focuses on results on a pretax operating income basis, which is defined as income (loss) before income taxes exclusive of realized investment gains (losses) and special items. Realized investment gains (losses) are excluded from this discussion as management believes the volatility in gains and losses associated with the selling of invested assets in the financial markets is not representative of ongoing operations. Special items are excluded from this discussion as management considers them as being not representative of our ongoing operations and believes a discussion of the results on a pretax operating income basis provides a better understanding of the results of ongoing operations. While management believes that pretax operating income provides relevant and useful information, it does not replace income before income taxes and net income calculated in accordance with generally accepted accounting principles as a measure of UNUM's profitability. Therefore, this discussion 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 (as amended) and the 1998 Form 10-K (as amended) of UNUM Corporation and subsidiaries ("UNUM"). The following table summarizes pretax operating income (loss) for the four operating segments and Corporate for the three months ended March 31, 1999, and 1998, and is followed by a discussion of the first quarter 1999 special item and a reconciliation of income (loss) before income taxes to pretax operating income (loss). Three Months Ended March 31, ------------------------- (Dollars in millions) 1999 1998 Change - -------------------------------------------------------------------------------- SUMMARY OF PRETAX OPERATING INCOME (LOSS) Disability Insurance Segment $ 97.8 $ 84.9 15.2% Special Risk Insurance Segment 39.5 36.1 9.4 Colonial Products Segment 26.2 24.0 9.2 Retirement Products Segment 0.3 0.5 (40.0) Corporate (17.4) (14.2) 22.5 - -------------------------------------------------------------------------------- Total pretax operating income $146.4 $131.3 11.5% ================================================================================ UNUM reported increased pretax operating income for the three months ended March 31, 1999, as compared with the same period in 1998. The increase was primarily attributable to improvements in pretax operating income for the Disability Insurance and Special Risk Insurance segments. Premium growth driven by strong sales, was the primary contributor for both segments' improved first quarter operating results, as compared with one year ago. See the segment discussions that follow for a more detailed analysis of operating results. SPECIAL ITEM IN FIRST QUARTER 1999 - ---------------------------------- During first quarter 1999, UNUM recognized a pretax charge relating to its reinsurance businesses of $101.1 million. The charge includes $45.5 million related to the Lloyd's of London managed and non-managed syndicates. Included in the $45.5 million is $44.0 million related to UNUM's risk participation in various Lloyd's of London syndicates, which primarily consists of the recognition of estimated losses for all open syndicate years. The remaining $1.5 million represents a reduction of profit commissions related to the reinsurance management company operations. The charge also includes a reserve increase of $28.6 million for expected ultimate losses in certain reinsurance pools in which UNUM participates and a $27.0 million write-down to recognize goodwill impairment on UNUM's reinsurance management company. Based upon the poor results to date and revisions to future expected earnings from these businesses, UNUM determined that the goodwill associated with the reinsurance management company was not recoverable when measured using the estimated future undiscounted cash flows. The impairment represents the difference between the carrying value of the reinsurance management company and the estimated fair value using both an earnings valuation model and a discounted free cash flow valuation model. A portion of these losses does not receive a tax benefit, which unfavorably impacted UNUM's effective tax rate in first quarter 1999. The impact of the charge to UNUM in first quarter 1999 was a $72.6 million increase in benefits to policyholders, of which $56.1 million was reflected in the Special Risk Insurance segment and $16.5 million was reflected in the Disability Insurance segment, a $27.0 million increase in other operating expenses and a $1.5 million reduction in fee income reflected in the Special Risk Insurance 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 operating segments and Corporate for the three months ended March 31, 1999, and 1998: Disability Special Risk Colonial Retirement Consolidated (Dollars in millions) Insurance Insurance Products Products Corporate UNUM - --------------------------------------------------------------------------------------------------- Three Months Ended March 31, 1999: - ---------------------------------- Income (loss) before income taxes $81.2 $(45.0) $26.9 $ 2.8 $(17.4) $ 48.5 Exclude realized investment (gains) losses 0.1 (0.1) (0.7) (2.5) -- (3.2) - --------------------------------------------------------------------------------------------------- 81.3 (45.1) 26.2 0.3 (17.4) 45.3 Special item: Charge for reinsurance businesses 16.5 84.6 -- -- -- 101.1 - --------------------------------------------------------------------------------------------------- PRETAX OPERATING INCOME (LOSS) $97.8 $ 39.5 $26.2 $ 0.3 $(17.4) $146.4 =================================================================================================== Three Months Ended March 31, 1998: - ---------------------------------- Income (loss) before income taxes $88.1 $ 36.2 $24.4 $(0.1) $(14.2) $134.4 Exclude realized investment (gains) losses (3.2) (0.1) (0.4) 0.6 -- (3.1) - --------------------------------------------------------------------------------------------------- PRETAX OPERATING INCOME (LOSS) $84.9 $ 36.1 $24.0 $ 0.5 $(14.2) $131.3 ===================================================================================================
PRETAX OPERATING INCOME (LOSS) BY SEGMENT - ----------------------------------------- The following sections discuss the results of the four operating segments and Corporate for the three months ended March 31, 1999, and 1998. Within these operating segment discussions, reference is made to pretax operating income (loss), which excludes realized investment gains (losses) and the special item previously defined. The summary financial information provided prior to each segment discussion has been adjusted to exclude the impact of the special item from the related income statement line items, consistent with the discussion of results on a pretax operating income basis. UNUM Corporation and Subsidiaries Form 10-Q/A March 31, 1999 DISABILITY INSURANCE SEGMENT Three Months Ended March 31, ------------------ (Dollars in millions) 1999 1998 - ------------------------------------------------------------------------------ REVENUES Premiums Group LTD $392.7 $342.4 Group STD 82.0 63.0 UNUM Limited 46.7 38.9 Individual Products 41.2 29.4 Other Disability Insurance 40.6 33.0 - ------------------------------------------------------------------------------ Total premiums (a) 603.2 506.7 Investment income 125.2 117.0 Fees and other income 16.6 12.9 - ------------------------------------------------------------------------------ Total operating revenues 745.0 636.6 BENEFITS AND EXPENSES Benefits to policyholders 494.4 413.0 Operating expenses 137.3 119.2 Commissions 58.6 49.2 Increase in deferred policy acquisition costs (43.1) (29.7) - ------------------------------------------------------------------------------ Total operating benefits and expenses 647.2 551.7 - ------------------------------------------------------------------------------ Pretax operating income (b) 97.8 84.9 Special items (c) (16.5) -- Realized gains (losses) (0.1) 3.2 - ------------------------------------------------------------------------------ Income before income taxes (d) $ 81.2 $ 88.1 ============================================================================== SUPPLEMENTAL INFORMATION (e): Sales (annualized new premiums) Group LTD $ 65.2 $ 57.6 Group STD $ 27.6 $ 23.7 UNUM Limited $ 11.5 $ 3.8 Long Term Care $ 11.5 $ 4.7 Lifelong Disability Protection $ 3.7 $ 2.3 Benefit ratio (% of premiums) 82.0% 81.5% Operating expense ratio (% of premiums) 22.8% 23.5% ============================================================================== (a) One-time premiums, which are generated by claim block acquisitions, for the three months ended March 31, 1999, and 1998, were $21.0 million and $12.8 million, respectively, for group long term disability ("group LTD"). Management intends to pursue additional claim block acquisitions in the future. (b) For the definition of pretax operating income see the Consolidated Overview. (c) For a discussion of the first quarter 1999 special item see the caption "Special Item in First Quarter 1999" within the Consolidated Overview section. (d) The Disability Insurance segment discussion of results is on a pretax operating income basis. Management believes pretax operating income is a better representation of our ongoing operations. While management believes pretax operating income provides relevant and useful information, it does not replace income before income taxes and net income calculated in accordance with generally accepted accounting principles as a measure of UNUM's profitability. Therefore, this discussion should be read in conjunction with UNUM's Consolidated Financial Statements (Unaudited) and Notes to Consolidated Financial Statements (Unaudited) included elsewhere in the Form 10-Q (as amended) and the 1998 Form 10-K (as amended). (e) Information relating to sales is presented as an indicator of premium growth in the segment. Benefit ratios and operating expense ratios show the relative relationships among data to earned premiums in the segment's income statement. The Disability Insurance segment reported increased pretax operating income for the three months ended March 31, 1999, as compared with the same period in 1998. The increase was primarily attributable to solid premium growth in group LTD and group short term disability ("group STD") and increased investment income for the segment. Higher benefit ratios in most lines of business partially offset these favorable factors. As discussed in the section titled Forward-Looking Information, certain risks and uncertainties are inherent in UNUM's business. Components of claims experience, including but not limited to, incidence levels and claims duration, may continue for some period of time at or above the higher levels experienced in 1998. Therefore, management continues to monitor claims experience and responds to changes by periodically adjusting prices, refining underwriting guidelines, changing product features and strengthening risk management policies and procedures. The proposed merger of UNUM and Provident is expected to have a near term adverse impact on the productivity of UNUM's claims management function resulting in some delay in claim resolutions during 1999 and additional claim payments to policyholders. Claim personnel will be distracted from normal claim management activities as a result of planning and implementing the integration of the two companies' claims organizations. As previously reported in UNUM's Form 10-K (as amended), claim resolution rates were revised for claim operations integration activities in fourth quarter 1998. During first quarter 1999, those activities progressed as assumed. At December 31, 1998, management assumed the revised claim resolution rates for first quarter 1999 to be 90% of assumptions, excluding the impact of the claim operations integration activities. The actual experience for the first quarter 1999 was 88% as compared with the 90% revised assumption. The difference between the revised claim resolution rates and the actual claim resolution rates was reflected in pretax operating income during first quarter 1999. If the impact of merger related claim operations integration activities on claim durations had not been anticipated at December 31, 1998, first quarter 1999 pretax operating income would have been negatively impacted by $14.1 million. Management expects the remaining claim operations integration activities to impact claim reserves as anticipated at December 31, 1998. Management will continue to evaluate the impacts of the proposed mergerwith Provident on disability claims experience and the assumptions around expected disability claims duration. If the claim operations integration activities take longer than expected to implement or if they result in unforeseen difficulties, claim durations could continue to increase and income could be adversely affected. During 1998, market interest rates fell to historically low levels negatively affecting investment returns. Management expects the reserve discount rate for certain disability lines will continue to decline due primarily to the impact of the declining interest rate environment resulting in higher claim liabilities. Management expects to price new business and reprice existing business, at contract renewal dates, in an attempt to mitigate the effect on new claim liabilities from declining interest rates. However, given the competitive market conditions for UNUM's disability products, it is uncertain whether pricing actions can mitigate the entire effect of interest rate declines. In addition, as previously disclosed in Note 9 "Proposed Merger with Provident and Pro Forma Combined Condensed Financial Statements," management expects to lower the discount rate used to calculate certain disability claim reserves, to conform with Provident's process and assumptions, which are considered more appropriate in the context of the combined entity resulting from the proposed merger with Provident. Pretax operating income for group LTD increased for the three months ended March 31, 1999, as compared with the same period in 1998, primarily resulting from improved premium growth driven by strong sales, and increased investment income. Partially offsetting the increase was a higher benefit ratio as compared with first quarter 1998, largely due to increased levels of claims incidence and a longer duration of claims. For the three months ended March 31, 1999, group STD's pretax operating income increased as compared with the same period in 1998. The increase was primarily attributable to significant premium growth of 30.2% and a favorable operating expense ratio. Premium growth resulted largely from the impact of strong sales results, which reflect management's continuing efforts to cross-sell group STD products with other group products sold by UNUM. An unfavorable change in the benefit ratio, primarily from larger size cases, higher claims incidence levels and slightly longer duration of claims, partially offset the increase. UNUM Limited experienced increased pretax operating income for the three months ended March 31, 1999, as compared with first quarter 1998. A favorable benefit ratio, largely resulting from higher claim recoveries, was the primary driver of the increase in pretax operating income. UNUM Corporation and Subsidiaries Form 10-Q/A March 31, 1999 SPECIAL RISK INSURANCE SEGMENT Three Months Ended March 31, ------------------ (Dollars in millions) 1999 1998 - ------------------------------------------------------------------------------ REVENUES Premiums Group life $189.6 $154.4 Other special risk products 150.9 118.8 - ------------------------------------------------------------------------------ Total premiums 340.5 273.2 Investment income 21.3 19.0 Fees and other income 20.1 15.9 - ------------------------------------------------------------------------------ Total operating revenues 381.9 308.1 BENEFITS AND EXPENSES Benefits to policyholders 239.5 191.9 Operating expenses 74.3 59.5 Commissions 74.9 61.3 Increase in deferred policy acquisition costs (46.3) (40.7) - ------------------------------------------------------------------------------ Total operating benefits and expenses 342.4 272.0 - ------------------------------------------------------------------------------ Pretax operating income (a) 39.5 36.1 Special items (b) (84.6) -- Realized gains 0.1 0.1 - ------------------------------------------------------------------------------ Income before income taxes (c) $(45.0) $ 36.2 ============================================================================== SUPPLEMENTAL INFORMATION (d): Group life sales (annualized new premiums) $ 43.9 $ 31.3 Benefit ratio (% of premiums) 70.3% 70.2% Operating expense ratio (% of premiums) 21.8% 21.8% ============================================================================== (a) For the definition of pretax operating income see the Consolidated Overview. (b) For a discussion of the first quarter 1999 special item see the caption "Special Item in First Quarter 1999" within the Consolidated Overview section. (c) The Special Risk Insurance segment discussion of results is on a pretax operating income basis. Management believes pretax operating income is a better representation of our ongoing operations. While management believes pretax operating income provides relevant and useful information, it does not replace income before income taxes and net income calculated in accordance with generally accepted accounting principles as a measure of UNUM's profitability. Therefore, this discussion should be read in conjunction with UNUM's Consolidated Financial Statements (Unaudited) and Notes to Consolidated Financial Statements (Unaudited) included elsewhere in the Form 10-Q (as amended) and the 1998 Form 10-K (as amended). (d) Information relating to sales is presented as an indicator of premium growth in the segment. Benefit ratios and operating expense ratios show the relative relationships among data to earned premiums in the segment's income statement. The Special Risk Insurance segment reported increased pretax operating income for the quarter ended March 31, 1999, as compared with the same period in 1998. The increase was primarily due to premium growth driven by strong sales in the group life product lines and increased investment income for the segment. The increase was partially offset by unfavorable results in the reinsurance businesses. Due to the nature of the risks underwritten and the relative size of the blocks of businesses, several of the products in the Special Risk Insurance segment can exhibit claims variability. During first quarter 1999, UNUM conducted a comprehensive strategic review of its reinsurance businesses to determine the appropriateness of their fit within the context of the UNUMProvident merged entity. These businesses include the reinsurance management operations and the risk assumption (reinsurance pool participation, direct reinsurance and Lloyd's of London syndicate participation). In April 1999, UNUM completed the comprehensive strategic review of its reinsurance businesses. UNUM concluded that these businesses are not solidly aligned with UNUM's strength in the disability insurance market and decided to exit these businesses. UNUM intends to sell the reinsurance management operations and either reinsure the risk assumption businesses or place them in run-off. UNUM Corporation and Subsidiaries Form 10-Q/A March 31, 1999 COLONIAL PRODUCTS SEGMENT Three Months Ended March 31, ------------------ (Dollars in millions) 1999 1998 - ------------------------------------------------------------------------------ REVENUES Premiums $ 140.7 $ 137.5 Investment income 17.3 15.3 Fees and other income 0.2 1.6 - ------------------------------------------------------------------------------ Total operating revenues 158.2 154.4 BENEFITS AND EXPENSES Benefits to policyholders 68.9 68.7 Interest credited 4.3 3.6 Operating expenses 36.5 35.4 Commissions 28.5 32.2 Increase in deferred policy acquisition costs (6.2) (9.5) - ------------------------------------------------------------------------------ Total operating benefits and expenses 132.0 130.4 - ------------------------------------------------------------------------------ Pretax operating income (a) 26.2 24.0 Realized gains 0.7 0.4 - ------------------------------------------------------------------------------ Income before income taxes (b) $ 26.9 $ 24.4 ============================================================================== SUPPLEMENTAL INFORMATION (c): Sales (annualized first month's premiums) $ 48.1 $ 41.2 Benefit ratio (% of premiums) 49.0% 50.0% Operating expense ratio (% of premiums) 25.9% 25.7% ============================================================================== (a) For the definition of pretax operating income see the Consolidated Overview. (b) The Colonial Products segment discussion of results is on a pretax operating income basis. Management believes pretax operating income is a better representation of our ongoing operations. While management believes pretax operating income provides relevant and useful information, it does not replace income before income taxes and net income calculated in accordance with generally accepted accounting principles as a measure of UNUM's profitability. Therefore, this discussion should be read in conjunction with UNUM's Consolidated Financial Statements (Unaudited) and Notes to Consolidated Financial Statements (Unaudited) included elsewhere in the Form 10-Q (as amended) and the 1998 Form 10-K (as amended). (c) Information relating to sales is presented as an indicator of premium growth in the segment. Benefit ratios and operating expense ratios show the relative relationships among data to earned premiums in the segment's income statement. Pretax operating income increased in the Colonial Products segment in first quarter 1999, as compared with first quarter 1998. The increase was due primarily to lower benefit ratios in certain product lines and an increase in investment income for the segment, partially offset by slightly higher operating expense ratios across most product lines and an increase in interest credited. In the first quarter 1999, sales increased in comparison with the same period in 1998, however, these sales are not necessarily indicative of the levels that may be attained in the future. Therefore, management continues its efforts to increase sales and premium through the realignment of the sales organization and the enhancement of collaborative sales across UNUM. UNUM Corporation and Subsidiaries Form 10-Q/A March 31, 1999 RETIREMENT PRODUCTS SEGMENT The Retirement Products segment includes products no longer actively marketed by UNUM. For the three months ended March 31, 1999, pretax operating income for the Retirement Products segment decreased slightly as compared with the same period in 1998. 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 months ended March 31, 1999, as compared with the same period in 1998, the increased pretax operating loss was due primarily to increased interest expense due to a higher average debt balance, partially offset by lower operating expenses. LITIGATION Refer to Note 4 "Litigation" for information. 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 classified as available for sale, equity securities, cash and short-term investments. At March 31, 1999, UNUM had short-term and long-term debt totaling $362.6 million and $598.5 million, respectively. At March 31, 1999, approximately $334 million was available for additional financing under the existing revolving credit facility and $200 million of investment grade debt instruments was available for issuance under the shelf registration. Contingent upon market conditions and corporate needs, management may 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. UNUM had outstanding letters of credit of $160.6 million at March 31, 1999. Effective November 23, 1998, UNUM's Board of Directors rescinded the company's stock repurchase program as a result of the pending merger agreement with Provident Companies Inc. As a result, no shares of UNUM common stock were repurchased during the first three months of 1999. During the first quarter of 1998, UNUM acquired approximately 0.7 million shares of its common stock in the open market at an aggregate cost of $36.7 million. On December 4, 1997, UNUM borrowed [British pound] 100 million ($168.3 million) through a private placement with an investor in the United Kingdom. Under the terms of the agreement, the investor exercised its right to redeem the private placement on April 13, 1999, at par value. UNUM issued commercial paper to meet its immediate needs and is currently evaluating various financing alternatives to replace this financing. YEAR 2000 DATE CONVERSION The following discussion regarding the Year 2000 Date Conversion contains forward-looking statements, and should be read in conjunction with the Forward- Looking Information disclosure made at the beginning of the Management's Discussion and Analysis. As of March 31, 1999, UNUM has completed the assessment phase and essentially completed the code remediation phase for all its critical and non-critical systems with approximately 95% completing the testing phase. Deployment is underway for most critical and non-critical systems as of March 31, 1999. As previously discussed in UNUM's 1998 Form 10-K (as amended), management has substantially completed all phases for its critical and non- critical systems, and as of March 31, 1999, continues to expect completion of all phases by the end of 1999. UNUM estimates that total internal (opportunity costs) and external (out-of- pocket) costs for addressing the year 2000 conversion will range from $70 million to $80 million, which are expensed as incurred. As of March 31, 1999, UNUM has incurred approximately $62 million in connection with its year 2000 program. 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. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. UNUM Corporation and Subsidiaries Form 10-Q/A March 31, 1999 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Page (a) Exhibit Index 12. Statement re: Computation of ratio of earnings to fixed charges. 33 15. Letter re: Unaudited interim financial information. 34 27. Financial Data Schedules (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 March 31, 1999. UNUM Corporation and Subsidiaries Form 10-Q/A March 31, 1999 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 May 17, 1999 /s/ ROBERT E. BROATCH -------------------- ----------------------------- Robert E. Broatch Senior Vice President and Chief Financial Officer Date May 17, 1999 /s/ JOHN M. LANG, JR -------------------- ----------------------------- John M. Lang, Jr. Vice President and Corporate Controller EX-12 2 UNUM Corporation and Subsidiaries Form 10-Q/A March 31, 1999 EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Three Months Ended March 31, ------------------ (Unaudited - Dollars in millions) 1999 1998 - ------------------------------------------------------------------------------ Earnings: Income before income taxes $ 48.5 $134.4 Add: Fixed charges 19.7 14.2 - ------------------------------------------------------------------------------ Earnings as adjusted $ 68.2 $148.6 ============================================================================== Fixed charges: Interest expense $ 16.8 $ 11.7 Interest portion of rent expense 2.9 2.5 - ------------------------------------------------------------------------------ Total fixed charges $ 19.7 $ 14.2 ============================================================================== Ratio of earnings to fixed charges 3.5 10.5 ============================================================================== 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 EXHIBIT 15 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 We are aware that our report dated April 27, 1999, on our review of interim financial information of UNUM Corporation for the three month period ended March 31, 1999, and 1998, and included in the Company's quarterly report on Form 10-Q/A 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 March 31, 1999. 1,000 3-MOS DEC-31-1999 MAR-31-1999 7,972,000 0 0 28,800 1,273,300 140,000 9,824,900 77,000 1,806,500 1,357,300 15,381,200 9,449,900 0 0 871,600 961,100 0 0 20,000 2,646,800 15,381,200 1,085,100 172,800 3,200 42,300 881,200 (95,600) 0 48,500 33,000 15,500 0 0 0 15,500 0.11 0.11 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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