-----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, Jh5Z3nZrTT9vOWWzvat5PDTqR74HO1JfG1OiYMj/DEseG2AmH4TOvE+XyRGDqFYe tl6Q6kXNR2Bzndb3vqiBKA== 0000912057-96-005295.txt : 19960328 0000912057-96-005295.hdr.sgml : 19960328 ACCESSION NUMBER: 0000912057-96-005295 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960327 SROS: NYSE SROS: PSE 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09254 FILM NUMBER: 96539292 BUSINESS ADDRESS: STREET 1: 2211 CONGRESS ST P612 CITY: PORTLAND STATE: ME ZIP: 04122 BUSINESS PHONE: 207-770-43 MAIL ADDRESS: STREET 1: 2211 CONGRESS STREET CITY: PORTLAND STATE: ME ZIP: 04122 10-K405 1 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER 1-9254 UNUM CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 01-0405657 (STATE OR OTHER JURISDICTION OF I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2211 CONGRESS STREET, PORTLAND, MAINE 04122 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (207) 770-2211 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - -------------------------------- ------------------------------------------- Common stock, $0.10 par value New York Stock Exchange Pacific Stock Exchange Preferred stock purchase rights New York Stock Exchange Pacific Stock Exchange 8.8% Junior Subordinated New York Stock Exchange Deferrable Interest Debentures, Series A, Due 2025
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE 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 ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 8, 1996, was approximately $4,250,500,000. As of March 8, 1996, 73,240,347 shares of the registrant's common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Information from the Registrant's proxy statement dated March 25, 1996, is incorporated by reference into Part III. Exhibit Index appears on page 70. TABLE OF CONTENTS PART I
ITEM PAGE - ---- ---- 1. Business...................................................................................................... 3 A. Description of Business................................................................................... 3 B. Disability Insurance Segment.............................................................................. 4 C. Special Risk Insurance Segment............................................................................ 5 D. Colonial Products Segment................................................................................. 6 E. Retirement Products Segment............................................................................... 7 F. Investments............................................................................................... 8 G. Risk Management and Reinsurance........................................................................... 9 H. Reserves.................................................................................................. 10 I. Employees................................................................................................. 10 J. Competition............................................................................................... 10 K. Regulation................................................................................................ 11 L. Participation Fund Account................................................................................ 12 2. Properties.................................................................................................... 12 3. Legal Proceedings............................................................................................. 12 4. Submission of Matters to a Vote of Security Holders........................................................... 12 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters..................................... 12 6. Selected Financial Data....................................................................................... 13 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 15 8. Financial Statements and Supplementary Data................................................................... 31 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................... 61 PART III 10. Directors and Executive Officers of the Registrant............................................................ 61 A. Directors of the Registrant............................................................................... 61 B. Executive Officers of the Registrant...................................................................... 61 11. Executive Compensation........................................................................................ 62 12. Security Ownership of Certain Beneficial Owners and Management................................................ 62 13. Certain Relationships and Related Transactions................................................................ 62 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................................. 62 Signatures.................................................................................................... 63 Index to Exhibits............................................................................................. 70
2 PART I ITEM 1. BUSINESS A. DESCRIPTION OF BUSINESS UNUM Corporation is a Delaware corporation organized in 1985 as an insurance holding company. UNUM Corporation and subsidiaries ("UNUM") are the leading providers of group long term disability insurance ("group LTD") in the United States and the United Kingdom. UNUM is also a major provider of employee benefits, individual disability insurance and special risk reinsurance. UNUM also markets long term care and retirement income products. The operations of the following subsidiaries account for substantially all of UNUM's consolidated assets and revenues. UNUM Corporation is based in Portland, Maine, and through its affiliates has operations in North America, the United Kingdom and the Pacific Rim. UNUM conducts its operations in the United States through a number of wholly-owned subsidiaries including: UNUM Life Insurance Company of America ("UNUM America"), a Maine life insurance company licensed in 49 states and Canada, the leading provider of group disability insurance in the nation and provider of employee benefits, long term care and retirement products; First UNUM Life Insurance Company ("First UNUM"), a New York life insurance company; Commercial Life Insurance Company, a Wisconsin life insurance company and a leader in special risk insurance and professional association insurance marketing; Duncanson & Holt, Inc., a New York corporation and a leading accident and health reinsurance underwriting manager; Colonial Companies, Inc., a Delaware holding company whose wholly-owned subsidiary, Colonial Life & Accident Insurance Company, is a leader in payroll-deducted voluntary employee benefits offered to employees at their worksites; and UNUM Holding Company, a Delaware corporation. Through UNUM Holding Company, UNUM Corporation also owns UNUM Sales Corporation, a licensed broker-dealer incorporated in Delaware, and Claims Service International, Inc., a Delaware corporation, which provides claims administration services. UNUM Corporation also holds all of the outstanding capital stock of UNUM European Holding Company, which is incorporated in the United Kingdom. UNUM's United Kingdom operations are conducted by UNUM Limited, which is the United Kingdom's leader in group disability insurance and a wholly-owned subsidiary of UNUM European Holding Company, and Duncanson & Holt Europe Ltd., a wholly-owned subsidiary of Duncanson & Holt, Inc. UNUM's Japanese operations are conducted through a wholly-owned subsidiary, UNUM Japan Accident Insurance Company Limited ("UNUM Japan"), a Japanese non-life insurance company, which was established in 1994. On December 3, 1992, UNUM and Colonial Companies, Inc. ("Colonial Companies"), signed a definitive merger agreement. On March 26, 1993, Colonial Companies Class A common stock shareholders voted to approve the merger. Under the agreement, UNUM exchanged 0.731 shares of its common stock for each share of Colonial Companies Class A and Class B common stock outstanding on March 26, 1993. UNUM issued approximately 11.4 million shares of common stock from treasury in connection with the merger. In addition, outstanding options to acquire shares of Colonial Companies Class B common stock were converted into options to acquire shares of UNUM common stock. The merger was accounted for as a pooling of interests. On January 24, 1996, UNUM America entered into an agreement for the sale of its group tax-sheltered annuity ("TSA") business to The Lincoln National Life Insurance Company ("Lincoln Life"), a part of Lincoln National Corporation, and to a new New York insurance subsidiary of Lincoln Life. The agreement also contemplates that First UNUM will enter into a similar agreement with Lincoln Life's New York insurance subsidiary. The sale, which is subject to regulatory approvals, involves approximately 1,700 group contractholders and assets under management of approximately $3 billion. The agreement initially contemplates the reinsurance of these contracts under an indemnity reinsurance arrangement. These contracts will then be reinsured pursuant to an assumption reinsurance arrangement upon consent of the TSA contractholders and/or participants. The purchase price (ceding commission) at closing is expected to be approximately $70 million. It is anticipated that it will take several months (perhaps six to nine months) to obtain the necessary approvals and otherwise close the sale. There is no guarantee that the sale will close. On February 7, 1996, UNUM announced plans to merge Commercial Life Insurance Company into UNUM America to accelerate growth of its special risk business, increase its commitment to the association group business and to improve operating and capital efficiencies. The merger will be effective December 31, 1996, subject to regulatory approvals. 3 To more clearly reflect UNUM's management of its businesses and to more appropriately group its product portfolios, UNUM began reporting its operations, effective January 1, 1995, principally in four business segments: Disability Insurance, Special Risk Insurance, Colonial Products and Retirement Products. Corporate includes transactions that are generally non-insurance related and interest expense on corporate borrowings. For comparative purposes, prior period information has been restated to reflect reporting in these segments. Refer to Item 7 and Item 8 (Note 16) for more information. B. DISABILITY INSURANCE SEGMENT The Disability Insurance segment, which in 1995 accounted for 60.0% of UNUM's revenues and 56.8% of its income before income taxes, includes disability products offered in North America, the United Kingdom and Japan including: group LTD, individual disability, group short term disability, association group disability, disability reinsurance and long term care insurance. UNUM AMERICA AND FIRST UNUM: UNUM America and First UNUM market their group and individual insurance products, as well as long term care products, which are included in the Disability Insurance and Special Risk Insurance segments, through a network of 33 offices in the United States and Canada that distribute these products through brokers. As of December 31, 1995, these branch offices were organized into four regions and were staffed with approximately 720 management, sales, service and administrative personnel. GROUP LONG TERM DISABILITY UNUM America and First UNUM's group LTD product is the Disability Insurance segment's principal product. UNUM America and First UNUM target sales of group LTD to executive, administrative and management personnel, and other professionals. Since 1976, UNUM America and First UNUM combined have been the United States' leading provider of group LTD according to EMPLOYEE BENEFIT PLAN REVIEW, a recognized industry publication. Group LTD provides employees with insurance coverage for loss of income in the event of inability to work due to sickness or injury. Most of these policies begin providing benefits following 90- or 180-day waiting periods and continue providing benefits until the employee reaches age 65-70. Group LTD benefits are paid monthly and generally are limited to two-thirds of the employee's earned income up to a specified maximum benefit. Premiums for group LTD insurance are based upon the expected mortality, morbidity and persistency of the insured group, as well as assumptions concerning operating expenses and future interest rates. INDIVIDUAL DISABILITY Individual disability products provide coverage for loss of income for professionals, corporate executives, business owners and administrative support personnel in the event of disability. As reported in the Life Insurance Marketing Research Association's 1994 INDIVIDUAL HEALTH ISSUES AND INFORCE SURVEY for the United States and Canada, the most recent available data, UNUM America and First UNUM combined were the fourth largest provider of individual disability income policies measured by premium inforce. UNUM announced in November 1994 that it would discontinue sales of the traditional, fixed price, non-cancellable individual disability product ("non-cancellable product") in the United States upon introduction of the new disability product in each state. During the second quarter of 1995, UNUM introduced the guaranteed renewable Lifelong Disability Protection product, which is replacing the non-cancellable product. The Lifelong Disability Protection product provides benefits and transitional support for moderate disabilities, while providing richer benefits for severe disabilities. Various options are available that permit tailoring of an insurance policy to the specific client's needs. The most common options include up to 60% base income replacement coverage, an option to purchase up to 40% further coverage in the event of catastrophic injury or illness involving the loss of two or more Activities of Daily Living, and an automatic option to convert to a long term care policy at retirement age. At the end of 1995, the Lifelong Disability Protection product had been approved in 42 states and the District of Columbia. Sales of the non-cancellable product are being discontinued in each state following the regulatory approval of the Lifelong Disability Protection product. Until the new products are approved, UNUM will continue to sell individual disability products on a non-cancellable basis, with a fixed premium for the duration of the policy. The basic individual disability policy provides the insured with a portion of the earned income which is lost as a result of sickness or injury. Monthly benefits available range from 30% to 70% of the insured's earned income up to a specified maximum benefit. UNUM also markets buy/sell and key person coverage and policies that provide reimbursement for business overhead expenses incurred during a period of disability. 4 Individual disability insurance premium rates are based on expected mortality, morbidity and persistency, as well as assumptions concerning policy related expenses, inflation and investment income. GROUP SHORT TERM DISABILITY Group short term disability insurance ("group STD") provides employees with insurance coverage for loss of income in the event of inability to work due to sickness or injury. Most of these policies begin providing benefits immediately for accidents, or following a one-week waiting period for sickness, and continue providing benefits for up to 26 weeks. Group STD benefits are paid weekly and generally are limited to 60% of the employee's earned income up to a specified maximum benefit. As reported by EMPLOYEE BENEFIT PLAN REVIEW, UNUM America and First UNUM combined were one of the top three providers of group STD for 1994, based on premium and number of lives inforce. LONG TERM CARE UNUM America and First UNUM market long term care ("LTC") insurance to employer groups, continuing care retirement communities and individuals. The group LTC product is offered on an employer or employee-paid basis, and employer groups may offer coverage to retirees, spouses, parents and grandparents, in addition to the employee. UNUM LIMITED: UNUM Limited was the leading provider for 1994 of group LTD insurance in the United Kingdom, as reported by Employers Re. International. UNUM Limited targets group LTD sales to management personnel, other professionals, and technical and skilled artisans. These products are marketed through a network of independent brokers. UNUM Limited's group LTD products provide employees with insurance coverage for loss of income in the event of inability to work due to sickness or injury. UNUM Limited also markets individual disability insurance through brokers and agents to self-employed individuals and those not covered under group policies. Premiums for group LTD and individual disability insurance are based upon the expected mortality, morbidity and persistency of the insured group, as well as assumptions concerning operating expenses and future interest rates. In May 1994, UNUM Limited assumed the management of the group risk portfolio of Windsor Life Assurance Company Limited ("Windsor Life"), which included group LTD and group life products. Windsor Life was the third largest group LTD provider in the United Kingdom in 1993, as reported by Employers Re. International. UNUM JAPAN: On June 20, 1994, the Japanese Ministry of Finance granted UNUM a provisional license that allowed UNUM to establish a non-life insurance company, UNUM Japan Accident Insurance Company Limited ("UNUM Japan"), to market disability and other accident products in Japan. UNUM Japan has subsequently received an official license. UNUM Japan targets sales of group LTD to executive, administrative and management personnel, and other professionals. These products are marketed through contracted independents and brokers. Group LTD provides employees with insurance coverage for loss of income in the event of inability to work due to sickness or injury. Most of these policies begin providing benefits following 90- or 365-day waiting periods and continue providing benefits until the employee reaches age 65-70. Group LTD benefits are paid monthly and generally are limited to 60% of the employee's earned income up to a specified maximum benefit. Premiums for group LTD insurance are based upon the expected mortality, morbidity and persistency of the insured group, as well as assumptions concerning operating expenses and future interest rates. OTHER: Through Commercial Life Insurance Company ("Commercial Life"), UNUM is a leader in the association group marketplace, offering disability income to members of professional associations. Duncanson & Holt Services manages long term disability reinsurance through UNUM America and a disability reinsurance syndicate. Duncanson & Holt Services is a leading manager of group LTD reinsurance in the United States. Refer to Item 7 and Item 8 (Note 16) under the caption "Disability Insurance Segment" for more information. C. SPECIAL RISK INSURANCE SEGMENT The Special Risk Insurance segment in 1995 accounted for 18.2% of UNUM's revenues and 15.8% of its income before income taxes. The Special Risk Insurance segment includes group life, special risk accident insurance, non-disability reinsurance operations, reinsurance underwriting management operations and other special risk insurance products. 5 The Special Risk Insurance segment's group insurance products are sold primarily on a basis that permits annual repricing. This enables UNUM to adjust the pricing of its products to more closely match the underlying claim experience and interest rate environment. UNUM America and First UNUM's group life insurance products provide term insurance to a broad range of employees. As reported by EMPLOYEE BENEFIT PLAN REVIEW for 1994, the most recent available data, UNUM America and First UNUM combined were the fifth largest writer of group life insurance in the United States, based on number of contracts inforce. UNUM America and First UNUM also market other special risk insurance products, including group accidental death & dismemberment insurance. UNUM America and First UNUM market their group and individual insurance products, as well as long term care products, which are included in the Disability Insurance and Special Risk Insurance segments, through a network of 33 offices in the United States and Canada that distribute these products through brokers. As of December 31, 1995, these branch offices were organized into four regions and were staffed with approximately 720 management, sales, service and administrative personnel. Through Commercial Life, UNUM is a leading provider of group special risk accident products, including group travel and voluntary accident insurance. Commercial Life also provides group universal life, group term life and payroll deduction programs for employees through a network of independent brokers and specialty agents. Commercial Life is a leader in the association group marketplace, offering business overhead expense, accidental death and dismemberment, hospital indemnity and term life insurance to members of professional associations. On July 30, 1992, UNUM purchased Duncanson & Holt, Inc. ("D&H"), a leading accident and health reinsurance underwriting manager. As a reinsurance underwriting manager, D&H is authorized to conduct reinsurance business on behalf of the member companies participating in its reinsurance facilities. D&H provides pool management services that may include marketing, underwriting, administration, claims payment and actuarial services for client companies, but does not bear any insurance risk. D&H has offices throughout the United States and in London, Toronto and Singapore. The non-disability reinsurance operations include UNUM America's participation in reinsurance facilities managed by Duncanson & Holt, facilities managed by non-related companies and direct reinsurance arrangements primarily for accident and health, long term care and special risks. As a member company in reinsurance facilities, UNUM America assumes a share of the insurance risk of the facility. During 1995, Duncanson & Holt Europe Ltd., an affiliate of D&H based in the United Kingdom, was authorized by Lloyd's of London to establish two new Lloyd's Managing Agents and to acquire a third existing Lloyd's Managing Agent. Each manages a syndicate that underwrites primarily personal accident and other "non-marine" classes of business at Lloyd's of London. Refer to Item 7 and Item 8 (Note 16) under the caption "Special Risk Insurance Segment" for more information. D. COLONIAL PRODUCTS SEGMENT The Colonial Products segment in 1995 accounted for 12.8% of UNUM's revenues and 23.0% of its income before income taxes. The Colonial Products segment includes Colonial Life & Accident Insurance Company ("Colonial") and affiliates. Colonial, the principal subsidiary, markets a broad line of payroll-deducted, voluntary benefits to employees at their worksites, while focusing on accident and sickness, cancer and life products. Colonial's accident policies generally provide benefit payments for disability income, death, dismemberment or major injury. Accident policies are designed to supplement other benefits available through Social Security, workers' compensation, and other insurance plans. Colonial offers a wide range of life insurance products, with universal life and whole life accounting for most of the life insurance sold. Colonial's cancer policies are designed to provide payments for hospitalization and scheduled medical benefits, with the amounts of such payments established by the policies. All of Colonial's insurance policies are issued on a nonparticipating basis. More than 97% of Colonial's premiums for 1995 were derived from policies marketed to employees at their worksites, with premiums in most cases to be collected through payroll deduction. Such policies are issued on a "guaranteed renewable" basis, which means that Colonial cannot refuse to renew any policy, but it does reserve the right on a product-by-product basis to increase premiums for inforce policies. This right to change premiums is or may be subject to various state insurance department rules, regulations, and approvals. 6 Since 1985, Colonial has marketed its accident and health products as qualified fringe benefits that can be purchased with pretax dollars as part of a flexible benefits program pursuant to Section 125 of the Internal Revenue Code. In 1995, premiums from sales to employees participating in such programs accounted for approximately 50% of total premiums. A flexible benefits program assists employers in managing their benefits and compensation packages and provides policyholders with the ability to choose the benefits that best meet their needs. Although Congress might change the tax laws to limit or eliminate fringe benefits available on a pretax basis and such a change could limit or eliminate Colonial's ability to continue marketing its products in this way, Colonial believes its products provide policyholders value, which will remain even if the tax advantages offered by flexible benefit programs are eliminated. Colonial markets its products nationwide primarily through a 5,400-member independent contractor sales force. Approximately 1,300 home office employees provide corporate administration, sales support, internal services and systems, claims processing, policyholder services and employer services. Colonial Companies' subsidiary, BenefitAmerica, Inc. ("BenefitAmerica"), offers employers administrative services for their employee benefit programs. The services offered by BenefitAmerica include administration of flexible spending accounts, which are offered under an employer's flexible benefits plan pursuant to Section 125 of the Internal Revenue Code, as well as other administrative services to those plans. The services offered by BenefitAmerica complement the services and products offered to employers by Colonial. Refer to Item 7 and Item 8 (Note 16) under the caption "Colonial Products Segment" for more information. E. RETIREMENT PRODUCTS SEGMENT The Retirement Products segment accounted for 8.7% of UNUM's revenues and 11.9% of its income before income taxes in 1995. This segment markets and services tax-sheltered annuities ("TSA") in UNUM America and First UNUM. This segment also includes guaranteed investment contracts ("GICs"), deposit administration accounts ("DAs"), 401(k) plans, individual life and group medical insurance, all of which are no longer actively marketed by UNUM. On September 11, 1995, UNUM announced plans to withdraw from the tax sheltered annuity business to focus greater attention on core disability and special risk businesses. On January 24, 1996, UNUM America entered into an agreement for the sale of its group TSA business to The Lincoln National Life Insurance Company ("Lincoln Life"), a part of Lincoln National Corporation, and to a new New York insurance subsidiary of Lincoln Life. The agreement also contemplates that First UNUM will enter into a similar agreement with Lincoln Life's New York insurance subsidiary. The sale, which is subject to regulatory approvals, involves approximately 1,700 group contractholders and assets under management of approximately $3 billion. The agreement initially contemplates the reinsurance of these contracts under an indemnity reinsurance arrangement. These contracts will then be reinsured pursuant to an assumption reinsurance arrangement upon consent of the TSA contractholders and/or participants. The purchase price (ceding commission) at closing is expected to be approximately $70 million. It is anticipated that it will take several months (perhaps six to nine months) to obtain the necessary approvals and otherwise close the sale. There is no guarantee that the sale will close. TSA products (Section 403(b) plans under the Internal Revenue Code) are marketed to non-profit hospitals and organizations. These contracts offer a fixed fund that provides for annual renewable guarantees of principal and interest. In addition, some TSA contracts offer variable annuity investment alternatives. These investment alternatives are mutual funds offered as subaccounts in a UNUM separate account. The mutual funds, managed by nationally recognized investment managers, include a variety of choices such as growth, balanced and stock index funds. UNUM also offers recordkeeping and reporting services to TSA contractholders. UNUM America and First UNUM market their TSA products through a network of 13 offices in the United States, which distribute these products as well as the group and individual insurance products offered by the Disability Insurance and Special Risk Insurance segments, primarily through brokers. In the fourth quarter of 1991, UNUM announced plans to withdraw from the 401(k) market by the end of 1992. UNUM has transferred 401(k) service responsibilities to its formerly wholly-owned subsidiary, Preferred Benefits Corporation, which was sold in the second quarter of 1992. UNUM discontinued active marketing of GICs and DAs primarily due to the lack of demand and the level of investment risk. UNUM discontinued new sales of universal life and other individual life policies as of January 1, 1988. UNUM began exiting the group medical product line in 1987 with the discontinuance of new sales on the traditional group medical product. In 1990, management announced its intention to exit the group medical product entirely. Beginning with the February 1991 renewals, policyholders had the option of transferring their group medical product to another insurer. UNUM services commitments to inforce policyholders, which include conversions of group life and group medical insurance. Refer to Item 7 and Item 8 (Note 16) under the caption "Retirement Products Segment" for more information. 7 F. INVESTMENTS Refer to Item 7 under the caption "Investments" for more information. Additional information about UNUM's mortgage loan portfolio is provided below: UNUM management believes that its mortgage loan portfolio is well diversified geographically and among property types. The mortgage loan portfolio percentages by geographic region and property type at December 31, 1995, and 1994, were as follows:
GEOGRAPHIC REGION 1995 1994 ----- ----- New England....................................... 12.3% 10.6% Mid-Atlantic...................................... 20.0 17.4 Southeast......................................... 12.8 15.0 Southwest......................................... 7.8 8.4 Pacific........................................... 14.2 15.1 North Central..................................... 15.0 16.0 Farm Belt......................................... 10.2 9.5 Oil Patch......................................... 7.7 8.0 ----- ----- Total......................................... 100.0% 100.0% ----- ----- ----- -----
PROPERTY TYPE 1995 1994 ----- ----- Office Building................................... 24.6% 26.2% Retail............................................ 33.9 30.9 Industrial........................................ 22.6 19.5 Residential....................................... 6.5 7.2 Medical........................................... 3.7 6.5 Nursing Home...................................... 1.2 2.7 Hotel/Motel....................................... 5.5 5.8 Other............................................. 2.0 1.2 ----- ----- Total......................................... 100.0% 100.0% ----- ----- ----- -----
Mortgage loans delinquent 60 days or more on a contract delinquency basis by geographic region and property type were as follows at December 31, 1995, and 1994 (dollars in millions):
GEOGRAPHIC REGION 1995 1994 ---- ----- New England....................................... $ -- $15.7 Mid-Atlantic...................................... -- 3.5 Pacific........................................... -- 0.9 North Central..................................... 2.8 2.2 ---- ----- Total......................................... $2.8 $22.3 ---- ----- ---- -----
PROPERTY TYPE 1995 1994 ---- ----- Office Building................................... $2.2 $22.3 Medical........................................... 0.6 -- ---- ----- Total......................................... $2.8 $22.3 ---- ----- ---- -----
Mortgage loans that were restructured prior to the adoption of Financial Accounting Standard ("FAS") No. 114, "Accounting by Creditors for Impairment of a Loan," by geographic region and property type were as follows at December 31, 1995, and 1994 (dollars in millions):
GEOGRAPHIC REGION 1995 1994 ----- ----- New England....................................... $ 3.2 $ 3.3 Mid-Atlantic...................................... 4.3 4.4 Southeast......................................... 9.3 9.5 Southwest......................................... 7.8 7.9 Pacific........................................... 9.6 10.8 North Central..................................... 14.4 14.5 Farm Belt......................................... 8.7 8.8 Oil Patch......................................... 2.6 14.4 ----- ----- Total......................................... $59.9 $73.6 ----- ----- ----- -----
PROPERTY TYPE 1995 1994 ----- ----- Office Building................................... $25.0 $32.2 Retail............................................ 12.7 12.8 Industrial........................................ 5.8 8.6 Residential....................................... 6.9 7.1 Hotel/Motel....................................... 7.9 2.4 Other............................................. 1.6 10.5 ----- ----- Total......................................... $59.9 $73.6 ----- ----- ----- -----
Effective January 1, 1995, UNUM adopted FAS 114, which defined the principles to measure and record a loan when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In general, impaired loans as defined by FAS 114 compare with loans previously defined and disclosed as problem and potential problem loans. 8 Impaired loans by geographic region and property type were as follows at December 31, 1995 (dollars in millions):
GEOGRAPHIC REGION 1995 --------- New England.......................................... $ 14.9 Mid-Atlantic......................................... 15.2 Southwest............................................ 12.4 North Central........................................ 2.8 Oil Patch............................................ 4.8 --------- Total............................................ $ 50.1 --------- ---------
PROPERTY TYPE 1995 --------- Office Building...................................... $ 23.3 Retail............................................... 16.0 Industrial........................................... 5.4 Medical.............................................. 5.4 --------- Total............................................ $ 50.1 --------- ---------
Potential problem mortgage loans were defined by UNUM as current and performing loans with which management had some concerns about the ability of the borrower to comply with present loan terms and whose book value exceeded the market value of the underlying collateral. Potential problem loans by geographic region and property type were as follows at December 31, 1994 (dollars in millions):
GEOGRAPHIC REGION 1994 --------- New England.......................................... $ 3.4 Mid-Atlantic......................................... 9.3 Southeast............................................ 6.3 Southwest............................................ 1.5 Pacific.............................................. 4.1 North Central........................................ 0.8 Farm Belt............................................ 5.9 Oil Patch............................................ 4.9 --------- Total............................................ $ 36.2 --------- ---------
PROPERTY TYPE 1994 --------- Office Building...................................... $ 17.2 Retail............................................... 0.7 Residential.......................................... 2.2 Medical.............................................. 4.6 Hotel/Motel.......................................... 11.5 --------- Total............................................ $ 36.2 --------- ---------
G. RISK MANAGEMENT AND REINSURANCE Risk management, which includes product design, pricing, underwriting, reserving and benefits management, involves a determination of the type and amount of risk that an insurer is willing to accept, administration and evaluation of business inforce, and control of claims. UNUM has underwriters organized within business segments who evaluate policy applications on the basis of information provided by the applicant and other sources. UNUM reinsures with other companies portions of the insurance policies it has underwritten. Reinsurance allows UNUM to sell policies with higher benefits than the entire risk that UNUM is willing to assume. UNUM remains liable to the insured for the payment of policy benefits if the reinsurers cannot meet their obligations under the reinsurance agreements. Within the Disability Insurance and Special Risk Insurance segments, UNUM America and First UNUM have underwriters for group disability, individual disability, group life and long term care products. These underwriting functions are aligned geographically with UNUM America and First UNUM's four sales regions. Quotes for prospective customers are based upon UNUM America and First UNUM's experience with profitability and persistency of the respective employer's risk category. The maximum group LTD, group STD, and LTC monthly benefit varies, but the usual maximum monthly amount available is $35,000, $10,000, and $6,000 respectively. For group life insurance products, UNUM retains up to $750,000 per individual life and reinsures the balance with other insurance carriers. In 1994, UNUM America and First UNUM announced the discontinuance of sales of its traditional fixed price, non-cancellable individual disability insurance product in the United States and, during 1995, introduced the new guaranteed renewable individual disability product. As of the end of 1995, this new product has received regulatory approval in most states. UNUM requires medical examinations, financial data, and other information to make a decision on the acceptability of the individual risk and to appropriately classify an applicant for individual disability insurance products. On new sales of the new guaranteed renewable product, UNUM retains up to $8,000 plus 25% of amounts in excess of $8,000 basic monthly indemnity per life for personal disability coverages, $20,000 plus 25% of amounts in excess of $20,000 per life for business overhead expense coverages and $500,000 per life for buy/sell coverages. The financial and medical underwriting areas of UNUM Limited handle the underwriting of group and individual disability policies and group life policies. The maximum yearly benefit for group LTD is 326,000 pounds sterling. UNUM 9 Limited retains 75,000 pounds sterling of this risk and reinsures the balance. The maximum yearly initial benefit for individual disability insurance is 125,000 pounds sterling and amounts over 40,000 pounds sterling per annum are reinsured. On group life business, UNUM Limited retains 60% of the risk up to a maximum of 150,000 pounds sterling per individual life. UNUM (except for Colonial and Commercial Life) reinsures the risk of individual life insurance contracts that exceed $425,000 on any one life. Colonial limits its risk for death and dismemberment benefits to $100,000 per life. Colonial also has reinsurance on its cancer insurance products that provides coverage for claim payments in excess of $50,000 in any one year, per claimant, up to a lifetime maximum of $1 million per claimant. Commercial Life reinsures the risk on its accidental death and dismemberment contracts that exceed $400,000 on any one life. Commercial Life also reinsures the risk on individual, group and franchise life contracts that exceed $250,000 on any one life. In addition to the reinsurance arrangements above, UNUM (except for Colonial, UNUM Limited and Commercial Life) is covered by catastrophe reinsurance, which provides additional protection against aggregate losses in excess of $1 million up to a maximum of $100 million. This protection is activated whenever one event causes the disability and/or death of five or more people covered under UNUM's disability or life contracts. Colonial is covered by catastrophe reinsurance for accidental deaths totaling more than $300,000 from a single disaster, up to a limit of $5 million. UNUM Limited's group disability business is partially covered by catastrophe reinsurance of 3 million pounds sterling for losses from one event involving more than twenty-five lives. Commercial Life is covered by catastrophe reinsurance, which provides additional protection against aggregate losses in excess of $1 million up to a maximum of $54 million for losses involving three or more covered lives. Also, UNUM purchased excess-of-loss reinsurance totaling $60 million over three years through a Lloyd's of London syndicate for the non-cancellable individual disability business of UNUM America and First UNUM. Reinsurance premiums assumed and ceded for the year ended December 31, 1995, were $241.5 million and $66.2 million, respectively. No current or planned reinsurance activity is expected to have a significant impact on the ability of UNUM to underwrite additional insurance. H. RESERVES The reserves reported in the consolidated financial statements of UNUM Corporation and subsidiaries have been computed in accordance with generally accepted accounting principles ("GAAP"). These reserve balances generally differ from those specified by the laws of the various states and those carried in the statutory financial statements. The differences between GAAP and statutory reserves arise from the use of different mortality, morbidity, interest, expense and lapse assumptions. Pursuant to insurance laws of the states of Maine, New York, South Carolina and Wisconsin, the United Kingdom and Japan, UNUM's insurance subsidiaries (UNUM America, First UNUM, Colonial Life, Commercial Life, UNUM Limited and UNUM Japan, respectively) set up statutory reserves, carried as liabilities, to meet obligations on their various policies. These statutory reserves are amounts which, together with premiums to be received and interest on such reserves at assumed rates, are calculated to be sufficient to meet the policy and contract obligations of UNUM's insurance subsidiaries. Pursuant to federal insurance laws of Canada, UNUM America has established regulatory reserves to meet the obligations of policies written in its Canadian branch. Statutory, GAAP and regulatory reserves are based upon UNUM's insurance subsidiaries' experience as adjusted to provide for possible adverse deviations. These estimates are periodically reviewed and compared to actual experience. The assumptions are revised when it is determined that future expected experience differs from the assumed estimates. I. EMPLOYEES At December 31, 1995, UNUM had approximately 6,900 full-time employees. UNUM does not have collective bargaining agreements with employees. J. COMPETITION The principal competitive factors affecting UNUM's business are reputation, financial strength, quality of service, risk management expertise, distribution, product design and price. There is competition among insurance companies for the types of individual and group insurance and retirement products sold by UNUM. At the end of 1995, there were more than 1,800 legal reserve life insurance companies in the United States and Canada and life assurance offices in the United Kingdom, which may offer insurance products similar to those marketed by UNUM. UNUM also competes with banks, investment advisors, mutual funds and other financial entities to provide products and services. All areas of group insurance are highly competitive because of the large number of insurance companies and other entities offering these products. 10 K. REGULATION UNUM's insurance subsidiaries are subject to regulation and supervision in the jurisdictions in which they do business. Although the extent of such regulation varies, U.S. state, Canadian, United Kingdom and Japanese insurance laws generally establish supervisory agencies, such as state insurance departments, the Office of the Superintendent of Financial Institutions ("OSFI"), The Department of Trade and Industry ("DTI") and the Ministry of Finance ("MOF"), respectively, with broad administrative powers. These powers relate chiefly to the granting and revocation of the licenses to transact business, and establishing reserve requirements and the form and content of required financial statements. Such powers also include the licensing of agents in the U.S. and the approval of policy forms in the U.S. and Japan. UNUM's insurance operations and subsidiaries must meet the standards and tests for its investments promulgated by insurance laws and regulations of Maine, New York, South Carolina, Wisconsin, Canada, the United Kingdom and Japan, as applicable. UNUM's United States domiciled insurance subsidiaries are required to file quarterly and annual statements with the various insurance departments in state jurisdictions in which they do business. These statements comply with the rules of the National Association of Insurance Commissioners ("NAIC"). UNUM's insurance subsidiaries are examined periodically by examiners of the states of Maine, New York, South Carolina and Wisconsin and of other states (on an "association" or "zone" basis) in which they are licensed to do business. UNUM's insurance branch operation in Canada is periodically examined by Canadian insurance regulatory authorities and is required to file annual reports that comply with the insurance laws of Canada and with the rules of the OSFI of the Canadian Federal government and each of the provinces. UNUM's United Kingdom subsidiary is required to file financial statements annually with the DTI, in accordance with United Kingdom law and regulation. UNUM Japan is required to file financial statements annually with the MOF, in accordance with Japanese laws and regulations. UNUM's insurance subsidiaries operate under insurance laws, which require that they establish and carry, as liabilities, actuarial reserves to meet their obligations on their disability, life, accident and health policies, and annuities. These reserves are verified periodically by various regulators. UNUM's reinsurance underwriting manager, Duncanson & Holt, Inc., ("D&H") is a licensed reinsurance intermediary in New York. It is subject to regulation in New York and other states where it does business. Duncanson & Holt Underwriters, Ltd., a subsidiary of D&H, is a corporate member of Lloyd's of London and is subject to all rules applicable to such members. UNUM Sales Corporation, a registered broker-dealer, is regulated by the National Association of Securities Dealers, Inc. and the Securities and Exchange Commission. It is the principal underwriter for variable annuity contracts offered by UNUM America and First UNUM. Future operations of UNUM Sales Corporation may be affected by the completion of the TSA sale, as previously discussed in Item 1A and Item 1E, and implementation of the details of the transaction. The laws of the State of Maine require periodic registration and reporting by insurance companies domiciled within its jurisdiction, which control or are controlled by other corporations or persons. This constitutes, by definition, a holding company system. UNUM America is domiciled in Maine and is subject to these laws. New York, which is the domiciliary state of First UNUM; South Carolina, which is the domiciliary state of Colonial Life; and Wisconsin, which is the domiciliary state of Commercial Life, have similar laws. Accordingly, the UNUM insurance subsidiaries are registered as members of the UNUM holding company system in the states of Maine, New York, South Carolina and Wisconsin. The statutes of these states require periodic disclosure concerning the ultimate controlling person and intercorporate transactions within the holding company system, some of which require prior approval. Effective December 31, 1991, UNUM America merged with two of UNUM Corporation's wholly-owned Maine life insurance subsidiaries, UNUM Life Insurance Company ("UNUM Life") and UNUM Pension and Insurance Company ("UPIC"), with UNUM America remaining as the surviving corporation. In connection with the merger of UNUM Life and UPIC into UNUM America, UNUM Life ceased to maintain its licensing status in the State of New York effective December 31, 1991, with all future New York business being transacted by First UNUM. As a condition of New York regulatory approval, UNUM America agreed to maintain a security deposit in the State of New York equal to 102% of outstanding statutory liabilities to New York policyholders, insureds and claimants of UNUM Life. The security deposit consists of certain cash and invested assets. An initial deposit was made in February 1992 and, at December 31, 1995, the required deposit was $845.3 million. UNUM America has the ability to withdraw assets from this account and to substitute other assets at its discretion. The balance of the security deposit will be reviewed and adjusted at least annually based upon the outstanding liabilities described above. In the event of the consummation of the TSA sale, as described in Item 1A and 1E, the balance of the security deposit may be adjusted based on the outstanding liabilities of the TSA business. 11 L. PARTICIPATION FUND ACCOUNT Participating policies issued prior to November 14, 1986, by the former Union Mutual Life Insurance Company ("Union Mutual") will remain participating as long as they remain in force. A Participation Fund Account ("PFA") has been established for the sole benefit of all of Union Mutual's individual participating life and annuity policies and contracts. At December 31, 1995, the PFA had $364.2 million in assets, which were held by UNUM America. UNUM agreed to pay certain expenses associated with the PFA and at December 31, 1995, the reserve for the present value of such expenses was $15.0 million. PFA assets, investment earnings and income from operations are not available to UNUM America or UNUM during the operation or upon the termination of the PFA. In the unlikely event that the assets of the PFA are not adequate to provide for policyholder benefits (exclusive of dividends, which are not guaranteed), UNUM America would be required to provide for any shortfall, and such amounts, if any, would reduce earnings of UNUM America and UNUM. All operating data of the individual participating life and annuity contracts has been excluded from the Consolidated Statements of Income and all other operating data included in this report unless otherwise noted. The assets and liabilities associated with the participating business are included in UNUM's Consolidated Balance Sheets. ITEM 2. PROPERTIES UNUM owns home office property consisting of five office buildings and four service buildings located throughout the Portland, Maine, area. UNUM also owns an office building in the United Kingdom, which is the home office of UNUM Limited. The home office of the Colonial Companies is located in Columbia, South Carolina, and is also owned by UNUM. In addition, UNUM leases, on periods principally from three to six years, office and warehouse space for use by its home office, affiliates, and sales forces. ITEM 3. LEGAL PROCEEDINGS 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 December 31, 1995. 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 is 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. Although UNUM believes its claims are meritorious, the United States is aggressively resisting the claims and the ultimate recovery, if any, cannot be determined at this time. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of shareholders, through solicitation of proxies or otherwise, during the fourth quarter of 1995. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The principal markets in which UNUM's common stock is traded are the New York Stock Exchange and the Pacific Stock Exchange. UNUM's ticker symbol is "UNM." As of December 31, 1995, there were 24,153 shareholders of record of common stock. Information concerning restrictions on the ability of UNUM's subsidiaries to transfer funds to UNUM in the form of cash dividends is described in Item 8 (Note 12). The market price (as quoted by the New York Stock Exchange) and cash dividends paid, per share of UNUM's common stock, by calendar quarter for the past two years were as follows:
1995 1994 ------------------------------------------ ------------------------------------------ 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q - -------------------------------------------------------------------------------------------------------------------------------- High.................................... $ 56.500 $ 54.000 $ 48.000 $ 46.000 $ 46.875 $ 50.000 $ 56.750 $ 58.000 Low..................................... $ 50.625 $ 45.375 $ 39.875 $ 37.750 $ 35.125 $ 43.000 $ 44.500 $ 48.000 Close................................... $ 55.000 $ 52.750 $ 46.875 $ 45.250 $ 37.750 $ 46.000 $ 44.750 $ 52.750 Dividend Paid........................... $ 0.265 $ 0.265 $ 0.265 $ 0.24 $ 0.24 $ 0.24 $ 0.24 $ 0.20
12 ITEM 6. SELECTED FINANCIAL DATA The following should be read in conjunction with UNUM's Consolidated Financial Statements and related notes reported in Item 8. UNUM CORPORATION AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA (DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 1989 1988 1987 - ------------------------------------------------------------------------------------------------------------------------------ INCOME STATEMENT DATA Revenues: Premiums and other income (expense): Disability Insurance Segment...................... $1,879.9 $1,716.2 $1,547.9 $1,339.8 $1,214.6 $1,004.7 $ 803.8 $ 681.7 $ 630.8 Special Risk Insurance Segment...................... 702.3 607.1 559.4 432.8 368.5 347.0 306.2 176.3 165.7 Colonial Products Segment..... 475.1 441.3 407.4 371.9 325.4 281.1 241.0 216.7 192.1 Retirement Products Segment... 34.1 31.4 42.5 52.5 64.4 92.8 130.2 180.0 238.5 Corporate..................... 0.1 0.8 -- 0.8 -- (0.1) 0.2 -- 0.9 -------- -------- ----------- -------- -------- -------- -------- -------- -------- Total premiums and other income..................... 3,091.5 2,796.8 2,557.2 2,197.8 1,972.9 1,725.5 1,481.4 1,254.7 1,228.0 -------- -------- ----------- -------- -------- -------- -------- -------- -------- Net investment income (expense): (a) Disability Insurance Segment...................... 592.9 400.3 369.8 370.5 333.8 285.4 239.4 193.1 167.8 Special Risk Insurance Segment...................... 48.4 40.7 34.8 32.2 26.5 23.4 24.5 12.5 12.1 Colonial Products Segment..... 52.2 32.6 41.4 35.4 38.5 25.2 26.7 22.3 19.0 Retirement Products Segment... 323.7 338.0 387.6 408.7 411.3 426.1 424.0 413.2 418.2 Corporate..................... 14.2 4.2 6.2 3.9 1.5 (9.0) 5.9 20.3 19.1 -------- -------- ----------- -------- -------- -------- -------- -------- -------- Total net investment income..................... 1,031.4 815.8 839.8 850.7 811.6 751.1 720.5 661.4 636.2 -------- -------- ----------- -------- -------- -------- -------- -------- -------- Total revenues.............. 4,122.9 3,612.6 3,397.0 3,048.5 2,784.5 2,476.6 2,201.9 1,916.1 1,864.2 -------- -------- ----------- -------- -------- -------- -------- -------- -------- Benefits and expenses: Disability Insurance Segment...................... 2,255.8 2,060.3 1,603.6 1,446.6 1,306.4 1,093.7 878.8 756.0 701.4 Special Risk Insurance Segment...................... 690.4 581.9 555.3 418.7 355.2 342.2 312.9 180.4 172.0 Colonial Products Segment..... 439.6 411.2 378.4 346.8 306.4 259.6 225.5 201.1 178.6 Retirement Products Segment... 312.3 327.4 375.8 427.5 484.4 491.6 535.9 580.1 685.0 Corporate..................... 42.9 33.2 23.6 10.4 12.5 10.8 12.3 9.5 15.7 -------- -------- ----------- -------- -------- -------- -------- -------- -------- Total benefits and expenses................... 3,741.0 3,414.0 2,936.7 2,650.0 2,464.9 2,197.9 1,965.4 1,727.1 1,752.7 -------- -------- ----------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes and cumulative effects of accounting changes: Disability Insurance Segment...................... 217.0 56.2 314.1 263.7 242.0 196.4 164.4 118.8 97.2 Special Risk Insurance Segment...................... 60.3 65.9 38.9 46.3 39.8 28.2 17.8 8.4 5.8 Colonial Products Segment..... 87.7 62.7 70.4 60.5 57.5 46.7 42.2 37.9 32.5 Retirement Products Segment... 45.5 42.0 54.3 33.7 (8.7) 27.3 18.3 13.1 (28.3) Corporate..................... (28.6) (28.2) (17.4) (5.7) (11.0) (19.9) (6.2) 10.8 4.3 -------- -------- ----------- -------- -------- -------- -------- -------- -------- Total income before income taxes and cumulative effects of accounting changes.................... 381.9 198.6 460.3 398.5 319.6 278.7 236.5 189.0 111.5 -------- -------- ----------- -------- -------- -------- -------- -------- -------- Income taxes (credit)........... 100.8 43.9 148.3 107.3 74.3 60.9 51.1 30.1 (4.7) -------- -------- ----------- -------- -------- -------- -------- -------- -------- Cumulative effects of accounting changes........................ -- -- (12.1)(b) -- -- -- -- -- -- -------- -------- ----------- -------- -------- -------- -------- -------- -------- Net income.................. $ 281.1 $ 154.7 $ 299.9 $ 291.2 $ 245.3 $ 217.8 $ 185.4 $ 158.9 $ 116.2 -------- -------- ----------- -------- -------- -------- -------- -------- -------- -------- -------- ----------- -------- -------- -------- -------- -------- -------- Per common share: Net income.................... $ 3.87 $ 2.09 $ 3.81(b) $ 3.71 $ 3.15 $ 2.73 $ 2.03 $ 1.57 $ 1.06 Dividends paid................ $ 1.035 $ 0.92 $ 0.765 $ 0.625 $ 0.49 $ 0.375 $ 0.285 $ 0.23 $ 0.20
- ------------- (a) Includes investment income and net realized investment gains. (b) Effective January 1, 1993, UNUM adopted Financial Accounting Standard No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," which decreased net income by $32.1 million, or $0.40 per share, and Financial Accounting Standard No. 109, "Accounting for Income Taxes," which increased net income by $20.0 million, or $0.25 per share. 13 UNUM CORPORATION AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA (DOLLARS AND SHARES IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, -------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 - ------------------------------------------------------------------------------------------------------------------------------ BALANCE SHEET DATA Assets............ $14,787.8 $13,127.2 $12,437.3 $11,959.8 $11,310.9 $10,063.4 $9,045.7 $8,592.3 $7,783.0 $7,333.8 Long-term debt.... $ 457.3 $ 182.1 $ 128.6 $ 77.2 $ 51.5 $ 77.2 $ 1.5 $ 1.5 $ 1.7 $ 1.4 Stockholders' equity........... $ 2,302.9 $ 1,915.4 $ 2,102.7 $ 2,010.9 $ 1,755.5 $ 1,490.1 $1,445.0 $1,512.3 $1,463.8 $1,471.1 Shares outstanding...... 73.0 72.4 76.0 79.1 78.2 77.4 82.0 96.8 104.2 111.4 Weighted average shares outstanding during the year............. 72.7 74.2 78.8 78.5 77.8 79.9 91.4 101.3 109.1 NA(a)
- --------------- (a) In November 1986, UNUM converted to a stock company from a mutual company. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This management's discussion and analysis reviews the consolidated financial condition of UNUM at December 31, 1995, the consolidated results of operations for the past three years and, where appropriate, factors that may affect future financial performance are identified and discussed. Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Selected Consolidated Financial Data. CHANGE IN REPORTING SEGMENTS To more clearly reflect UNUM's management of its businesses and to more appropriately group its product portfolios, UNUM began reporting its operations, effective January 1, 1995, principally in four business segments. The following chart provides a summary of the changes in reporting segments. SEGMENTS AFTER THE CHANGE - -------------------------------------------------------------------------------- DISABILITY INSURANCE - -Group Long Term Disability ("LTD") - -UNUM Limited - -Individual Disability - -Group Short Term Disability ("STD") - -Long Term Care - -LTD Reinsurance - -Association Group Disability - -UNUM Japan SPECIAL RISK INSURANCE - -Group Life - -Group Accidental Death & Dismemberment ("AD&D") - -Reinsurance Pools - -Special Risk Products - -Duncanson & Holt ("D&H") Reinsurance Management COLONIAL PRODUCTS - -Accident & Sickness - -Cancer - -Life RETIREMENT PRODUCTS - -Tax Sheltered Annuities - -401(k) - -Other Retirement Products - -Individual Life - -Group Medical - -------------------------------------------------------------------------------- SEGMENTS BEFORE THE CHANGE - -------------------------------------------------------------------------------- EMPLOYEE BENEFITS - -Group LTD - -Group STD - -Group Life - -Group AD&D RELATED BUSINESSES - -UNUM Limited - -LTD Reinsurance - -Reinsurance Pools - -Special Risk Products - -D&H Reinsurance Management - -Association Group Disability COLONIAL COMPANIES - -Accident & Sickness - -Cancer - -Life INDIVIDUAL DISABILITY - -Individual Disability RETIREMENT SECURITY - -Tax Sheltered Annuities - -Long Term Care OTHER OPERATIONS - -401(k) - -Other Retirement Products - -Individual Life - -Group Medical - -------------------------------------------------------------------------------- Corporate includes transactions that are generally non-insurance related. For comparative purposes, prior period information has been restated to reflect the new reporting segments. 15 CONSOLIDATED OVERVIEW - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(DOLLARS AND SHARES IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS, AND PERCENTAGE INCREASE (DECREASE) OVER PRIOR YEAR) 1995 1994 1993 - ------------------------------------------------------------------------------------------ INCOME DATA Revenues Premiums.................................. $ 3,018.2 10.9% $ 2,721.3 10.0% $ 2,474.1 Investment income......................... 806.3 4.7 770.2 (2.6) 790.4 Net realized investment gains............. 225.1 nm 45.6 (7.7) 49.4 Fees and other income..................... 73.3 (2.9) 75.5 (9.1) 83.1 --------- ---- --------- ----- --------- Total revenues.......................... 4,122.9 14.1 3,612.6 6.3 3,397.0 Benefits and expenses....................... 3,741.0 9.6 3,414.0 16.3 2,936.7 --------- ---- --------- ----- --------- Income before income taxes and cumulative effects of accounting changes.............. 381.9 92.3 198.6 (56.9) 460.3 Income taxes................................ 100.8 nm 43.9 (70.4) 148.3 --------- ---- --------- ----- --------- Income before cumulative effects of accounting changes......................... 281.1 81.7 154.7 (50.4) 312.0 Cumulative effects of accounting changes Income taxes.............................. -- -- nm 20.0 Postretirement benefits other than pensions, net of tax..................... -- -- nm (32.1) --------- ---- --------- ----- --------- Net income.............................. $ 281.1 81.7% $ 154.7 (48.4)% $ 299.9 --------- ---- --------- ----- --------- --------- ---- --------- ----- --------- Per common share: Income before cumulative effects of accounting changes....................... $ 3.87 $ 2.09 $ 3.96 Cumulative effects of accounting changes Income taxes.............................. -- -- 0.25 Postretirement benefits other than pensions, net of tax..................... -- -- (0.40) --------- --------- --------- Net income.............................. $ 3.87 $ 2.09 $ 3.81 --------- --------- --------- --------- --------- --------- Summary of income (loss) before income taxes Disability Insurance Segment.............. $ 217.0 nm% $ 56.2 (82.1)% $ 314.1 Special Risk Insurance Segment............ 60.3 (8.5) 65.9 69.4 38.9 Colonial Products Segment................. 87.7 39.9 62.7 (10.9) 70.4 Retirement Products Segment............... 45.5 8.3 42.0 (22.7) 54.3 Corporate................................. (28.6) 1.4 (28.2) 62.1 (17.4) --------- ---- --------- ----- --------- Total income before income taxes........ $ 381.9 92.3% $ 198.6 (56.9)% $ 460.3 --------- ---- --------- ----- --------- --------- ---- --------- ----- --------- BALANCE SHEET DATA Assets.................................... $14,787.8 $13,127.2 $12,437.3 Long-term debt............................ $ 457.3 $ 182.1 $ 128.6 Stockholders' equity...................... $ 2,302.9 $ 1,915.4 $ 2,102.7 Shares outstanding........................ 73.0 72.4 76.0 Weighted average shares outstanding during the year................................. 72.7 74.2 78.8
- ------------ nm = not meaningful or in excess of 100% 16 CONSOLIDATED OVERVIEW In 1995, net income increased by $126.4 million to $281.1 million, or $3.87 per share, from $154.7 million, or $2.09 per share, in 1994. When the following significant items, as described below, are excluded: the increased realized investment gains resulting primarily from the sale of the common stock portfolio, the increased reserves resulting from the lowering of certain disability product reserve discount rates, and the increased group long term disability ("group LTD") reserves for incurred but not reported ("IBNR") claims, all of which took place in 1995; and the individual disability reserve strengthening recorded in 1994, income before income taxes slightly decreased in 1995. The decrease was primarily attributable to higher benefit ratios at UNUM Limited and in the group LTD and group life businesses, increased interest expense and lower interest spread margins on the tax sheltered annuity business. Partially offsetting these items were increased investment income, a lower benefit ratio in the individual disability line of business and continued expense management. The decrease in income before income taxes in 1994 was primarily due to unfavorable claims experience in the individual disability and group LTD businesses. SUMMARY OF SIGNIFICANT EVENTS FOR 1995 AND 1994 During second quarter 1995, UNUM sold virtually all of the common stock portfolio of its United States subsidiaries, primarily due to consideration of statutory capital requirements associated with investment in common stocks and to increase future investment income. The sale of the common stock portfolio contributed to significantly higher realized investment gains than in 1994. UNUM reinvested the proceeds from the sale of the common stock portfolio primarily in investment grade fixed income assets, which has decreased the required amount of statutory capital for regulatory purposes and increased investment income. Dependent on capital considerations and market conditions, UNUM may invest in equity securities in the future. Reserves for certain disability products are discounted using an interest rate which is a composite yield of assets matched with each product. As a result of the sale of the common stock portfolio, which had partially supported these disability reserves, and the subsequent reinvestment of the proceeds primarily in investment grade fixed income assets at yields below the average portfolio yield, certain reserve discount rates were lowered during second quarter 1995. The effect of lowering these discount rates was an increase to the reserve liabilities and benefits to policyholders reported in the Disability Insurance segment of $128.6 million and a decrease in net income of $83.6 million, or $1.15 per share, for the year ended December 31, 1995. The discount rate used to determine the group LTD reserves was reduced to 8.00% at June 30, 1995, as compared with 9.18% at December 31, 1994. At December 31, 1995, the group LTD discount rate was 7.94%. Management expects the reserve discount rate for certain disability products will further decline, since current cash flows are invested in high quality assets at current yields, which are below the composite yield of the existing assets purchased in prior years. UNUM periodically adjusts prices on both existing and new business in an effort to mitigate the impact of the current interest rate environment. During 1995, UNUM increased the group LTD reserves for IBNR claims by $38.4 million, which decreased net income by $25.0 million, or $0.34 per share, for the year ended December 31, 1995. IBNR reserves, which are established to fund anticipated case reserves for claims that have been incurred but not reported to UNUM, are actuarially established based on various factors, including incidence levels and claims severity. The increased IBNR reserves were based on management's judgment that claims currently incurred but not yet reported will reflect increased levels of claims incidence and severity. It is not possible to predict whether future incidence levels or claims severity will be consistent with UNUM's assumptions, or will improve or deteriorate. Throughout 1994, UNUM's individual disability business experienced a higher incidence of new claims and a disproportionate number of large claims, which management attributed to certain geographic and occupational segments of the business, particularly physicians. During the third quarter of 1994, management concluded that the deterioration of claims experience was not a temporary fluctuation in certain segments of the business, but was indicative of expected claim trends for the future. As a result, in third quarter 1994, UNUM increased reserves for existing claims by $83.3 million and strengthened reserves for estimated future losses by $109.1 million. These increased reserves reflected management's expectations of morbidity trends for the existing non-cancellable individual disability business. This reserve strengthening resulted in an increase to benefits to policyholders in the Consolidated Statement of Income of $192.4 million and a decrease to net income of $125.1 million, or $1.69 per share, for the year ended December 31, 1994. It is not possible to predict whether morbidity trends will be consistent with UNUM's assumptions; however, as of December 31, 1995, management believes that the strengthened reserve levels continue to be adequate. 17 SUBSEQUENT EVENTS On January 24, 1996, UNUM America entered into an agreement for the sale of its group tax-sheltered annuity ("TSA") business to The Lincoln National Life Insurance Company ("Lincoln Life"), a part of Lincoln National Corporation, and to a new New York insurance subsidiary of Lincoln Life. The agreement also contemplates that First UNUM will enter into a similar agreement with Lincoln Life's New York insurance subsidiary. The sale, which is subject to regulatory approvals, involves approximately 1,700 group contractholders and assets under management of approximately $3 billion. The agreement initially contemplates the reinsurance of these contracts under an indemnity reinsurance arrangement. These contracts will then be reinsured pursuant to an assumption reinsurance arrangement upon consent of the TSA contractholders and/or participants. The purchase price (ceding commission) at closing is expected to be approximately $70 million. It is anticipated that it will take several months (perhaps six to nine months) to obtain the necessary approvals and otherwise close the sale. There is no guarantee that the sale will close. Including the expected purchase price of approximately $70 million, management expects to generate approximately $160 million of statutory capital from this transaction. Plans for the use of this capital may include repaying debt, investing in new and existing businesses and stock repurchase. On February 7, 1996, UNUM announced plans to merge its Commercial Life Insurance Company affiliate into UNUM America to accelerate growth of its special risk business, increase its commitment to the association group business and to improve operating and capital efficiencies. The merger will be effective December 31, 1996, subject to regulatory approvals. During 1996, UNUM expects to incur costs of approximately $7 million related to the merger and anticipates annual savings of a similar amount following the merger due to reductions in operating costs. ACCOUNTING CHANGES Effective January 1, 1995, UNUM adopted FAS No. 114, "Accounting by Creditors for Impairment of a Loan," and FAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," which defined the principles to measure and record a loan when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The adoption of FAS 114 and FAS 118 did not have a material effect on UNUM's results of operations or financial position. Effective January 1, 1994, UNUM adopted FAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which specified the accounting and reporting for certain investments in equity securities and for all investments in debt securities. Upon the adoption of FAS 115, UNUM increased unrealized gains on available for sale securities included in stockholders' equity on January 1, 1994, by $41.8 million (net of deferred taxes of $22.5 million) to reflect the unrealized holding gains on fixed maturities classified as available for sale that were previously carried at amortized cost. In accordance with FAS 115, prior year consolidated financial statements have not been restated to reflect the change in accounting principle. The adoption of FAS 115 did not affect 1994 net income. Effective January 1, 1993, UNUM adopted FAS 106, which changed the method for recognition of the cost of postretirement benefits other than pensions from a cash basis to an accrual basis over the years in which employees render the related services. UNUM elected to recognize the FAS 106 liability at January 1, 1993, of $48.8 million as a cumulative effect of an accounting change, which decreased net income by $32.1 million, or $0.40 per share, in 1993. Also effective January 1, 1993, UNUM adopted FAS 109, which changed the method for calculating and reporting deferred income taxes in the financial statements from the deferred method to the liability method. The cumulative effect of this accounting change amounted to a $20.0 million increase, or $0.25 per share, in 1993 net income. INCOME TAXES Effective tax rates, which reflect income tax expense as a percentage of pretax income, were 26.4%, 22.1% and 32.2% for 1995, 1994 and 1993, respectively. The increase in the effective tax rate for 1995 was primarily due to increased pretax earnings, as compared with 1994. Reported income tax expense was below the federal statutory tax rate of 35% for 1995, 1994 and 1993, primarily due to tax savings from investments in tax-exempt securities. Management anticipates the effective tax rate for 1996 will be higher than 1995, primarily related to reduced levels of tax-exempt income. Although investments in tax-exempt securities result in increased consolidated net income, these investments reduce UNUM's business segments' income before income taxes. On August 10, 1993, legislation was enacted to increase the federal corporate income tax rate of 34% to 35%, retroactive to January 1, 1993. The change in tax rates resulted in a $7.8 million, or $0.10 per share, charge related to the adjustment of deferred tax liabilities. Excluding the adjustment to deferred income tax expense of $7.8 million for the enacted tax rate change, the 1993 effective tax rate would have been 30.5%. 18 DISABILITY INSURANCE SEGMENT - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(DOLLARS IN MILLIONS AND PERCENTAGE INCREASE (DECREASE) OVER PRIOR YEAR) 1995 1994 1993 ----------------------------------------------------------------------------------------------------- Revenues Premiums Group LTD........................................ $1,088.6 14.0% $ 955.0 2.3% $ 933.4 UNUM Limited..................................... 125.2 (11.2) 141.0 79.4 78.6 Individual disability............................ 357.6 3.1 346.8 11.2 312.0 Group STD........................................ 132.9 23.5 107.6 19.8 89.8 Other disability insurance....................... 151.0 5.2 143.5 25.7 114.2 -------- ----- -------- ----- ---------- Total premiums................................. 1,855.3 9.5 1,693.9 10.9 1,528.0 Investment income.................................... 408.2 14.0 358.2 6.5 336.4 Net realized investment gains........................ 184.7 nm 42.1 26.0 33.4 Fees and other income................................ 24.6 10.3 22.3 12.1 19.9 -------- ----- -------- ----- ---------- Total revenues................................. 2,472.8 16.8 2,116.5 10.4 1,917.7 Benefits and expenses Benefits to policyholders.......................... 1,711.2 8.8 1,572.1 37.3 1,144.9 Operating expenses................................. 421.3 1.5 415.0 7.7 385.4 Commissions........................................ 193.5 (0.9) 195.3 11.3 175.4 Increase in deferred policy acquisition costs...... (70.2) (42.5) (122.1) 19.6 (102.1) -------- ----- -------- ----- ---------- Total benefits and expenses.................... 2,255.8 9.5 2,060.3 28.5 1,603.6 -------- ----- -------- ----- ---------- Income before income taxes........................... $ 217.0 nm% $ 56.2 (82.1)% $ 314.1 Sales (annualized new premiums) Group LTD.......................................... $ 197.9 $ 215.4 $ 196.2 UNUM Limited....................................... $ 14.2 $ 15.5 $ 9.2 Individual disability.............................. $ 30.9 $ 65.5 $ 62.2 Group STD.......................................... $ 52.4 $ 47.8 $ 38.0 Persistency (premiums) Group LTD.......................................... 82.8% 84.0% 88.7% UNUM Limited....................................... 89.1% 89.9% 89.6% Individual disability.............................. 91.8% 92.4% 92.1% Group STD.......................................... 84.8% 83.8% 85.9% Benefit ratio (% of premiums)........................ 92.2% 92.8% 74.9% Operating expense ratio (% of premiums).............. 22.7% 24.5% 25.2%
- ------------ nm = not meaningful or in excess of 100% The Disability Insurance segment includes disability products offered through: UNUM America, First UNUM Life Insurance Company ("First UNUM") and Commercial Life Insurance Company ("Commercial Life") in North America; UNUM Limited in the United Kingdom; and UNUM Japan Accident Insurance Company Limited in Japan. The products included in this segment are group LTD, individual disability, group short term disability ("group STD"), association group disability, disability reinsurance and long term care insurance. SUMMARY The Disability Insurance segment reported slightly decreased income before income taxes in 1995, as compared with 1994, when the following items, as described below, are excluded: the increased realized investment gains resulting primarily from the sale of the common stock portfolio, the increased reserves resulting from the lowering of certain disability product reserve discount rates, the increased group LTD reserves for IBNR claims, and the increased reserves for unpaid claims related to the association group disability business, all of which took place in 1995; and the individual disability reserve strengthening and the related restructuring charge, recorded in 1994. This decrease was primarily attributable to a higher benefit ratio at UNUM Limited and in group LTD, and the inclusion of the results of UNUM 19 Japan's operations in the Disability Insurance segment effective January 1, 1995. Partially offsetting these decreases were increased investment income, a lower benefit ratio in the individual disability business, and continued expense management. During 1995, UNUM sold virtually all of the common stock portfolio of its United States subsidiaries, primarily due to consideration of statutory capital requirements associated with investment in common stocks and to increase future investment income. The sale of the common stock portfolio contributed to significantly higher realized investment gains in 1995 for the Disability Insurance segment. UNUM reinvested the proceeds from the sale of the common stock portfolio primarily in investment grade fixed income assets, which has decreased the required amount of statutory capital for regulatory purposes and increased investment income. Dependent on capital considerations and market conditions, UNUM may invest in equity securities in the future. Reserves for certain disability products are discounted using an interest rate that is a composite yield of assets matched with each product. The sale of the common stock portfolio, which partially supported these disability reserves, and the subsequent reinvestment of the proceeds primarily in investment grade fixed income assets with yields below the average portfolio yield, resulted in lower reserve discount rates. The result of lowering these discount rates was an increase to the reserve liabilities and benefits to policyholders of $128.6 million, reported in the second quarter of 1995. The discount rate used to determine the group LTD reserves was reduced to 8.00% at June 30, 1995, as compared with 9.18% at December 31, 1994. At December 31, 1995, the group LTD discount rate was 7.94%. Increased investment income in the Disability Insurance segment for 1995 was primarily a result of the reinvestment of the proceeds from the sale of the common stock portfolio into investment grade fixed income assets. This increase in investment income was partially offset by the effects of lower discount rates for certain disability products. Management expects the reserve discount rate for certain disability products will further decline, since current cash flows are invested in high quality assets at current yields, which are below the composite yield of the existing assets purchased in prior years. UNUM periodically adjusts prices on both existing and new business in an effort to mitigate the impact of the current interest rate environment. During 1995, UNUM increased the group LTD reserves for IBNR claims by $38.4 million. IBNR reserves, which are established to fund anticipated case reserves for claims that have been incurred but not reported to UNUM, are actuarially established based on various factors, including incidence levels and claims severity. The increased IBNR reserves were based on management's judgment that claims currently incurred but not yet reported will reflect increased levels of claims incidence and severity. It is not possible to predict whether future incidence levels or claims severity will be consistent with UNUM's assumptions, or will improve or deteriorate. During the fourth quarter of 1995, UNUM increased reserves for unpaid claims related to the association group disability business by $15.0 million, which decreased net income by $9.8 million, or $0.14 per share, for the year ended December 31, 1995. These increased reserves reflect management's expectations of slower than expected claim recoveries. In 1995, the association group line of business has been negatively affected by unfavorable claims experience, which management has attributed to certain geographical and occupational segments, particularly dentists and physicians. Management is taking pricing actions and strengthening underwriting standards to address this claims experience. Throughout 1994, UNUM's individual disability business experienced a higher incidence of new claims and a disproportionate number of large claims, which management attributed to certain geographic and occupational segments of the business, particularly physicians. During the third quarter of 1994, management concluded that the deterioration of claims experience was not a temporary fluctuation in certain segments of the business, but was indicative of expected claim trends for the future. As a result, in third quarter 1994, UNUM increased reserves for existing claims by $83.3 million and strengthened reserves for estimated future losses by $109.1 million. These increased reserves reflected management's expectations of morbidity trends for the existing non-cancellable individual disability business. It is not possible to predict whether morbidity trends will be consistent with UNUM's assumptions; however, as of December 31, 1995, management believes that the strengthened reserve levels continue to be adequate. In the fourth quarter of 1994, UNUM recorded a pretax charge of $14.4 million related to the decision to discontinue the individual disability non-cancellable product and the acceleration of organizational changes within UNUM America, which increased operating expenses and decreased net income by $9.4 million, or $0.13 per share, for the year ended December 31, 1994. The charge consisted of $9.2 million for severance costs for approximately 150 field and 250 home office employees and $5.2 million for exit costs of certain leased facilities and equipment. 20 Reserves for unpaid claims are estimates based on UNUM's historical experience and other actuarial assumptions that consider the effects of current developments, anticipated trends, risk management programs and renewal actions. Many factors affect actuarial calculations of claim reserves, including but not limited to interest rates and current and anticipated incidence rates, recovery rates, and economic and societal conditions. Reserve estimates and assumptions are periodically reviewed and updated with any resulting adjustments to reserves reflected in current operating results. Given the complexity of the reserving process, the ultimate liability may be more or less than such estimates indicate. In 1995, 1994 and 1993, claim block acquisitions generated one-time premium in the Disability Insurance segment of $63.8 million, $8.6 million and $58.3 million, respectively, for group LTD; $4.3 million and $15.0 million in 1995 and 1994, respectively, for long term care; and $25.8 million in 1994 for UNUM Limited. Management intends to pursue additional claim block acquisitions in the future. The ratio of operating expenses to premiums was 22.7%, 24.5% and 25.2% in 1995, 1994 and 1993, respectively. The decreases in 1995 and 1994 were primarily attributable to continued efforts to manage expenses and increased premium from 1995 claim block acquisitions, which do not have proportionally higher expenses. Deferrals of policy acquisition costs decreased in 1995 primarily due to lower levels of individual disability sales. The increase in deferred policy acquisition costs in 1994 was primarily attributable to deferrals of higher marketing costs associated with increased sales and renewal activity. Excluding the individual disability reserve strengthening and the related restructuring charge, income before income taxes decreased in 1994, as compared with 1993. This decrease was primarily attributable to a higher benefit ratio in individual disability and in group LTD, partially offset by continued expense management. GROUP LONG TERM DISABILITY The group LTD premium growth in 1995 and 1994 reflected annualized premium from new sales, selected price increases and acquisitions of closed blocks of claims. Group LTD sales decreased in 1995, which management attributed to significant price increases in certain segments of the business. Rate increases to address unfavorable experience on selected segments of the inforce business also contributed to the decline in persistency rates for 1995 and 1994. In general, case terminations from rate increases have occurred in less profitable segments of the business. Management expects to continue to seek inforce case rate increases, as appropriate, given claims experience, to improve profitability. However, such rate actions may increase case terminations and decrease the persistency rate of the group LTD business. During 1995 and 1994, management implemented and strengthened various risk management programs to address the unfavorable claims experience in group LTD. In addition to the selected price increases on new and inforce business, more stringent underwriting practices, and the reduction of benefit options for certain segments of the business, management established special claims units for both its group LTD and individual disability businesses to address specific aspects of disability claims, including complex and fraudulent claims. Additionally, management implemented new group LTD contract provisions that provide risk management features and claimant rehabilitation incentives. Management continually reviews the benefits management process to identify and strengthen risk management policies and procedures. During 1995, group LTD's benefit ratio increased slightly after excluding the effects of lowering the group LTD discount rate as a result of the sale of the common stock portfolio in the second quarter of 1995 and of increasing the group LTD reserves for IBNR claims. This increase was primarily attributable to increased claims severity. However, the effect of the increase in claims severity was partially offset by continued improvements in claim incidence rates and claim recoveries, which management attributes to risk management programs. Management continues to address the unfavorable claim trends in group LTD by periodically adjusting prices on selected new and inforce business, implementing more stringent underwriting guidelines and strengthening risk management programs. Management believes these actions have strengthened UNUM's ability to deal with these claim trends and the current interest rate environment. The level of earnings of the group LTD product will be a function of various factors, including but not limited to, the effectiveness of these continuing actions over time. UNUM LIMITED During 1995, UNUM Limited's group long term disability business continued to be adversely affected by unfavorable claims experience, which began to emerge in late 1994. UNUM Limited has experienced a higher incidence of new claims and a disproportionate number of large claims in 1995, as compared with 1994, which management has attributed to certain segments of the business, particularly lawyers and accountants. To address the current claims environment, management has increased prices on those segments of the business that have experienced a higher incidence of new 21 claims, implemented more stringent underwriting standards and strengthened risk management programs. The level of earnings for UNUM Limited will be a function of various factors, including but not limited to, the effectiveness of these actions over time. Due to the relative size of the U.K. block of business, UNUM Limited's operating results can exhibit claims variability. During 1995, the U.S. dollar weakened slightly against the British pound sterling, increasing UNUM Limited's earnings as reported in U.S. dollars. The weighted average exchange rate was approximately $1.58, $1.53 and $1.51 for the years ended December 31, 1995, 1994 and 1993. At December 31, 1995, the spot rate had decreased to $1.55. INDIVIDUAL DISABILITY During 1995, the growth in individual disability's premium slowed as a result of management's decision in late 1994 to discontinue selling the non-cancellable individual disability insurance product in the United States and to transition to the new guaranteed renewable Lifelong Disability Protection product, which was introduced during the second quarter of 1995. Sales of the traditional, fixed price, non-cancellable individual disability product are being discontinued in each state following regulatory approval of the new product. As of the end of 1995, the new product has been approved for sale in most states. Throughout 1994, UNUM's individual disability business experienced a higher incidence of new claims and a disproportionate number of large claims, which management attributed to certain geographic and occupational segments of the business, particularly physicians. Management believes that changes in and consolidation of the health care delivery system in the United States and the increased prevalence of emerging and often subjective types of disabilities contributed to increased benefit costs. Unlike the group long term disability product, management has limited ability to manage the claims risk associated with non-cancellable individual disability business, since UNUM is contractually unable to reprice or cancel inforce policies that became unprofitable because of changes in claims experience that were unforeseen when the policy was sold. During the third quarter of 1994, management concluded that the deterioration of claims experience was not a temporary fluctuation in certain segments of the business, but was indicative of expected claim trends for the future. As a result, in third quarter 1994, UNUM increased reserves for existing claims by $83.3 million and strengthened reserves for estimated future losses by $109.1 million. These increased reserves reflected management's expectations of morbidity trends for the existing non-cancellable individual disability business. It is not possible to predict whether morbidity trends will be consistent with UNUM's assumptions; however, as of December 31, 1995, management believes that the strengthened reserve levels continue to be adequate. The individual disability business experienced a lower benefit ratio in 1995, as compared with 1994, after excluding the effects of increased reserves resulting from lowering the individual disability reserve discount rate in second quarter 1995 and the reserve strengthening recorded in 1994. The lower benefit ratio was primarily due to lower new claims incidence rates for physicians in 1995; however, such claims incidence rates can exhibit variability. During 1995, lower expenses, partially offset by reduced deferrals of policy acquisition costs resulting from lower individual disability sales in 1995, also contributed to the improved results of the individual disability business. During the fourth quarter of 1994, excess-of-loss reinsurance totaling $60 million over three years was purchased through a Lloyd's of London syndicate to cover UNUM's exposure to claims exceeding levels assumed in the strengthened reserves. Management continues to evaluate its financial options for this business, including reinsurance opportunities. GROUP SHORT TERM DISABILITY Group STD's contribution to the Disability Insurance segment's income before income taxes increased significantly in 1995 and 1994. These increases were primarily attributable to group STD's strong premium growth and continued risk and expense management. The record sales reported in 1995 reflected management's continuing efforts to cross-sell the group STD products with the group LTD business. 22 SPECIAL RISK INSURANCE SEGMENT - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(DOLLARS IN MILLIONS AND PERCENTAGE INCREASE (DECREASE) OVER PRIOR YEAR) 1995 1994 1993 --------------------------------------------------------------------------------------------- Revenues Premiums Group life insurance............................. $355.1 13.7% $312.3 14.8% $272.0 Other special risk products...................... 307.5 22.6 250.8 5.4 237.9 ------ ------ ------ ----- ------ Total premiums................................. 662.6 17.7 563.1 10.4 509.9 Investment income.................................... 44.0 8.6 40.5 18.4 34.2 Net realized investment gains........................ 4.4 nm 0.2 (66.7) 0.6 Fees and other income................................ 39.7 (9.8) 44.0 (11.1) 49.5 ------ ------ ------ ----- ------ Total revenues................................. 750.7 15.9 647.8 9.0 594.2 Benefits and expenses Benefits to policyholders.......................... 492.3 24.8 394.4 7.8 366.0 Operating expenses................................. 153.1 4.8 146.1 (6.2) 155.7 Commissions........................................ 60.9 11.7 54.5 9.2 49.9 Increase in deferred policy acquisition costs...... (15.9) 20.5 (13.2) (20.0) (16.5) Interest expense................................... -- (100.0) 0.1 (50.0) 0.2 ------ ------ ------ ----- ------ Total benefits and expenses.................... 690.4 18.6 581.9 4.8 555.3 ------ ------ ------ ----- ------ Income before income taxes........................... $ 60.3 (8.5)% $ 65.9 69.4% $ 38.9 ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ Sales (annualized new premiums) Group life insurance............................... $106.1 $ 90.8 $ 89.2 Persistency (premiums) Group life insurance................................ 83.0% 84.8% 89.2% Benefit ratio (% of premiums)........................ 74.3% 70.0% 71.8% Operating expense ratio (% of premiums).............. 23.1% 25.9% 30.5%
- ------------ nm = not meaningful or in excess of 100% The Special Risk Insurance segment includes group life products sold by UNUM America and First UNUM, special risk accident insurance sold by Commercial Life and other special risk insurance products. The segment also includes non- disability reinsurance operations, which represent UNUM's participation in various reinsurance pools, and the reinsurance underwriting management operations of Duncanson & Holt, Inc. Increased sales and selected price increases on new and inforce cases contributed to the group life premium growth of 13.7%. Rate increases to address unfavorable experience on certain segments of the inforce business contributed to the decline in group life persistency rates for 1995 and 1994. Management expects to continue to seek inforce case rate increases, as appropriate, to improve profitability. Premium growth in 1995 for other special risk products was primarily attributable to reinsurance operations, which had claim block acquisitions totaling $39.1 million and increased pool participation. The decrease in income before income taxes for 1995, as compared with 1994, was primarily attributable to increased claims in the group life and special risk accident insurance businesses, combined with reduced fee income from the reinsurance underwriting management operations. Partially offsetting these decreases were continued premium growth, increased realized investment gains from the sale of the common stock portfolio and favorable claims experience in certain reinsurance pools. Due to the nature of the risks underwritten and the relative size of the blocks of businesses, several of the Special Risk Insurance segment's products can exhibit claims variability. The Special Risk Insurance segment's income before income taxes increased in 1994, primarily due to favorable claims experience in the group life business and in special risk accident insurance, combined with premium growth and expense management. Partially offsetting these increases were reduced fee income from the reinsurance underwriting management operations and unfavorable claims experience in certain reinsurance pools. 23 COLONIAL PRODUCTS SEGMENT - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(DOLLARS IN MILLIONS AND PERCENTAGE INCREASE (DECREASE) OVER PRIOR YEAR) 1995 1994 1993 ---------------------------------------------------------------------------------------------- Revenues Premiums........................................... $472.7 7.7% $439.1 8.7% $403.9 Investment income.................................. 41.3 33.7 30.9 3.7 29.8 Net realized investment gains...................... 10.9 nm 1.7 (85.3) 11.6 Fees and other income.............................. 2.4 9.1 2.2 (37.1) 3.5 ------ ------ ------ ------ ------ Total revenues................................... 527.3 11.3 473.9 5.6 448.8 Benefits and expenses Benefits to policyholders.......................... 235.1 6.3 221.1 6.6 207.5 Interest credited.................................. 6.5 30.0 5.0 19.0 4.2 Operating expenses................................. 114.7 7.1 107.1 13.7 94.2 Commissions........................................ 108.9 12.6 96.7 4.3 92.7 Increase in deferred policy acquisition costs...... (25.6) 36.9 (18.7) (7.9) (20.3) Interest expense................................... -- -- -- (100.0) 0.1 ------ ------ ------ ------ ------ Total benefits and expenses...................... 439.6 6.9 411.2 8.7 378.4 ------ ------ ------ ------ ------ Income before income taxes........................... $ 87.7 39.9% $ 62.7 (10.9)% $ 70.4 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Sales (annualized first month's premiums)............ $200.4 $183.1 $171.4 Benefit ratio (% of premiums)........................ 49.7% 50.4% 51.4% Operating expense ratio (% of premiums).............. 24.3% 24.4% 23.3%
- ------------ nm = not meaningful or in excess of 100% The Colonial Products segment includes Colonial Life & Accident Insurance Company ("Colonial") and affiliates. Colonial, the principal subsidiary, offers payroll-deducted, voluntary employee benefits to employees at their worksites. Accident and sickness, cancer and life insurance products are marketed by Colonial primarily through independent sales representatives. During 1995, Colonial experienced improved sales growth as compared with 1994. These improved sales levels were attributed to increased productivity and the offering of a number of new products. During 1995, Colonial made further investments to automate policy enrollment for new sales and to realign the sales organization. These investments reflect management's continued focus on strategies to improve sales through increasing productivity, enhancing effectiveness, and differentiating Colonial in the marketplace. Premium growth slowed slightly again in 1995, reflecting the effects of weaker sales growth during 1994 and 1993; however, management believes that the record sales levels experienced during 1995, combined with the continuation of customer conservation programs and investments being made in the sales organization, will have a positive effect on future premium growth. Investment income increased during 1995, primarily because of increased cash flows and additional income realized from the reinvestment of the proceeds from the second quarter 1995 sale of Colonial's equity portfolio into investment grade fixed income assets. The sale of the equity portfolio also contributed to the higher level of realized investment gains during the year. Realized investment gains for 1993 include gains associated with Colonial's sales of higher yielding but callable investments to realign its investment portfolio with UNUM's investment philosophy. Colonial's benefit ratio improved again in 1995 to 49.7%, as compared with 50.4% in 1994 and 51.4% in 1993. The lower benefit ratio was driven by continued favorable claims experience and improved incidence rates across most product lines. The expense ratio remained virtually unchanged for 1995 reflecting management's continued investment in the sales organization, offset by continued efforts to control expenditures and improved operating effectiveness. During 1994, the expense ratio increased because of higher than expected costs associated with sales organization realignment and litigation expenses, which were partially offset by continued expense control efforts. Colonial's income before income taxes increased in 1995, primarily because of increased investment income, higher realized investment gains and an improved benefit ratio. For 1994, income before income taxes decreased primarily because of reduced realized investment gains and increased expenses, partially offset by favorable claims experience. 24 RETIREMENT PRODUCTS SEGMENT - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(DOLLARS IN MILLIONS AND PERCENTAGE INCREASE (DECREASE) OVER PRIOR YEAR) 1995 1994 1993 -------------------------------------------------------------------------------------------------- Revenues Premiums........................................... $ 27.6 9.5% $ 25.2 (22.0)% $ 32.3 Investment income.................................. 298.9 (11.0) 335.8 (12.6) 384.3 Net realized investment gains...................... 24.8 nm 2.2 (33.3) 3.3 Fees and other income.............................. 6.5 4.8 6.2 (39.2) 10.2 -------- ----- -------- ----- -------- Total revenues................................... 357.8 (3.1) 369.4 (14.1) 430.1 Benefits and expenses Benefits to policyholders.......................... 54.4 5.8 51.4 (10.3) 57.3 Interest credited.................................. 220.9 (7.1) 237.7 (14.1) 276.8 Operating expenses................................. 33.4 10.6 30.2 3.8 29.1 Commissions........................................ 6.6 (29.8) 9.4 6.8 8.8 (Increase) decrease in deferred policy acquisition costs............................................. (3.0) nm (1.3) nm 3.8 -------- ----- -------- ----- -------- Total benefits and expenses...................... 312.3 (4.6) 327.4 (12.9) 375.8 -------- ----- -------- ----- -------- Income before income taxes........................... $ 45.5 8.3% $ 42.0 (22.7)% $ 54.3 -------- ----- -------- ----- -------- -------- ----- -------- ----- -------- Invested assets under management for tax sheltered annuities, at end of period......................... $3,074.3 $3,065.0 $3,033.0
- ------------ nm = not meaningful or in excess of 100% The Retirement Products segment includes tax sheltered annuities ("TSAs"), which are marketed by UNUM America and First UNUM, and products which are no longer actively marketed by UNUM, including guaranteed investment contracts ("GICs"), deposit administration accounts ("DAs") and 401(k) plans. As previously discussed in the Consolidated Overview, UNUM America entered into an agreement for the sale of its group TSA business to Lincoln Life, a part of Lincoln National Corporation, and to a new New York insurance subsidiary of Lincoln Life. The agreement also contemplates that First UNUM will enter into a similar agreement with Lincoln Life's New York insurance subsidiary. The group TSA business of UNUM America and First UNUM accounted for approximately $34 million of the Retirement Products segment's income before income taxes in 1995, 1994 and 1993. During 1995 and 1994, investment income declined primarily due to investments in lower yielding tax-exempt securities, a reduced average investment yield caused by the low interest rate environment, and a reduced invested asset base under management for GICs, DAs and 401(k) plans. To facilitate the expected sale of the TSA business later in 1996, management expects to primarily liquidate fixed maturities and accumulate cash and short-term investments, which will further reduce investment yields earned on TSA assets during 1996. During 1994, UNUM implemented an investment strategy to increase investments in tax-exempt securities. Although investments in tax-exempt securities resulted in increased consolidated net income, these investments reduced the Retirement Products segment's income before income taxes by $7.6 million and $6.7 million in 1995 and 1994, respectively. During 1995, primarily due to market conditions, UNUM ceased the purchase of tax-exempt securities and sold the majority of tax-exempt securities held by the TSA business. Since 1993, UNUM has offered the holders of certain types of TSA contracts the opportunity to modify their contracts. The proposed contract amendments provide for UNUM to increase the minimum guaranteed credited interest rates in return for contractholders relinquishing the right to make lump-sum withdrawals without an associated fee. As expected, certain contract holders elected to withdraw their funds rather than convert to the modified contract provisions, which has affected the overall growth of invested assets under management. During 1995, interest spread margins declined, as compared with the unusually favorable levels experienced during 1994 and 1993. As interest rates declined in 1993, the rate and level of interest credited to TSA contractholders declined as well. Despite a rising interest rate environment in 1994, the level of interest credited to TSA contractholders continued to 25 decline. As a result, the TSA business experienced unusually favorable interest spread margins during those years. Management expects the lower interest spread margins in 1995 on TSAs to continue, which may reduce future earnings of the Retirement Products segment. The reduced asset base under management for GICs, DAs and 401(k) plans has also resulted in lower revenues from investment income and reduced amounts of interest credited. Management expects continued decreases in the amounts of investment income and interest credited as the related GICs, DAs and 401(k) contracts mature or terminate. Management expects future earnings for these closed blocks of businesses to decline, reflecting their run-off nature. Income before income taxes increased in 1995, as compared with 1994, primarily due to increased realized investment gains from the sale of UNUM's equity portfolio during the second quarter of 1995, partially offset by lower interest spread margins on TSAs. For 1994, the decrease in income before income taxes was primarily attributable to the declining income levels of the closed blocks of businesses. CORPORATE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 1995 1994 1993 --------------------------------------------------------- Loss before income taxes......... $(28.6) $(28.2) $(17.4)
Corporate includes transactions that are generally non-insurance related. The increased loss before income taxes in 1995 was primarily attributable to increased interest expense on corporate borrowings, partially offset by reduced operating expenses. The increased loss before income taxes in 1994 was primarily due to increased interest expense and increased operating expenses related to UNUM's investment in Japan. Effective January 1, 1995, the operations of UNUM Japan are reported in the Disability Insurance segment. Costs related to UNUM's investment in Japan prior to January 1, 1995, are reported as operating expenses in Corporate. BUSINESS RESTRUCTURING AND OTHER CHARGES Charges of $8.4 million and $14.4 million were recorded in 1995 and 1994, respectively, related to the acceleration of organizational changes within UNUM America and the decision to discontinue the individual disability non-cancellable product. Partially offsetting the charge recorded in 1995 was a $3.4 million curtailment gain, related to workforce reductions in UNUM Corporation's noncontributory defined benefit pension plan. Of the total $22.8 million charge, UNUM paid $15.9 million during 1995, which represented severance costs of $13.3 million for 373 of the 379 individuals included in the charges and $2.6 million of lease costs. The remaining $6.9 million includes $0.4 million of severance costs and $6.5 million of lease costs, the total of which is expected to be paid as follows: $3.4 million in 1996, $3.2 million in 1997, and $0.3 million in 1998. INVESTMENTS UNUM's investment portfolio is concentrated in investment grade bonds. UNUM evaluates total expected return after consideration of all associated expenses and losses, within criteria established for each product line. Product line investment strategies are developed to complement business risks by meeting the liquidity and solvency requirements of each product. UNUM purchases assets with maturities, expected cash flows and prepayment conditions that are consistent with these strategies. The nature and quality of the types of investments comply with policies established by management, which are more stringent overall than the statutes and regulations imposed by the jurisdictions in which UNUM's insurance subsidiaries are licensed. UNUM's investments are reported in the consolidated financial statements at net realizable value or net of any applicable allowances for probable losses. Allowances for mortgages and real estate held for sale are established based on a review of specific assets as well as the overall portfolio, considering the carrying value of the underlying assets. If a decline in market value is considered to be other than temporary, the investment is reduced to estimated net realizable value and the reduction is recorded as a realized investment loss. UNUM discontinues the accrual of investment income on invested assets when it is determined that collectability is doubtful. Management monitors the risk associated with the invested asset portfolio and regularly reviews and adjusts the allowance for probable losses. During the second quarter of 1995, UNUM sold virtually all of the common stock portfolio of its United States subsidiaries, primarily due to consideration of statutory capital requirements associated with investment in common stocks and to increase future investment income. UNUM has reinvested the proceeds from the sale of the common stock portfolio primarily in investment grade fixed income assets. Dependent on capital considerations and market conditions, UNUM may invest in equity securities in the future. 26 At December 31, 1995, the composition of UNUM's $11.7 billion of invested assets was 78.1% fixed maturities, 10.0% mortgage loans, 1.9% real estate, 0.2% equity securities, and 9.8% other invested assets. To facilitate the expected sale of the TSA business later in 1996, management expects to primarily liquidate fixed maturities and accumulate cash and short-term investments. Gross realized investment gains were $287.0 million, $117.0 million, and $85.2 million, and gross realized investment losses were $61.9 million, $71.4 million, and $35.8 million for the years ended December 31, 1995, 1994, and 1993, respectively. FIXED MATURITIES Effective January 1, 1994, UNUM adopted Financial Accounting Standard ("FAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which specified the accounting and reporting for certain investments in equity securities and for all investments in debt securities. UNUM adopted the provisions for FAS 115 for these investments held or acquired after January 1, 1994. Upon the adoption of FAS 115, UNUM increased unrealized gains on available for sale securities included in stockholders' equity on January 1, 1994, by $41.8 million (net of deferred taxes of $22.5 million) to reflect the unrealized holding gains on fixed maturities classified as available for sale which were previously carried at amortized cost. In addition, UNUM reclassified certain fixed maturities from held to maturity to available for sale on January 1, 1994, in connection with the adoption of FAS 115. In November 1995, the FASB issued "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," which provided a one-time opportunity to reassess the appropriateness of the classifications of securities described in FAS 115, and to reclassify fixed maturities from the held to maturity category without calling into question the intent to hold other debt securities to maturity in the future. On December 31, 1995, UNUM reassessed its fixed maturity portfolio and as allowed under the implementation guidance, reclassified fixed maturities with an amortized cost of $6,082.8 million and a related net unrealized gain of $393.0 million from the held to maturity category to available for sale. In connection with the reclassification of the held to maturity fixed maturities to available for sale, on December 31, 1995, UNUM adjusted its unpaid claims by $261.2 million to reflect the changes that would have been necessary if the unrealized gains and losses related to fixed maturities classified as available for sale had been realized. At December 31, 1995, the fixed maturity portfolio included $139.4 million of below investment grade bonds (below "Baa") recorded at fair value, which represented 1.5% of the fixed maturity portfolio, and had an associated amortized cost of $133.8 million. At December 31, 1994, the carrying value of below investment grade bonds included in the fixed maturity portfolio was $193.8 million, which represented 2.5% of the fixed maturity portfolio, and had an associated market value of $193.4 million. Virtually all of the nonconvertible, below investment grade bonds were purchased at investment grade, but were subsequently downgraded. UNUM's investment policy is to invest primarily in fixed maturities of investment grade quality. Selected purchases of convertible subordinated debentures, which UNUM considered to be part of its investment strategy for equity securities, have contributed to the amount of below investment grade bonds. Fixed maturity ratings are obtained from external rating agencies, and if not externally rated, are rated by UNUM internally using similar methods. Management does not expect any risks or uncertainties associated with below investment grade bonds to have a significant affect on UNUM's consolidated financial position or results of operations. UNUM had no fixed maturities delinquent 60 days or more at December 31, 1995. The percentage of fixed maturities delinquent 60 days or more, compared to total fixed maturities, was 0.25% at December 31, 1994. During 1995, UNUM sold fixed maturities of two issuers classified as held to maturity with an amortized cost of $4.0 million, and realized a net loss of $1.2 million on the sales. The bonds were sold due to significant deterioration of the issuers' creditworthiness, as evidenced by bankruptcy filings. During 1994, UNUM sold fixed maturities of five issuers classified as held to maturity with an amortized cost of $49.8 million due to evidence of significant deterioration of the issuers' creditworthiness. These sales resulted in a net realized loss of $3.0 million. MORTGAGES At December 31, 1995, and 1994, UNUM's mortgage loans were $1,163.4 million and $1,216.3 million, respectively. Management establishes allowances for mortgage loans based upon a review of individual loans and the overall loan portfolio, considering the value of the underlying collateral. UNUM uses a comprehensive rating system to evaluate the investment and credit risk of each mortgage loan and to target specific properties for inspection and reevaluation. The percentage of mortgage loans delinquent 60 days or more on a contract delinquency basis was 0.2% and 1.8% at December 31, 1995, and 1994, respectively. 27 Management believes that its mortgage loan portfolio is well diversified geographically and among property types. UNUM's incidence of new problem mortgage loans has continued to decline in 1995, as overall economic activity improved modestly, and many of the real estate markets in which UNUM has mortgage loans stabilized. Management expects a modest level of additional delinquencies and problem loans in the future. Management believes the allowance provided on mortgage loans as of December 31, 1995, is adequate to cover probable losses. Effective January 1, 1995, UNUM adopted Financial Accounting Standard ("FAS") No. 114, "Accounting by Creditors for Impairment of a Loan," and FAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures," which defined the principles to measure and record a loan when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The adoption of FAS 114 and FAS 118 did not have a material affect on UNUM's results of operations or financial position. In general, impaired loans as defined by FAS 114 compare with loans previously defined and disclosed as problem and potential problem loans. Problem loans were defined as loans that were delinquent 60 days or more on a contract delinquency basis. Potential problem loans were defined as current and performing loans with which management had some concerns about the ability of the borrower to comply with present loan terms and whose book value exceeded the market value of the underlying collateral. At December 31, 1995, impaired loans totaled $50.1 million, as compared with $58.5 million of problem and potential problem loans at December 31, 1994. Included in the $50.1 million of impaired loans was $38.4 million of loans which had a related allowance for probable losses of $7.1 million, and $11.7 million of loans which had no related allowance for probable losses. Interest lost on impaired loans in 1995, and problem and potential problem loans in 1994 and 1993, was not material. Mortgage loans that were restructured prior to the adoption of FAS 114, are defined by UNUM as loans whose terms have been modified to interest rates less than market at the time of restructure and are currently expected to perform pursuant to such modified terms. UNUM modifies loans to protect its investment and only when it is anticipated that the borrower will be able to meet the modified terms. As of December 31, 1995, restructured mortgage loans totaled $59.9 million, as compared with $73.6 million at December 31, 1994. Interest lost on restructured loans was not material in 1995, 1994 or 1993. Realized investment losses related to impaired mortgage loans in 1995 amounted to $9.2 million, compared with realized investment losses related to restructured and problem mortgage loans of $8.5 million and $4.8 million for 1994 and 1993, respectively. Impaired mortgage loans as of December 31, 1995, are not expected to have a significant impact on UNUM's results of operations, liquidity, or capital resources. REAL ESTATE At December 31, 1995, investment real estate amounted to $222.2 million compared with $190.8 million at December 31, 1994. UNUM purchases investment real estate in selected markets when certain investment criteria are met. Investment real estate is intended to be held long-term and is carried at cost less accumulated depreciation. Occasionally, investment real estate is reclassified and revalued as real estate held for sale when it no longer meets UNUM's investment criteria. At December 31, 1995, real estate held for sale amounted to $35.5 million compared with $31.0 million at December 31, 1994. Real estate acquired through foreclosure is valued at fair value at the date of foreclosure. Real estate held for sale is included in other assets in the Consolidated Balance Sheets and is valued net of an allowance which reduces the carrying value to the lower of fair value less estimated costs to sell, or cost. Additions to the allowance for probable losses related to real estate held for sale resulted in realized investment losses of $6.3 million, $0.8 million and $18.8 million for the years ended December 31, 1995, 1994 and 1993, respectively. Additions to the allowance represent charges to net realized investment gains less recoveries. Given the current real estate environment, additional foreclosures are anticipated, but at a reduced level from the early 1990s. Current and anticipated real estate acquired through foreclosure is not expected to have a significant affect on UNUM's results of operations, liquidity, or capital resources. LIQUIDITY AND CAPITAL RESOURCES UNUM's businesses produce positive cash flows, which are invested primarily in intermediate, fixed maturity investments intended to reflect the nature of anticipated cash obligations of insurance benefit payments and insurance contract maturities and to optimize investment returns at appropriate risk levels. Unexpected cash requirements and liquidity needs 28 can be met through UNUM's investment portfolio of fixed maturities classified as available for sale, equity securities, cash and short-term investments. To facilitate the expected sale of the TSA business later in 1996, management expects to primarily liquidate fixed maturities and accumulate cash and short-term investments. From time to time, dividend payments, which may be subject to approval by insurance regulatory authorities, are made from UNUM's affiliates and insurance subsidiaries to UNUM Corporation. These dividends, along with other funds, are used to service the needs of UNUM Corporation including: debt service, common stock dividends, stock repurchase, administrative costs and corporate development. Income determined using statutory accounting is one of the major determinants of an insurance company's dividend capacity to its parent in the following fiscal year. Statutory accounting rules and practices, which differ in certain respects from generally accepted accounting principles, are mandated by regulators in an insurance company's state of domicile. In 1995, UNUM America's statutory net income increased to $226.4 million, as compared with $39.2 million in 1994, which was primarily due to significant improvements in the income of certain disability products, and significantly higher realized investment gains as a result of the sale of the common stock portfolio. As described in the Disability Insurance segment, in 1994 UNUM America strengthened reserves for existing claims related to the traditional non-cancellable individual disability products, which resulted in a statutory after-tax charge of $69.6 million in third quarter 1994. This charge combined with unfavorable claims experience in certain disability businesses contributed to the decline in UNUM America's statutory income in 1994. As a result of the increase in UNUM America's statutory earnings in 1995, the amount available under current law for payment of dividends during 1996 to UNUM Corporation from all U.S. domiciled insurance subsidiaries without state insurance regulatory approval, increased to approximately $135 million, as compared with approximately $81 million for 1995. UNUM Corporation also has the ability to draw a dividend of approximately $19 million from its United Kingdom- based affiliate, UNUM Limited, subject to certain U.S. tax consequences. Cash flow requirements are also supported by a committed revolving credit facility totaling $500 million, which expires October 1, 1999. UNUM Corporation's commercial paper program is supported by the revolving credit facility, and is available for general liquidity needs, capital expansion, acquisitions and stock repurchase. The committed revolving credit facility contains certain covenants which, among other provisions, require maintenance of certain levels of stockholders' equity and limits on level of debt. In September 1993, UNUM filed an omnibus shelf registration statement with the Securities and Exchange Commission which became effective on October 8, 1993, relating to $450 million of securities (including debt securities, preferred stock, common stock and other securities). On October 8, 1993, UNUM filed a prospectus supplement to establish a $250 million medium-term note ("MTN") program under the shelf registration. On May 11, 1995, UNUM Corporation issued $172.5 million of 8.80% Monthly Income Debt Securities ("MIDS") (Junior Subordinated Deferrable Interest Debentures, Series A) under the shelf registration, which mature in 2025. At December 31, 1995, UNUM had short-term and long-term debt totaling $126.5 million and $457.3 million, respectively. At December 31, 1995, approximately $417 million was available for additional financing under the existing revolving credit facility and approximately $96 million of investment grade debt instruments were available for issuance under the shelf registration. Contingent upon market conditions and corporate needs, management may refinance short-term notes payable with longer term securities. At December 31, 1995, approximately 2.7 million shares of common stock remained authorized for stock repurchase. During 1995, UNUM did not acquire any shares in the open market. During 1994 and 1993, UNUM repurchased 3.9 million and 3.7 million shares, respectively, in the open market. The aggregate cost of the 1994 and 1993 repurchases was $183.3 million and $192.5 million, respectively, which was primarily funded through additional borrowings. During 1995, 1994 and 1993, withdrawals of 401(k), GIC and DA contracts reported in the Retirement Products segment, including contract terminations, payments to participants and transfers to other carriers, were approximately $46 million, $130 million and $309 million, respectively. Withdrawals during 1995, 1994 and 1993, were at levels expected by management and reflect the run-off nature of these closed blocks of businesses. UNUM manages liquidity objectives by including certain conditions in pension contracts which prohibit or restrict availability of funds. UNUM was committed at December 31, 1995, to purchase fixed maturities and other invested assets in the amount of $91.2 million. Independent of the cash flows of UNUM Corporation, management anticipates that the operating cash flows of the subsidiaries of UNUM Corporation will be sufficient to meet benefit obligations, planned investment commitments and operational needs of those companies. 29 RATINGS Standard & Poor's Corporation ("Standard & Poor's"), Moody's Investors Service ("Moody's") and A.M. Best Company ("A.M. Best") are among the third parties that provide UNUM independent assessments of its overall financial position. Ratings from these agencies for financial strength and claims paying ability are available for the individual United States domiciled insurance company subsidiaries rather than on a consolidated basis, since the financial information used to develop the ratings is based on statutory accounting practices in the United States. Debt ratings for UNUM Corporation are based on consolidated financial information under generally accepted accounting principles. The table below reflects the debt ratings for UNUM Corporation and the claims paying ability and financial strength ratings for UNUM's United States domiciled insurance company subsidiaries at March 8, 1996:
------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- STANDARD & POOR'S MOODY'S A.M. BEST - ------------------------------------------------------------------------------------------------------------------------------- UNUM CORPORATION RATINGS: Senior Debt (MTN program) A+ A1 (Strong) (Upper Medium Grade) Commercial Paper A-1 P-1 (Strong) (Superior Ability) Subordinated Debt (MIDS) A A2 (Strong) (Upper Medium Grade) UNITED STATES SUBSIDIARIES' RATINGS: CLAIMS PAYING ABILITY RATING FINANCIAL STRENGTH RATING UNUM America AA Aa2 A++ (Excellent) (Excellent) (Superior) First UNUM AA Aa2 A+ (Excellent) (Excellent) (Superior) Colonial Life & Accident AA- Aa3 A+ (Excellent) (Excellent) (Superior) Commercial Life AA A (Excellent) (Excellent)
At March 8, 1996, the unsold portion of the shelf registration related to preferred stock carried a rating of "(P)"a1"" (Upper-Medium Quality) from Moody's Investors Service. INSURANCE REGULATION The Risk-Based Capital standards for life insurance companies, as prescribed by the National Association of Insurance Commissioners, are based on a formula that establishes capital requirements relating to existing asset default risk, insurance risk, interest rate (asset/liability mismatch) risk and business risk. A company's Total Adjusted Capital (statutory capital, surplus and Asset Valuation Reserve plus certain other adjustments) is compared to the Authorized Control Level ("ACL") of Risk-Based Capital produced by the formula. Subject to certain trend tests to determine the change in the ACL ratio from year to year, companies with Total Adjusted Capital above 200% of ACL are assumed to be adequately capitalized. Companies below 200% of ACL are identified as requiring various levels of regulatory action ranging from increased information requirements for companies between 150% and 200% of ACL, to mandatory control by the domiciliary insurance department for companies below 70% of ACL. At December 31, 1995, the ACL ratios for UNUM America, First UNUM, Colonial Life and Commercial Life were 382%, 382%, 436% and 329%, respectively. This compares with ACL ratios at December 31, 1994, of 307%, 357%, 442% and 378%, respectively. DERIVATIVE FINANCIAL INSTRUMENTS UNUM periodically uses common derivative financial instruments such as options, futures and forward exchange contracts to hedge certain risks associated with future investments and certain payments denominated in foreign currencies, primarily British pound sterling, Canadian dollar and Japanese yen. These derivative financial instruments are used to protect UNUM from the effect of market fluctuations in interest and exchange rates between the contract date and the 30 date on which the hedged transaction occurs. In using these instruments, UNUM is subject to the off-balance-sheet risk that the counterparties of the transactions will fail to completely perform as contracted. UNUM manages this risk by only entering into contracts with highly rated institutions and listed exchanges. UNUM does not intend to hold derivative financial instruments for the purpose of trading. At December 31, 1995 and 1994, UNUM had no open derivative financial instruments. 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 December 31, 1995. In the opinion of management, the ultimate liability, if any, arising from this litigation is not expected to have a material 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 is 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. Although UNUM believes its claims are meritorious, the United States is aggressively resisting the claims and the ultimate recovery, if any, cannot be determined at this time. EFFECT OF INFLATION Inflation is one of the factors that has increased the need for insurance. Many policyholders who once had adequate insurance programs at lower coverage levels have increased their disability insurance coverage to provide the same relative financial benefits and protection. Changing interest rates, which are traditionally linked to changes in inflation, affect UNUM's level of discounted reserves. While rising interest rates are beneficial when investing current cash flows, they can also reduce the fair value of existing fixed rate long-term investments. In addition, lower interest rates can lead to early payoffs and refinancing of some of UNUM's fixed rate investments. Management generally invests in fixed rate instruments that are structured to limit the exposure to such reinvestment risk. NEW ACCOUNTING PRONOUNCEMENTS In March 1995, the FASB issued FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. UNUM will adopt FAS 121 effective January 1, 1996. The adoption of FAS 121 is not expected to have a material effect on UNUM's results of operations or financial position. In October 1995, the FASB issued FAS No. 123, "Accounting for Stock-Based Compensation," which establishes financial accounting and reporting standards for stock-based employee compensation plans. FAS 123 defines a new method of accounting for employee stock compensation plans using a fair value based method, under which compensation cost is measured and recognized in results of operations. Alternatively, FAS 123 allows an entity to retain the accounting method for employee stock compensation plans defined under APB Opinion No. 25, "Accounting for Stock Issued to Employees." If an entity retains the accounting defined under APB 25, certain pro forma disclosures of net income and earnings per share must be made as if the fair value based method defined under FAS 123 had been applied. UNUM is required to adopt FAS 123 effective January 1, 1996. UNUM has determined that it will retain the accounting methodology prescribed by APB 25 and will disclose the pro forma effects of such stock-based compensation as required in 1996. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX PAGE - ---------------------------------------------------------------------------------------------------------------------------- --- Report of Independent Accountants........................................................................................... 32 Consolidated Financial Statements: Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993.................................... 33 Consolidated Balance Sheets as of December 31, 1995 and 1994.............................................................. 34 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993...................... 35 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993................................ 36 Notes to Consolidated Financial Statements.................................................................................. 37
31 REPORT OF INDEPENDENT ACCOUNTANTS To the Directors and Stockholders UNUM Corporation We have audited the consolidated financial statements of UNUM Corporation and subsidiaries as listed in Item 8 and the financial statement schedules as listed in Item 14(a) of this Form 10-K. These consolidated financial statements and financial statement schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of UNUM Corporation and subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. As discussed in Notes 2, 7, and 9 to the consolidated financial statements, the Corporation changed its method of accounting for certain investments in debt securities in 1994 and its method of accounting for postretirement benefits other than pensions, and accounting for income taxes in 1993. /s/ COOPERS & LYBRAND L.L.P. Portland, Maine February 6, 1996 32 UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA)
------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- Revenues Premiums.......................................................................................... $3,018.2 $2,721.3 $2,474.1 Investment income................................................................................. 806.3 770.2 790.4 Net realized investment gains..................................................................... 225.1 45.6 49.4 Fees and other income............................................................................. 73.3 75.5 83.1 -------- -------- -------- Total revenues................................................................................ 4,122.9 3,612.6 3,397.0 Benefits and expenses Benefits to policyholders......................................................................... 2,493.0 2,239.0 1,775.7 Interest credited................................................................................. 227.4 242.7 281.0 Operating expenses................................................................................ 728.2 713.0 675.6 Commissions....................................................................................... 369.9 355.9 326.8 Increase in deferred policy acquisition costs..................................................... (114.7) (155.3) (135.1) Interest expense.................................................................................. 37.2 18.7 12.7 -------- -------- -------- Total benefits and expenses................................................................... 3,741.0 3,414.0 2,936.7 -------- -------- -------- Income before income taxes and cumulative effects of accounting changes............................. 381.9 198.6 460.3 Income taxes Current........................................................................................... 98.6 30.4 73.4 Deferred.......................................................................................... 2.2 13.5 74.9 -------- -------- -------- Total income taxes............................................................................ 100.8 43.9 148.3 -------- -------- -------- Income before cumulative effects of accounting changes.............................................. 281.1 154.7 312.0 Cumulative effects of accounting changes Income taxes...................................................................................... -- -- 20.0 Postretirement benefits other than pensions, net of tax........................................... -- -- (32.1) -------- -------- -------- Net income.......................................................................................... $ 281.1 $ 154.7 $ 299.9 -------- -------- -------- -------- -------- -------- Per common share Income before cumulative effects of accounting changes............................................ $ 3.87 $ 2.09 $ 3.96 Cumulative effects of accounting changes Income taxes...................................................................................... -- -- 0.25 Postretirement benefits other than pensions, net of tax........................................... -- -- (0.40) -------- -------- -------- Net income.......................................................................................... $ 3.87 $ 2.09 $ 3.81 -------- -------- -------- -------- -------- --------
See notes to consolidated financial statements. 33 UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN MILLIONS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
DECEMBER 31, ---------------------- 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------- Assets Investments Fixed maturities: Available for sale-at fair value (amortized cost: 1995-$8,583.5; 1994-$1,701.4).................. $ 9,135.4 $ 1,640.6 Held to maturity-principally at amortized cost (fair value: 1994-$6,168.6)....................... -- 6,227.2 Equity securities available for sale-at fair value (cost: 1995-$21.1; 1994-$492.2)................. 25.2 627.9 Mortgage loans..................................................................................... 1,163.4 1,216.3 Real estate, net................................................................................... 222.2 190.8 Policy loans....................................................................................... 219.2 201.0 Other long-term investments........................................................................ 30.4 38.1 Short-term investments............................................................................. 896.7 291.9 ---------- ---------- Total investments................................................................................ 11,692.5 10,433.8 Cash................................................................................................. 42.5 36.1 Accrued investment income............................................................................ 208.5 195.9 Premiums due......................................................................................... 224.3 189.7 Deferred policy acquisition costs.................................................................... 1,142.3 1,035.2 Property and equipment, net.......................................................................... 153.7 153.4 Other assets......................................................................................... 791.8 737.2 Separate account assets.............................................................................. 532.2 345.9 ---------- ---------- Total assets..................................................................................... $ 14,787.8 $ 13,127.2 ---------- ---------- ---------- ---------- Liabilities and Stockholders' Equity Liabilities Future policy benefits............................................................................. $ 1,718.7 $ 1,591.6 Unpaid claims and claim expenses................................................................... 4,856.4 3,853.9 Other policyholder funds........................................................................... 3,840.3 4,058.8 Income taxes Current.......................................................................................... 20.7 12.4 Deferred......................................................................................... 392.0 348.6 Notes payable...................................................................................... 583.8 428.7 Other liabilities.................................................................................. 540.8 571.9 Separate account liabilities....................................................................... 532.2 345.9 ---------- ---------- Total liabilities................................................................................ 12,484.9 11,211.8 Stockholders' equity Preferred stock, par value $0.10 per share, authorized 10,000,000 shares, none issued.............. Common stock, par value $0.10 per share, authorized 120,000,000 shares, issued 99,987,958 shares... 10.0 10.0 Additional paid-in capital......................................................................... 1,088.2 1,080.5 Unrealized gains on available for sale securities, net............................................. 213.1 49.6 Unrealized foreign currency translation adjustment................................................. (23.1) (23.7) Retained earnings.................................................................................. 1,713.2 1,507.2 ---------- ---------- 3,001.4 2,623.6 Less: Treasury stock, at cost (1995-26,980,331 shares; 1994-27,575,430 shares)......................... 691.6 706.6 Restricted stock deferred compensation........................................................... 6.9 1.6 ---------- ---------- Total stockholders' equity....................................................................... 2,302.9 1,915.4 ---------- ---------- Total liabilities and stockholders' equity....................................................... $ 14,787.8 $ 13,127.2 ---------- ---------- ---------- ---------- See notes to consolidated financial statements.
34 UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
COMMON UNREALIZED GAINS UNREALIZED STOCK (LOSSES) ON FOREIGN RESTRICTED $0.10 ADDITIONAL AVAILABLE FOR CURRENCY STOCK PAR PAID-IN SALE SECURITIES, TRANSLATION RETAINED TREASURY DEFERRED VALUE CAPITAL NET ADJUSTMENT EARNINGS STOCK COMPENSATION TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1993.................... $10.0 $1,066.6 $121.1 $ (20.9) $1,182.3 $ (345.5) $ (2.7) $2,010.9 1993 Transactions: Net income............. 299.9 299.9 Unrealized gains on equity securities, net................... 28.0 28.0 Unrealized foreign currency translation adjustment............ (3.2) (3.2) Dividends to stockholders ($0.765 per common share)................ (61.4) (61.4) Treasury stock acquired.............. (192.5) (192.5) Employee stock option and other transactions.......... 11.8 8.2 1.0 21.0 ------ ---------- ------ ------------- ---------- -------- ------ -------- Balance at December 31, 1993.................... 10.0 1,078.4 149.1 (24.1) 1,420.8 (529.8) (1.7) 2,102.7 1994 Transactions: Net income............. 154.7 154.7 Unrealized losses on available for sale securities, net....... (99.5) (99.5) Unrealized foreign currency translation adjustment............ 0.4 0.4 Dividends to stockholders ($0.92 per common share)................ (68.3) (68.3) Treasury stock acquired.............. (183.3) (183.3) Employee stock option and other transactions.......... 2.1 6.5 0.1 8.7 ------ ---------- ------ ------------- ---------- -------- ------ -------- Balance at December 31, 1994.................... 10.0 1,080.5 49.6 (23.7) 1,507.2 (706.6) (1.6) 1,915.4 1995 Transactions: Net income............. 281.1 281.1 Unrealized gains on available for sale securities, net....... 163.5 163.5 Unrealized foreign currency translation adjustment............ 0.6 0.6 Dividends to stockholders ($1.035 per common share)................ (75.1) (75.1) Employee stock option and other transactions.......... 7.7 15.0 (5.3) 17.4 ------ ---------- ------ ------------- ---------- -------- ------ -------- Balance at December 31, 1995.................... $10.0 $1,088.2 $213.1 $ (23.1) $1,713.2 $ (691.6) $ (6.9) $2,302.9 ------ ---------- ------ ------------- ---------- -------- ------ -------- ------ ---------- ------ ------------- ---------- -------- ------ --------
See notes to consolidated financial statements. 35 UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ------------------------------------- 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------- Operating activities: Net income.......................................................... $ 281.1 $ 154.7 $ 299.9 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effects of accounting changes, net of tax.............. -- -- 12.1 Increase in future policy benefits and unpaid claims and claim expenses......................................................... 905.3 720.1 412.9 Increase in amounts receivable under reinsurance agreements....... (61.0) (18.6) (129.1) Increase (decrease) in income tax liability....................... (3.5) (3.3) 109.8 Increase in deferred policy acquisition costs..................... (114.9) (155.4) (125.5) Realized investment gains......................................... (242.0) (59.0) (69.2) Other............................................................. (8.9) 62.3 46.4 ---------- --------- ---------- Net cash provided by operating activities....................... 756.1 700.8 557.3 ---------- --------- ---------- Investing activities: Maturities of fixed maturities...................................... -- -- 924.6 Maturities of fixed maturities held to maturity..................... 835.7 754.8 -- Maturities of fixed maturities available for sale................... 99.3 41.2 -- Sales of fixed maturities held to maturity.......................... 2.8 46.8 45.7 Sales of fixed maturities available for sale........................ 577.3 407.6 218.2 Sales of equity securities available for sale....................... 836.7 314.1 -- Sales and maturities of other investments........................... 312.0 414.9 550.2 Purchases of investments............................................ -- -- (1,832.2) Purchases of fixed maturities held to maturity...................... (230.2) (795.2) -- Purchases of fixed maturities available for sale.................... (1,971.9) (943.9) -- Purchases of equity securities available for sale................... (131.3) (216.6) -- Purchases of other investments...................................... (322.4) (211.5) -- Net (increase) decrease in short-term investments................... (604.8) (221.7) 38.8 Net additions to property and equipment............................. (28.9) (29.9) (18.2) Investments in subsidiaries, net.................................... -- -- 0.9 ---------- --------- ---------- Net cash used in investing activities........................... (625.7) (439.4) (72.0) ---------- --------- ---------- Financing activities: Deposits and interest credited to investment contracts.............. 669.6 608.6 735.2 Maturities and withdrawals from investment contracts................ (888.1) (800.5) (1,022.4) Dividends to stockholders........................................... (75.1) (68.3) (61.4) Treasury stock acquired............................................. -- (183.3) (192.5) Proceeds from notes payable......................................... 291.5 54.7 51.5 Repayment of notes payable.......................................... (1.3) (1.2) (50.1) Net increase (decrease) in short-term debt.......................... (135.1) 136.6 37.3 Other............................................................... 13.8 7.2 15.1 ---------- --------- ---------- Net cash used in financing activities........................... (124.7) (246.2) (487.3) ---------- --------- ---------- Effect of exchange rate changes on cash............................... 0.7 0.1 2.4 ---------- --------- ---------- Net increase in cash.................................................. 6.4 15.3 0.4 Cash at beginning of year............................................. 36.1 20.8 20.4 ---------- --------- ---------- Cash at end of year................................................... $ 42.5 $ 36.1 $ 20.8 ---------- --------- ---------- ---------- --------- ---------- Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes...................................................... $ 82.6 $ 48.8 $ 67.3 Interest.......................................................... $ 44.7 $ 20.4 $ 13.3
See notes to consolidated financial statements. 36 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying consolidated financial statements of UNUM Corporation and subsidiaries ("UNUM") have been prepared on the basis of generally accepted accounting principles. 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. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of UNUM Corporation and subsidiaries. Significant intercompany accounts and transactions have been eliminated. RECLASSIFICATION Certain 1994 and 1993 amounts have been reclassified in 1995 for comparative purposes. INVESTMENTS Investments are reported as follows: - Fixed maturities available for sale (certain bonds and redeemable preferred stocks) -- at fair value. - Fixed maturities held to maturity (certain bonds and redeemable preferred stocks) -- principally at amortized cost. - Equity securities available for sale (common stocks and non-redeemable preferred stocks) -- at fair value. - Mortgage loans -- at amortized cost less an allowance for probable losses. - Real estate -- at cost less accumulated depreciation. - Policy loans -- at unpaid principal balance. - Other long-term investments -- at cost plus UNUM's equity in undistributed net earnings since acquisition. - Short-term investments -- are considered available for sale and are carried at cost which approximates fair value. Fixed maturities and equity securities are classified as available for sale as they may be sold in response to changes in interest rates, resultant prepayment risk, liquidity and capital needs, or other similar economic factors. Unrealized gains and losses related to securities classified as available for sale are excluded from net income and reported in a separate component of stockholders' equity, net of applicable deferred taxes and related adjustments to unpaid claims. The unrealized gains and losses are determined based on estimated market values at the balance sheet date and are not necessarily the amounts which would be realized upon sale of the securities or representative of future market values. Changing interest rates affect the level of unrealized gains and losses related to securities classified as available for sale. While rising interest rates are beneficial when investing current cash flows, they can also reduce the fair value of existing fixed rate long-term investments. In addition, lower interest rates can lead to early payoffs and refinancing of some of UNUM's fixed rate investments. Management generally invests in fixed rate instruments that are structured to limit the exposure to such reinvestment risk. Fixed maturities that UNUM has the positive intent and ability to hold to maturity are classified as held to maturity. Realized investment gains and losses, which are determined on the basis of specific identification and include adjustments for allowances for probable losses, are reported separately in the Consolidated Statements of Income. If a decline in fair value of an invested asset is considered to be other than temporary, the investment is reduced to its net realizable value and the reduction is accounted for as a realized investment loss. UNUM discontinues the accrual of investment income on invested assets when it is determined that collectability is doubtful. UNUM recognizes investment income on impaired loans when the income is received. 37 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Real estate held for sale, which is included in other assets in the Consolidated Balance Sheets, is valued at the lower of fair value less estimated costs to sell, or cost. UNUM has provided an allowance for probable losses on real estate held for sale that reduces the carrying value of the asset to fair value. Purchases and sales of short-term financial instruments are part of investing activities and not necessarily a part of the cash management program. Therefore, short-term financial instruments are classified as investments in the Consolidated Balance Sheets and are included as investing activities in the Consolidated Statements of Cash Flows. DERIVATIVE FINANCIAL INSTRUMENTS Gains or losses on hedges of existing assets or liabilities are deferred and included in the carrying amounts of those assets or liabilities. Gains or losses related to qualifying hedges of firm commitments or anticipated transactions are also deferred and recognized in the carrying amount of the underlying asset or liability when the hedged transaction occurs. RECOGNITION OF PREMIUM REVENUES AND RELATED EXPENSES Group insurance premiums are recognized as income over the period to which the premiums relate. Individual disability premiums are recognized as income when due. Benefits and expenses are associated with earned premiums to result in recognition of profits over the life of the contracts. This association is accomplished by recording a provision for future policy benefits and unpaid claims and claim expenses, and by amortizing deferred policy acquisition costs. For retirement and universal life products, premium and other policy fee revenue consist of charges for the cost of insurance, policy administration and surrenders assessed during the period. Charges related to services to be performed in the future are deferred until earned. The amounts received in excess of premium and fees are recorded as deposits and included in other policyholder funds in the Consolidated Balance Sheets. Benefits and expenses include benefit claims in excess of related account balances, interest credited at various rates and amortization of deferred policy acquisition costs. DEFERRED POLICY ACQUISITION COSTS The costs of acquiring new business that vary with and that are related primarily to the production of new business have been deferred to the extent such costs are deemed recoverable from future profits. Such costs include commissions, certain costs of policy issue and underwriting, and certain variable field office expenses. For individual disability, group disability, and group life and health business, the costs are amortized in proportion to expected future premiums. For universal life and certain retirement products, the costs are amortized in proportion to estimated gross profits from interest margins, mortality and other elements of performance under the contracts. Amortization is adjusted periodically to reflect differences between actual experience and original assumptions, with any resulting changes reflected in current operating results. The amounts deferred and amortized were as follows: - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ------------------------------- (DOLLARS IN MILLIONS) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- Deferred......................................................................................... $ 308.3 $ 308.1 $ 282.8 Less amortized................................................................................... (193.6) (152.8) (147.7) --------- --------- --------- Increase in deferred policy acquisition costs.................................................. $ 114.7 $ 155.3 $ 135.1 --------- --------- --------- --------- --------- ---------
RESERVES FOR FUTURE POLICY BENEFITS Reserves for future policy benefits are calculated by the net-level premium method, and are based on UNUM's expected morbidity, mortality and interest rate assumptions at the time a policy is issued. These reserves represent the portion of premiums received, accumulated with interest and held to provide for claims that have not yet been incurred. The reserve assumptions are periodically reviewed and compared to actual experience and are revised if it is determined that future expected experience is different from the reserve assumptions. Reserves for group insurance policies consist primarily of unearned premiums. 38 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The interest rates used in the calculation of reserves for future policy benefits at December 31, 1995, and 1994, principally ranged from: Individual disability.......................................................... 5.5% to 9.5% Individual life................................................................ 5.0% to 9.0% Individual accident and health................................................. 5.0% to 9.0% Individual and group annuities................................................. 5.0% to 9.0%
Certain reserve calculations are based on interest rates within these ranges graded down over periods from 15 to 20 years. RESERVES FOR UNPAID CLAIMS AND CLAIM EXPENSES Unpaid claims and claim expense reserves represent the amount estimated to fund claims that have been reported but not settled and claims incurred but not reported. Reserves for unpaid claims are estimated based on UNUM's historical experience and other actuarial assumptions that consider the effects of current developments, anticipated trends, risk management programs and renewal actions. Many factors affect actuarial calculations of claim reserves, including but not limited to interest rates and current and anticipated incidence rates, recovery rates, and economic and societal conditions. Reserve estimates and assumptions are periodically reviewed and updated with any resulting adjustments to reserves reflected in current operating results. Given the complexity of the reserving process, the ultimate liability may be more or less than such estimates indicate. The interest rates used in the calculation of disability claims reserves at December 31, 1995, and 1994, were principally as follows: - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Group long term disability (North America)............................................... 7.94% 9.18% Group long term disability (United Kingdom).............................................. 9.67% 9.94% Individual disability.................................................................... 6.75% to 9.67% 6.75% to 9.94%
The interest rate used to discount the disability reserves is a composite of the yields on assets specifically matched with each block of business. Management expects the reserve discount rate for certain disability products will further decline, since current cash flows are invested in high quality assets at current yields, which are below the composite yield of the existing assets purchased in prior years. UNUM periodically adjusts prices on both existing and new business in an effort to mitigate the impact of the current interest rate environment. For other accident and health business, reserves are based on projections of historical claims run-out patterns. 39 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Activity in the liability for unpaid claims and claim expenses is summarized as follows: - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- Balance at January 1.......................................................................... $ 3,853.9 $ 3,341.5 $ 2,983.6 Less reinsurance recoverables............................................................... (82.7) (68.0) -- --------- --------- --------- Net Balance at January 1...................................................................... 3,771.2 3,273.5 2,983.6 Incurred related to: Current year................................................................................ 1,825.0 1,609.3 1,417.8 Prior years................................................................................. 507.0 436.0 238.0 --------- --------- --------- Total incurred................................................................................ 2,332.0 2,045.3 1,655.8 Paid related to: Current year................................................................................ 523.9 517.6 471.0 Prior years................................................................................. 1,099.5 1,030.0 894.9 --------- --------- --------- Total paid.................................................................................... 1,623.4 1,547.6 1,365.9 Net Balance at December 31.................................................................... 4,479.8 3,771.2 3,273.5 Plus reinsurance recoverables............................................................... 115.4 82.7 68.0 Effect of unrealized gains on fixed maturities................................................ 261.2 -- -- --------- --------- --------- Balance at December 31........................................................................ $ 4,856.4 $ 3,853.9 $ 3,341.5 --------- --------- --------- --------- --------- ---------
The increase in incurrals related to prior years was $507.0 million, $436.0 million, and $238.0 million (net of reinsurance), for 1995, 1994 and 1993, respectively. These increases were primarily the result of interest accrued on reserves, changes in reserve estimates and assumptions of interest rates, morbidity, mortality and expense costs, and changes in foreign exchange rates, primarily related to the disability reserves of UNUM's United Kingdom-based affiliate, UNUM Limited. Due to the long-term claims payment pattern of some of UNUM's businesses, certain reserves, particularly disability, are discounted for interest. Changes in reserve estimates and assumptions were primarily a result of increased reserves from lower discount rates for certain disability products following the sale of the common stock portfolio in 1995, and adjustments to strengthen certain disability reserves in 1995 and 1994. The components of the increase in unpaid claims and claims expenses incurred and related to prior years were as follows: - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- Interest accrued on reserves.............................................................................. $270.0 $267.0 $237.0 Changes in reserve estimates and assumptions.............................................................. 239.0 154.0 6.0 Changes in foreign exchange rates......................................................................... (2.0) 15.0 (5.0) ------ ------ ------ Increase in incurrals related to prior years............................................................ $507.0 $436.0 $238.0 ------ ------ ------ ------ ------ ------
In connection with the transfer of all fixed maturities previously classified as held to maturity to available for sale, explained in Note 2, unpaid claims were adjusted by $261.2 million on December 31, 1995. Unpaid claims are adjusted to reflect changes that would have been necessary if the unrealized gains and losses related to fixed maturities classified as available for sale had been realized. Where applicable, UNUM has reflected those adjustments in the liability balances with corresponding credits or charges, net of related deferred taxes, reported as a component of unrealized gains on available for sale securities in stockholders' equity. Effective January 1, 1993, UNUM adopted Financial Accounting Standard ("FAS") No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," which eliminated the practice by insurance 40 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) enterprises of reporting assets and liabilities relating to reinsured contracts net of the effects of reinsurance. Since UNUM did not restate its financial statements upon adoption of FAS 113, reserve balances prior to December 31, 1993, are shown net of reinsurance recoverables. CHANGES IN ACCOUNTING ESTIMATES During 1995, UNUM sold virtually all of the common stock portfolio of its United States subsidiaries. The sale of the common stock portfolio, which partially supported certain disability reserves, and the reinvestment of the proceeds primarily in investment grade fixed income assets at yields below the average portfolio yield, resulted in lower reserve discount rates for certain disability products reported in the Disability Insurance segment. This change in accounting estimate to lower certain discount rates resulted in an increase of $128.6 million to benefits to policyholders in the Consolidated Statement of Income, and a decrease to net income of $83.6 million, or $1.15 per share. During 1995, UNUM increased the group long term disability reserves for incurred but not reported ("IBNR") claims, as reported in the Disability Insurance segment. The increased IBNR reserves were based on management's judgment that claims currently incurred but not yet reported will reflect increased levels of claims incidence and severity. This change in accounting estimate resulted in an increase to benefits to policyholders in the Consolidated Statement of Income of $38.4 million, and a decrease to net income of $25.0 million, or $0.34 per share. During 1995, UNUM increased reserves for unpaid claims related to the association group disability business by $15.0 million to reflect management's expectations of slower than expected claim recoveries. This change in accounting estimate, which was reflected in the Disability Insurance segment, decreased net income by $9.8 million, or $0.14 per share. During 1994, UNUM increased reserves for existing claims by $83.3 million and strengthened reserves for estimated future losses by $109.1 million. These increased reserves reflected management's expectations of morbidity trends for the non-cancellable individual disability business, as reported in the Disability Insurance Segment. This change in accounting estimate resulted in an increase to benefits to policyholders in the Consolidated Statement of Income of $192.4 million, and a decrease to net income of $125.1 million, or $1.69 per share. OTHER POLICYHOLDER FUNDS Other policyholder funds are liabilities for investment-type contracts and represent customer deposits plus interest credited to those deposits at various rates. LIABILITIES FOR RESTRUCTURING ACTIVITIES Liabilities for restructuring activities are recorded when management, prior to the balance sheet date, commits to execute an exit plan that will result in the incurral of costs that have no future economic benefit, or approves a plan of termination and communicates sufficient detail of the plan to employees. SEPARATE ACCOUNTS Certain assets of UNUM's defined benefit plans and tax sheltered annuity contracts are in separate accounts that are pooled investment funds of securities. Investment income and realized gains and losses on these accounts accrue directly to the contractholders. Assets, carried at market value, and liabilities of the separate accounts are shown separately in the Consolidated Balance Sheets. The assets of the separate accounts are legally segregated and are not subject to claims that arise out of any other business of UNUM. ACCOUNTING FOR PARTICIPATING INDIVIDUAL LIFE INSURANCE Participating policies issued by the former Union Mutual Life Insurance Company ("Union Mutual") prior to UNUM's conversion to a stock life insurance company on November 14, 1986, will remain participating as long as they remain in force. A Participation Fund Account ("PFA") was established for the sole benefit of all of Union Mutual's individual participating life and annuity policies and contracts. 41 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The assets of the PFA are to provide for the benefit, dividend and certain expense obligations of the participating individual life insurance policies and annuity contracts. This line of business participates in the experience of the PFA and its operations have been excluded from the Consolidated Statements of Income. The PFA represented approximately 2.5% and 2.5% of total assets and 2.8% and 3.0% of total liabilities at December 31, 1995, and 1994, respectively. INCOME TAXES The provision for income taxes includes amounts currently payable and deferred income taxes, which result from differences between financial reporting and tax bases of assets and liabilities, and are measured using enacted tax rates and laws. Deferred U.S. income taxes have not been provided on accumulated earnings of UNUM's foreign subsidiaries. These earnings could generate additional U.S. tax if remitted to UNUM Corporation. FOREIGN CURRENCY TRANSLATION Foreign subsidiaries' balance sheet and income statement accounts expressed in local functional currencies are translated into U.S. dollars using ending and quarterly average exchange rates, respectively. The resulting translation adjustments are reported in a separate component of stockholders' equity. EARNINGS PER SHARE The weighted average number of shares outstanding used to calculate earnings per share was approximately 72,677,000, 74,158,000 and 78,779,000 in 1995, 1994 and 1993, respectively. The assumed exercise of outstanding stock options does not result in a material dilution of earnings per share. NEW ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standard ("FAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. UNUM will adopt FAS 121 effective January 1, 1996. The adoption of FAS 121 is not expected to have a material effect on UNUM's results of operations or financial position. In October 1995, the FASB issued FAS No. 123, "Accounting for Stock-Based Compensation," which establishes financial accounting and reporting standards for stock-based employee compensation plans. FAS 123 defines a new method of accounting for employee stock compensation plans using a fair value based method, under which compensation cost is measured and recognized in results of operations. Alternatively, FAS 123 allows an entity to retain the accounting method for employee stock compensation plans defined under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." If an entity retains the accounting defined under APB 25, certain pro forma disclosures of net income and earnings per share must be made as if the fair value based method defined under FAS 123 had been applied. UNUM is required to adopt FAS 123 effective January 1, 1996. UNUM has determined that it will retain the accounting methodology prescribed in APB 25 and will disclose the pro forma effects of such stock-based compensation as required in 1996. NOTE 2. INVESTMENTS Effective January 1, 1994, UNUM adopted FAS 115, "Accounting for Certain Investments in Debt and Equity Securities," which specified the accounting and reporting for certain investments in equity securities and for all investments in debt securities. UNUM adopted the provisions of FAS 115 for these investments held or acquired after January 1, 1994. Upon the adoption of FAS 115, UNUM increased unrealized gains on available for sale securities included in stockholders' equity on January 1, 1994, by $41.8 million (net of deferred taxes of $22.5 million) to reflect the unrealized holding gains on fixed maturities classified as available for sale that were previously carried at amortized cost. In addition, UNUM reclassified certain fixed maturities from held to maturity to available for sale on January 1, 1994, in connection with the adoption of FAS 115. In November 1995, the FASB issued "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," which provided a one-time opportunity to reassess the appropriateness of the 42 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. INVESTMENTS (CONTINUED) classifications of securities described in FAS 115, and to reclassify fixed maturities from the held to maturity category without calling into question the intent to hold other debt securities to maturity in the future. On December 31, 1995, UNUM reassessed its fixed maturity portfolio and as allowed under the implementation guidance, reclassified fixed maturities with an amortized cost of $6,082.8 million and a related net unrealized gain of $393.0 million from the held to maturity category to available for sale. In connection with the reclassification of the held to maturity fixed maturities to available for sale, on December 31, 1995, UNUM adjusted its unpaid claims by $261.2 million to reflect the changes that would have been necessary if the unrealized gains and losses related to fixed maturities classified as available for sale had been realized. The following tables summarize the components of investment income, net realized investment gains and changes in unrealized investment gains (losses): INVESTMENT INCOME - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ---------------------- (DOLLARS IN MILLIONS) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- Fixed maturities: Held to maturity........................................................................................ $488.0 $548.1 $570.1 Available for sale...................................................................................... 182.2 87.9 59.5 Equity securities available for sale...................................................................... 5.3 10.4 12.6 Mortgage loans............................................................................................ 119.9 137.4 165.2 Real estate............................................................................................... 15.2 15.8 12.8 Policy loans.............................................................................................. 8.6 10.2 10.4 Other long-term investments............................................................................... 1.6 0.9 4.5 Short-term investments.................................................................................... 27.1 8.5 7.1 ------ ------ ------ Gross investment income............................................................................... 847.9 819.2 842.2 Less investment expenses.................................................................................. (17.0) (23.9) (26.6) Less investment income on participating individual life insurance policies and annuity contracts.......... (24.6) (25.1) (25.2) ------ ------ ------ Investment income..................................................................................... $806.3 $770.2 $790.4 ------ ------ ------ ------ ------ ------
NET REALIZED INVESTMENT GAINS - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ---------------------- (DOLLARS IN MILLIONS) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- Gross realized investment gains: Fixed maturities: Held to maturity...................................................................................... $ 0.1 $ 0.2 $ 6.1 Available for sale.................................................................................... 14.2 10.2 8.8 Equity securities available for sale...................................................................... 253.3 93.1 57.8 Mortgage loans, real estate and other..................................................................... 19.4 13.5 12.5 ------ ------ ------ Gross realized investment gains....................................................................... 287.0 117.0 85.2 ------ ------ ------ Gross realized investment losses: Fixed maturities: Held to maturity...................................................................................... (0.7) (6.8) 3.4 Available for sale.................................................................................... (12.8) (28.8) (1.0) Equity securities available for sale...................................................................... (18.7) (12.2) (9.5) Mortgage loans, real estate and other..................................................................... (29.7) (23.6) (28.7) ------ ------ ------ Gross realized investment losses...................................................................... (61.9) (71.4) (35.8) ------ ------ ------ Net realized investment gains....................................................................... $225.1 $ 45.6 $ 49.4 ------ ------ ------ ------ ------ ------
43 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. INVESTMENTS (CONTINUED) CHANGE IN UNREALIZED GAINS ON AVAILABLE FOR SALE SECURITIES - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ---------------------- (DOLLARS IN MILLIONS) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- Fixed maturities available for sale....................................................................... $612.7 $(60.8) $ -- Equity securities available for sale...................................................................... (131.6) (86.0) 43.2 Unpaid claims adjustment.................................................................................. (261.2) -- -- Deferred taxes............................................................................................ (56.4) 47.3 (15.2) ------ ------ ------ Total change in unrealized gains on available for sale securities, as included in stockholders' equity................................................................................................. $163.5 $(99.5) $ 28.0 ------ ------ ------ ------ ------ ------
FIXED MATURITIES The amortized cost and fair values of fixed maturities at December 31, 1995, were as follows: - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR (DOLLARS IN MILLIONS) COST GAINS LOSSES VALUE - ----------------------------------------------------------------------------------------------------------------------------------- Available for sale: U.S. Government................................................................ $ 402.6 $ 10.3 $ -- $ 412.9 States and municipalities...................................................... 670.5 23.7 (0.7) 693.5 Foreign governments............................................................ 229.4 26.1 (0.5) 255.0 Public utilities............................................................... 1,617.8 117.6 (0.6) 1,734.8 Corporate bonds................................................................ 5,617.9 377.3 (2.7) 5,992.5 Redeemable preferred stocks.................................................... 27.8 1.5 (1.2) 28.1 Mortgage-backed securities..................................................... 17.5 1.1 -- 18.6 ----------- ----------- ----------- --------- Total available for sale..................................................... $ 8,583.5 $ 557.6 $ (5.7) $ 9,135.4 ----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
44 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. INVESTMENTS (CONTINUED) The amortized cost and fair values of fixed maturities at December 31, 1994, were as follows: - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR (DOLLARS IN MILLIONS) COST GAINS LOSSES VALUE - ----------------------------------------------------------------------------------------------------------------------------------- Held to maturity: U.S. Government................................................................ $ 10.9 $ -- $ -- $ 10.9 States and municipalities...................................................... 631.8 9.1 (31.3) 609.6 Foreign governments............................................................ 176.1 12.4 (1.4) 187.1 Public utilities............................................................... 1,375.5 12.8 (46.8) 1,341.5 Corporate bonds................................................................ 4,014.3 92.7 (106.8) 4,000.2 Mortgage-backed securities..................................................... 10.8 0.5 -- 11.3 Other debt securities.......................................................... 7.8 0.2 -- 8.0 ----------- ----------- ----------- --------- Total held to maturity....................................................... $ 6,227.2 $ 127.7 $ (186.3) $ 6,168.6 ----------- ----------- ----------- --------- ----------- ----------- ----------- --------- Available for sale: U.S. Government................................................................ $ 353.2 $ 0.8 $ (7.5) $ 346.5 States and municipalities...................................................... 433.2 2.3 (13.9) 421.6 Foreign governments............................................................ 58.9 0.2 (1.5) 57.6 Public utilities............................................................... 229.4 3.8 (9.6) 223.6 Corporate bonds................................................................ 552.1 0.8 (31.8) 521.1 Redeemable preferred stocks.................................................... 63.2 2.9 (7.0) 59.1 Mortgage-backed securities..................................................... 11.4 0.1 (0.4) 11.1 ----------- ----------- ----------- --------- Total available for sale..................................................... $ 1,701.4 $ 10.9 $ (71.7) $ 1,640.6 ----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
The amortized cost and fair value of fixed maturities at December 31, 1995, by contractual maturity date, are shown below. Expected maturities will differ from contractual maturities since certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
AMORTIZED FAIR (DOLLARS IN MILLIONS) COST VALUE - ---------------------------------------------------------------------------------------------------------------------------------- Available for sale: Due in one year or less................................................................................. $ 742.9 $ 753.1 Due after one year through five years................................................................... 3,325.4 3,481.5 Due after five years through ten years.................................................................. 3,672.5 3,958.0 Due after ten years..................................................................................... 825.2 924.2 ----------- --------- 8,566.0 9,116.8 Mortgage-backed securities (primarily due after 10 years)............................................... 17.5 18.6 ----------- --------- Total available for sale.............................................................................. $ 8,583.5 $ 9,135.4 ----------- --------- ----------- ---------
During 1995, UNUM sold fixed maturities of two issuers classified as held to maturity with an amortized cost of $4.0 million due to evidence of significant deterioration of the issuers' creditworthiness, as evidenced by bankruptcy filings. These sales resulted in a net realized loss of $1.2 million. During 1994, UNUM sold fixed maturities of five issuers classified as held to maturity with an amortized cost of $49.8 million due to evidence of significant deterioration of the issuers' creditworthiness. These sales resulted in a net realized loss of $3.0 million. 45 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. INVESTMENTS (CONTINUED) EQUITY SECURITIES The fair values, which also represent carrying amounts, and the cost of equity securities available for sale were as follows at December 31, 1995: - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
FAIR (DOLLARS IN MILLIONS) COST VALUE - ------------------------------------------------------------------------------------------------------------------------------------ Common stocks: Industrial, miscellaneous and all other............................................................................. $21.1 $25.2 ----- ----- ----- -----
Gross unrealized investment gains on equity securities available for sale totaled $5.5 million and $158.7 million and losses totaled $1.4 million and $23.0 million, at December 31, 1995, and 1994, respectively. MORTGAGE LOANS Effective January 1, 1995, UNUM adopted Financial Accounting Standard ("FAS") No. 114, "Accounting by Creditors for Impairment of a Loan," and FAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures," which defined the principles to measure and record an impaired loan. When it is probable that UNUM will be unable to collect all amounts of principal and interest due according to the contractual terms of a loan agreement, the loan is deemed impaired. Once a loan is determined to be impaired, an allowance for probable losses is established for the difference between the carrying amount of the loan and its estimated value. The estimated value is based on either the present value of expected future cash flows discounted using the loan's effective interest rate, the loan's observable market price or the fair value of the collateral. The adoption of FAS 114 and FAS 118 did not have a material effect on UNUM's results of operations or financial position. At December 31, 1995, the recorded investment in impaired loans amounted to $50.1 million. Included in the $50.1 million was $38.4 million of loans which had a related allowance for probable losses of $7.1 million, and $11.7 million of loans which had no related allowance for probable losses. Mortgage loans that were restructured prior to the adoption of FAS 114 amounted to $59.9 million and $73.6 million at December 31, 1995, and 1994, respectively. Troubled debt restructurings represent loans that are refinanced with terms more favorable to the borrower. Interest foregone on these loans was not material for the years ended December 31, 1995, 1994 or 1993. OTHER Real estate acquired in satisfaction of debt cumulatively amounts to $107.6 million at December 31, 1995. Real estate held for sale amounted to $35.5 million at December 31, 1995, and $31.0 million at December 31, 1994. Mortgages with an amortized cost of $1.9 million, real estate with a depreciated cost of $4.7 million and no bonds were non-income producing for the twelve months ended December 31, 1995. Interest lost on these investments was not material in 1995, 1994 or 1993. UNUM was committed at December 31, 1995, to purchase fixed maturities and other invested assets in the amount of $91.2 million. 46 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3. ALLOWANCE FOR PROBABLE LOSSES ON INVESTED ASSETS AND REAL ESTATE HELD FOR SALE Changes in the allowance for probable losses on invested assets and real estate held for sale were as follows: - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
BALANCE AT BALANCE BEGINNING AT END (DOLLARS IN MILLIONS) OF YEAR ADDITIONS DEDUCTIONS OF YEAR - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1995 Mortgage loans.................................................................... $43.2 $ 9.2 $(13.2) $39.2 Real estate held for sale......................................................... 13.2 6.3 (0.4) 19.1 ----- --------- ---------- ------- Total........................................................................... $56.4 $15.5 $(13.6) $58.3 ----- --------- ---------- ------- Year Ended December 31, 1994 Fixed maturities held to maturity and available for sale.......................... $ 0.3 $ -- $ (0.3) $ -- Mortgage loans.................................................................... 48.6 8.5 (13.9) 43.2 Real estate held for sale......................................................... 20.9 0.8 (8.5) 13.2 ----- --------- ---------- ------- Total........................................................................... $69.8 $ 9.3 $(22.7) $56.4 ----- --------- ---------- ------- Year Ended December 31, 1993 Fixed maturities held to maturity and available for sale.......................... $ 4.1 $(3.8) $ -- $ 0.3 Mortgage loans.................................................................... 51.5 4.8 (7.7) 48.6 Real estate held for sale......................................................... 13.6 18.8 (11.5) 20.9 ----- --------- ---------- ------- Total........................................................................... $69.2 $19.8 $(19.2) $69.8 ----- --------- ---------- ------- ----- --------- ---------- -------
Additions represent charges to net realized investment gains less recoveries, and deductions represent reserves released upon disposal or restructuring of the related asset. Subsequent to January 1, 1994, adjustments for other than temporary declines in value of all fixed maturities are recorded as a direct adjustment to the securities' carrying value. NOTE 4. DERIVATIVE FINANCIAL INSTRUMENTS UNUM periodically uses common derivative financial instruments such as options, futures and forward exchange contracts to hedge certain risks associated with future investments and certain payments denominated in foreign currencies, primarily British pound sterling, Canadian dollar and Japanese yen. These derivative financial instruments are used to protect UNUM from the effect of market fluctuations in interest and exchange rates between the contract date and the date on which the hedged transaction occurs. In using these instruments, UNUM is subject to the off-balance-sheet risk that the counterparties to the transactions will fail to completely perform as contracted. UNUM manages this risk by only entering into contracts with highly rated institutions and listed exchanges. UNUM does not intend to hold derivative financial instruments for the purpose of trading. At December 31, 1995, and 1994, UNUM had no open derivative financial instruments. 47 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5. REINSURANCE UNUM, through its life insurance subsidiaries, is involved in both the cession and assumption of reinsurance with other companies. Risks are reinsured with other companies to reduce UNUM's exposure to large losses and permit recovery of a portion of direct losses. UNUM remains liable to the insured for the payment of policy benefits if the reinsurers cannot meet their obligations under the reinsurance agreements. Deferred policy acquisition costs, premiums and expenses are stated net of reinsurance ceded to other companies. The effect of reinsurance on premiums earned and written for the years ended December 31, 1995, 1994 and 1993 was as follows: - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- Premiums earned: Direct...................................................................................... $ 2,842.9 $ 2,663.1 $ 2,331.5 Assumed..................................................................................... 241.5 170.7 192.6 Ceded....................................................................................... (66.2) (112.5) (50.0) --------- --------- --------- Premiums earned........................................................................... $ 3,018.2 $ 2,721.3 $ 2,474.1 --------- --------- --------- Premiums written: Direct...................................................................................... $ 2,877.2 $ 2,702.7 $ 2,335.6 Assumed..................................................................................... 250.4 170.9 196.2 Ceded....................................................................................... (64.4) (112.6) (50.5) --------- --------- --------- Premiums written.......................................................................... $ 3,063.2 $ 2,761.0 $ 2,481.3 --------- --------- --------- --------- --------- ---------
For the years ended December 31, 1995, 1994 and 1993, recoveries recognized under reinsurance agreements reduced benefits to policyholders by $58.9 million, $53.3 million, and $28.9 million, respectively. NOTE 6. BUSINESS RESTRUCTURING AND OTHER CHARGES Charges of $8.4 million and $14.4 million were recorded in 1995 and 1994, respectively, related to the acceleration of organizational changes within UNUM Life Insurance Company of America and the decision to discontinue the individual disability non-cancellable product. Partially offsetting the charge recorded in 1995 was a $3.4 million curtailment gain, related to workforce reductions in UNUM Corporation's noncontributory defined benefit pension plan. The following is a summary of restructuring and other charges:
------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- NUMBER OF SEVERANCE EXIT (DOLLARS IN MILLIONS) EMPLOYEES COST COST TOTAL - ------------------------------------------------------------------------------------------------------------------------------- Balance December 31, 1994............................................................... 379 $ 9.2 $ 5.2 $ 14.4 1995 Charge............................................................................. -- 4.5 3.9 8.4 Amounts paid in 1995.................................................................... (373) (13.3) (2.6) (15.9) --- --------- ----- ------ Balance December 31, 1995............................................................... 6 $ 0.4 $ 6.5 $ 6.9 --- --------- ----- ------ --- --------- ----- ------
Exit costs, which relate to certain leased facilities and equipment, are expected to be paid as follows: $3.0 million in 1996; $3.2 million in 1997; and $0.3 million in 1998. 48 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7. EMPLOYEE BENEFIT PLANS PENSION PLANS UNUM has a noncontributory defined benefit pension plan covering substantially all domestic employees, excluding employees of Colonial Companies, Inc., and Duncanson & Holt, Inc., who are covered under separate plans. The plan provides benefits based on the employee's years of service and compensation during the highest five consecutive years out of the last ten years of employment. UNUM funds the plan in accordance with the requirements of the Employee Retirement Income Security Act of 1974, as amended. Plan assets consist primarily of group annuity contracts and include 224,392 shares of UNUM Corporation common stock. Net pension cost included the following components:
------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------- (DOLLARS IN MILLIONS) 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- Service cost -- benefits earned during the year................................................... $ 7.7 $ 9.2 $ 8.6 Interest cost on projected benefit obligation..................................................... 12.3 11.6 10.9 Actual return on plan assets...................................................................... (42.5) 3.3 (16.5) Net amortization and deferral..................................................................... 28.2 (16.5) 5.2 Curtailment gain.................................................................................. (3.4) -- -- ------ ------ ------ Net pension cost.............................................................................. $ 2.3 $ 7.6 $ 8.2 ------ ------ ------ ------ ------ ------
The funded status of the plan and amounts recognized in UNUM's Consolidated Balance Sheets, as determined by the plan's actuaries, were as follows:
------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, -------------------- (DOLLARS IN MILLIONS) 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligation: Vested benefit obligation................................................................................. $ 174.4 $ 96.2 --------- --------- --------- --------- Accumulated benefit obligation............................................................................ $ 178.7 $ 99.1 --------- --------- --------- --------- Projected benefit obligation for service rendered to date................................................... $ (183.9) $ (141.9) Plan assets at fair value................................................................................... 192.7 153.5 --------- --------- Projected benefit obligation less than plan assets.......................................................... 8.8 11.6 Unrecognized net gain....................................................................................... (0.7) (26.2) Unrecognized prior service cost............................................................................. (17.0) (3.3) Unamortized net obligation.................................................................................. 2.1 2.7 --------- --------- Accrued pension cost.................................................................................... $ (6.8) $ (15.2) --------- --------- --------- ---------
The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.25% and 4.70%, respectively, at December 31, 1995, and 8.25% and 5.20%, respectively, at December 31, 1994. The expected long-term rate of return on plan assets was 9.0% in 1995 and 1994, and 8.25% in 1993. Prior year service costs are being amortized on a straight-line basis over expected employment periods for active employees. In December 1995, the Board of Directors of UNUM Corporation approved an amendment to the pension plan that included a new benefit formula. UNUM also administers certain supplemental retirement plans for eligible employees and officers and certain other pension plans. The cost of these plans was not significant for the years ended December 31, 1995, 1994 and 1993. 49 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7. EMPLOYEE BENEFIT PLANS (CONTINUED) RETIREMENT SAVINGS PLANS UNUM has several retirement savings and profit sharing plans for substantially all full-time and part-time employees who work 1,000 hours a year and have been employed for at least one year. Dependent upon which plan the employee participates in, eligible employees may contribute primarily up to 10% of their annual base salary, and UNUM matches a portion of each employee's contribution up to 6% of the employee's bi-weekly compensation. Participants may become 100% vested immediately upon becoming eligible to participate, or incrementally over a five year period. In 1995, 1994 and 1993, expense for these plans amounted to $8.4 million, $8.4 million and $8.3 million, respectively. UNUM intends to introduce single pension and retirement savings plans for all domestic employees effective January 1, 1997. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS UNUM provides certain health care and life insurance benefits for retired employees and covered dependents. Substantially all domestic employees of UNUM may become eligible for these benefits if they meet minimum age and service requirements, if they are eligible for retirement benefits and if they agree to contribute a portion of the cost. UNUM has the right to modify or terminate these benefits. The underlying plans are not currently funded. Effective January 1, 1993, UNUM adopted Financial Accounting Standard ("FAS") No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," which changed the method for recognition of the cost of these benefits from a cash basis to an accrual basis over the years in which the employees render the related services. UNUM elected to immediately recognize the FAS 106 liability at January 1, 1993, of $48.8 million as a cumulative effect of an accounting change, which decreased net income by $32.1 million, or $0.40 per share, during 1993. Postretirement benefits expense included the following components:
------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------- (DOLLARS IN MILLIONS) 1995 1994 - --------------------------------------------------------------------------------------------------------------- Service cost...................................................................................... $ 4.2 $3.8 Interest cost..................................................................................... 5.8 4.4 ----- ---- Postretirement benefits expense............................................................... $10.0 $8.2 ----- ---- ----- ----
The following represents the unfunded accumulated postretirement benefits obligation as determined by the plans' actuaries:
------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- DECEMBER 31, ----------- (DOLLARS IN MILLIONS) 1995 1994 - --------------------------------------------------------------------------------------------------------------- Retirees.......................................................................................... $21.5 $21.3 Active employees fully eligible................................................................... 9.3 4.5 Other active participants......................................................................... 41.5 38.9 ----- ---- Accumulated postretirement benefits obligation.................................................... 72.3 64.7 Unrecognized other amounts........................................................................ 0.1 (1.0) ----- ---- Accrued postretirement benefits cost.......................................................... $72.4 $63.7 ----- ---- ----- ----
Under UNUM's plans, the cost of covered health care benefits is assumed to increase 8.75% for retirees less than 65 years old, and 6.67% for retirees 65 years and older for 1996. These rates are assumed to decrease incrementally to 5.00% by 2001, and remain at that level thereafter. The weighted average discount rates used in determining the accumulated 50 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7. EMPLOYEE BENEFIT PLANS (CONTINUED) postretirement benefits obligation were 7.25% at December 31, 1995, and 8.00% and 8.25%, at December 31, 1994. The rates of increase in future compensation levels used in determining the accumulated postretirement benefits obligation were 4.7% and 5.2%, at December 31, 1995 and 1994, respectively. At December 31, 1995, a 1% increase in the trend rate for health care costs would increase the accumulated postretirement benefits obligation by $17.3 million and postretirement benefits expense by $2.7 million. NOTE 8. STOCK BASED COMPENSATION AND INCENTIVE PLANS LONG-TERM STOCK INCENTIVE PLAN AND EXECUTIVE STOCK OPTION PLAN The 1990 Long-Term Stock Incentive Plan ("Incentive Plan") provides for granting of restricted shares of UNUM Corporation common stock to key officers. The Incentive Plan also provides for granting of options to officers, non- employee directors of UNUM Corporation and key employees, to purchase UNUM Corporation common stock over ten years at a price not less than 100% of the fair market value on the date of grant. The maximum number of shares reserved for issuance under the Incentive Plan was 6,800,000 in 1995, 1994 and 1993. At December 31, 1995, 1994 and 1993, 1,680,235 shares, 2,511,145 shares, and 3,316,734 shares, respectively, were available for grant under the Incentive Plan. The restriction period for each restricted stock award under the Incentive Plan is in excess of three years, with the restrictions lapsing as a result of the achievement of prescribed financial performance objectives during each three year period, with the exception of 20,200 shares granted in 1995 and 10,000 shares granted in 1994, on which restrictions will lapse upon the grantee remaining in the employ of UNUM for a prescribed period of time. Plan participants are entitled to cash dividends and voting rights on their respective shares. All other restricted stock shares issued remained subject to restrictions. The market value of the restricted shares issued under the Incentive Plan has been recorded as deferred compensation and is included as a reduction of stockholders' equity in the Consolidated Balance Sheets. The 1987 Executive Stock Option Plan ("Option Plan") provided for granting to officers and key employees options to purchase UNUM Corporation common stock over ten years at a price not less than 100% of the fair market value on the date of grant. Options outstanding under the Option Plan are included in the summary of stock options. Between 1991 and 1994, certain officers were granted limited stock appreciation rights ("LSARs") in tandem with their outstanding options. LSARs afford the optionee the right to receive payment upon a change in control as defined in the plans equal to the higher of the excess of the highest price per share paid in connection with such change in control or the fair market value per share, over the option price per share. As an underlying stock option is exercised, the LSARs are automatically canceled. At December 31, 1995, 1994 and 1993, there were 480,825 LSARs, 590,275 LSARs, and 556,500 LSARs outstanding, respectively. THE 1998 GOALS STOCK OPTION PLAN The 1998 Goals Stock Option Plan ("1998 Option Plan") was introduced in January 1995. The 1998 Option Plan provides for granting to all eligible employees up to 150 options to purchase UNUM Corporation common stock at a price not less than 100% of the fair market value on the date of the grant. The options will vest to the employee in nine years from the date of the grant; however, if UNUM achieves its 1998 goals, vesting will be accelerated to early 1999. During 1995, 1,105,350 shares were granted under the 1998 Option Plan. Options outstanding under the 1998 Option Plan are included in the summary of stock options. 51 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8. STOCK BASED COMPENSATION AND INCENTIVE PLANS (CONTINUED) The following is a summary of stock options and restricted stock information:
------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- OPTIONS RESTRICTED STOCK - ------------------------------------------------------------------------------------------------------------------------------- Outstanding at January 1, 1993........................................................................ 3,126,882 115,400 1993 Activity: Granted at $52.88 to $57.75 per share............................................................... 1,031,650 -- Granted for restricted stock........................................................................ -- 32,525 Exercised at $9.03 to $36.75 per share.............................................................. (655,300) -- Canceled/reissued................................................................................... (100,278) (1,500) ---------- ----------- Outstanding at December 31, 1993...................................................................... 3,402,954 146,425 ---------- ----------- 1994 Activity: Granted at $38.00 to $51.31 per share............................................................... 884,375 -- Granted for restricted stock........................................................................ -- 46,850 Lapse of restrictions on restricted stock........................................................... -- (80,800) Exercised at $9.03 to $47.88 per share.............................................................. (282,729) -- Canceled/reissued................................................................................... (151,578) (2,525) ---------- ----------- Outstanding at December 31, 1994...................................................................... 3,853,022 109,950 ---------- ----------- 1995 Activity: Granted at $38.00 to $54.75 per share............................................................... 2,200,000 -- Granted for restricted stock........................................................................ -- 70,950 Lapse of restrictions on restricted stock........................................................... -- (33,100) Exercised at $10.81 to $56.38 per share............................................................. (541,188) -- Canceled/reissued................................................................................... (314,200) (5,600) ---------- ----------- Outstanding at December 31, 1995...................................................................... 5,197,634 142,200 ---------- ----------- ---------- -----------
The number of exercisable shares as of December 31, 1995, 1994 and 1993, was 2,108,060 shares, 1,975,219 shares, and 1,396,182 shares, respectively. ANNUAL INCENTIVE PLANS UNUM has several annual incentive plans for certain employees and executive officers, that provide additional compensation based on achievement of predetermined annual corporate and affiliate financial and non-financial goals. In 1995, 1994 and 1993, expense for these plans was $19.9 million, $7.5 million and $27.9 million, respectively. NOTE 9. INCOME TAXES Effective January 1, 1993, UNUM adopted Financial Accounting Standard No. 109, "Accounting for Income Taxes," which changed the method for calculating and reporting deferred income taxes in the financial statements from the deferred method to the liability method. The liability method requires that deferred tax liabilities or assets at the end of each period be determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Under this method, income tax will increase or decrease in the same period in which a change in tax rate is enacted. The cumulative effect of this accounting change amounted to a $20.0 million increase in net income, or $0.25 per share, for the year ended December 31, 1993. 52 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9. INCOME TAXES (CONTINUED) A reconciliation of income taxes computed by applying the federal income tax rate to income before income taxes and the consolidated income tax expense charged to operations follows:
------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, ---------------------- (DOLLARS IN MILLIONS) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------ Tax at federal statutory rate of 35%............................................................ $133.7 $ 69.5 $161.1 Tax-exempt income............................................................................... (30.0) (32.0) (29.4) Prior years' taxes.............................................................................. (6.6) -- (2.0) State income tax................................................................................ 3.8 2.2 3.9 Adjustment to deferred tax liability due to tax rate increase................................... -- -- 7.8 Realized investment gains....................................................................... (5.0) (1.3) -- Other........................................................................................... 4.9 5.5 6.9 ------ ------ ------ Income taxes................................................................................ $100.8 $ 43.9 $148.3 ------ ------ ------ ------ ------ ------
On August 10, 1993, legislation was enacted to increase the federal corporate income tax rate of 34% to 35%, retroactive to January 1, 1993. The tax rate increase resulted in a charge to net income totaling $11.4 million, or $0.15 per share, which included $3.6 million, or $0.05 per share, related to 1993 pretax income, and a $7.8 million, or $0.10 per share, adjustment to the deferred income tax liability. Deferred income tax liabilities and assets consist of the following:
------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, -------------------- (DOLLARS IN MILLIONS) 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Deferred policy acquisition costs........................................................................ $ 321.6 $ 298.9 Policy reserve adjustments............................................................................... -- 59.3 Net unrealized gains..................................................................................... 174.0 27.1 Value of business acquired............................................................................... 17.7 17.9 Invested assets.......................................................................................... 10.9 28.9 Other.................................................................................................... 16.0 10.6 --------- --------- Gross deferred tax liabilities......................................................................... 540.2 442.7 --------- --------- Deferred tax assets: Alternative minimum tax credit carryforwards............................................................. 29.0 45.3 Policy reserve adjustments............................................................................... 65.9 -- Net realized losses...................................................................................... 25.1 15.0 Postretirement benefits.................................................................................. 22.1 20.3 Loss carryforward........................................................................................ 1.0 5.9 Other.................................................................................................... 11.1 7.6 --------- --------- Gross deferred tax assets.............................................................................. 154.2 94.1 Less valuation allowance................................................................................... 6.0 -- --------- --------- Net deferred tax assets................................................................................ 148.2 94.1 --------- --------- Net deferred tax liability................................................................................. $ 392.0 $ 348.6 --------- --------- --------- ---------
Deferred income taxes relating to cumulative net unrealized gains on available for sale fixed maturity and equity securities were $174.0 million, $27.1 million and $79.4 million at December 31, 1995, 1994 and 1993, respectively. 53 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9. INCOME TAXES (CONTINUED) A valuation allowance is established when it is more likely than not that deferred tax assets will not be realized. UNUM established a valuation allowance of $6.0 million in 1995 to reflect the estimated amount of deferred tax assets which may not be realized related to certain reported foreign subsidiaries' losses. As of December 31, 1995, deferred U.S. income taxes have not been provided on the accumulated earnings of UNUM's foreign subsidiaries. These earnings could generate additional U.S. tax if remitted to UNUM Corporation. Prior to the Tax Reform Act of 1984 ("1984 Act"), half the excess of the tax basis gain from operations of a life insurance company over its taxable investment income was currently taxable. The other half was set aside in a Policyholders Surplus Account, together with certain special life insurance company deductions. The cumulative amount in the Policyholders Surplus Account as of December 31, 1983, was frozen by the 1984 Act and amounted to $31.8 million at December 31, 1995. Any direct or indirect distributions from this account would be taxed at current tax rates; however, no provision has been made for related taxes. If the amount set aside in this account were taxed at the current rate at December 31, 1995, for all life insurance subsidiaries, the tax would have amounted to $11.1 million. UNUM's Consolidated Statements of Income for 1995, 1994 and 1993, included the following amounts of foreign income and related income tax expense:
------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------- (DOLLARS IN MILLIONS) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------- Foreign income............................................................................ $(1.2) $24.2 $ 20.9 ----- ----- ------ ----- ----- ------ Income tax expense (credit): Current................................................................................. $ 1.4 $ 0.7 $(12.5) Deferred................................................................................ (0.2) 9.7 20.2 ----- ----- ------ Total................................................................................. $ 1.2 $10.4 $ 7.7 ----- ----- ------ ----- ----- ------
UNUM subsidiaries had operating loss carryforwards totaling $2.5 million and alternative minimum tax ("AMT") credit carryforwards totaling $29.0 million as of December 31, 1995. The operating loss carryforwards will expire, if not utilized, in 1999 through 2002. The AMT credits can be carried forward indefinitely. NOTE 10. NOTES PAYABLE Notes payable consisted of the following at December 31, 1995, and 1994:
------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, -------------------- (DOLLARS IN MILLIONS) 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Short-term debt: Commercial paper......................................................................................... $ 82.4 $ 216.5 Other notes payable, with weighted average interest rate of 1.0% in 1995 and 2.7% in 1994................ 29.1 30.1 Medium-term notes payable, due 1996, with interest rate of 6.2%.......................................... 15.0 -- --------- --------- Total short-term debt.................................................................................. 126.5 246.6 --------- --------- Long-term debt: Medium-term notes payable due 1997 to 2024 with interest rates ranging from 5.1% to 7.5%................. 290.4 180.8 Monthly income debt securities, due 2025, with interest rate of 8.8% $172.5 million issued net of unamortized offering costs of $5.6 million................................. 166.9 -- Other notes payable...................................................................................... -- 1.3 --------- --------- Total long-term debt................................................................................... 457.3 182.1 --------- --------- Total notes payable.................................................................................... $ 583.8 $ 428.7 --------- --------- --------- ---------
54 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10. NOTES PAYABLE (CONTINUED) At December 31, 1995, UNUM Corporation had a $500 million committed revolving credit facility that expires on October 1, 1999. UNUM's commercial paper program is supported by the revolving credit facility and is available for general liquidity needs, capital expansion, acquisitions or stock repurchase. The committed revolving credit facility contains certain covenants which, among other provisions, require maintenance of certain levels of stockholders' equity and limits on debt levels. The commercial paper outstanding at December 31, 1995, and 1994, had a weighted average interest rate of 5.88% and 6.34%, respectively. Aggregate maturities of notes payable are as follows: 1996-$126.5 million; 1997-$48.5 million; 1998-$68.0 million; 1999-$21.5 million; 2000-$60.0; thereafter-$259.3 million. NOTE 11. CAPITAL STOCK AND PREFERRED STOCK PURCHASE RIGHTS At December 31, 1995, approximately 2.7 million shares of common stock remained authorized for stock repurchase. During 1995, UNUM did not acquire any shares in the open market. During 1994 and 1993, UNUM repurchased 3.9 million and 3.7 million shares, respectively, in the open market. The aggregate cost of the 1994 and 1993 repurchases was $183.3 million and $192.5 million, respectively, which was primarily funded through additional borrowings. Under the Long-Term Stock Incentive Plan and Executive Stock Option Plan and the plans of Colonial Companies, Inc. (see Note 8 "Stock Based Compensation and Incentive Plans"), 612,138 shares, 329,579 shares, and 687,825 shares were issued in 1995, 1994 and 1993, respectively. UNUM adopted a Shareholder Rights Plan on March 13, 1992. Under the Plan, each Right, under certain specific circumstances, entitles the holder to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock at a purchase price of $150. The Rights become exercisable at a specified time after (1) a person or group acquires 10% or more of UNUM Corporation common stock or (2) a tender or exchange offer for 10% or more of UNUM Corporation common stock. The Rights expire at the close of business on March 13, 2002, unless earlier redeemed by the Company under certain circumstances at a price of $0.01 per Right. NOTE 12. DIVIDEND RESTRICTIONS UNUM is subject to various state insurance regulatory restrictions that limit the maximum amount of dividends available from its United States domiciled insurance subsidiaries without prior approval. Under current law, during 1996 approximately $135 million will be available for payment of dividends to UNUM Corporation without state insurance regulatory approval. Dividends in excess of this amount may only be paid with state insurance regulatory approval. The aggregate statutory capital and surplus of the United States domiciled insurance subsidiaries of UNUM Corporation was approximately $1,149 million and $840 million, at December 31, 1995, and 1994, respectively. The aggregate statutory net income of UNUM Corporation's United States domiciled insurance subsidiaries was approximately $290 million, $70 million and $216 million for 1995, 1994 and 1993, respectively. State insurance regulatory authorities prescribe statutory accounting practices that differ in certain respects from generally accepted accounting principles. The significant differences relate to deferred acquisition costs, deferred income taxes, non-admitted asset balances, required investment risk reserves and reserve calculation assumptions. UNUM Corporation also has the ability to draw a dividend of approximately $19 million from its United Kingdom based affiliate, UNUM Limited, subject to certain U.S. tax consequences. NOTE 13. 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 December 31, 1995. 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 is based on a claim for a deduction in certain prior tax years, for $652 million in cash 55 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13. LITIGATION (CONTINUED) and stock distributed to policyholders in connection with the 1986 conversion of Union Mutual Life Insurance Company to a stock company. Although UNUM believes its claims are meritorious, the United States is aggressively resisting the claims and the ultimate recovery, if any, cannot be determined at this time. NOTE 14. SUBSEQUENT EVENT On January 24, 1996, UNUM America entered into an agreement for the sale of its group tax-sheltered annuity ("TSA") business to The Lincoln National Life Insurance Company ("Lincoln Life"), a part of Lincoln National Corporation, and to a new New York insurance subsidiary of Lincoln Life. The agreement also contemplates that First UNUM will enter into a similar agreement with Lincoln Life's New York insurance subsidiary. The sale, which is subject to regulatory approvals, involves approximately 1,700 group contractholders and assets under management of approximately $3 billion. The agreement initially contemplates the reinsurance of these contracts under an indemnity reinsurance arrangement. These contracts will then be reinsured pursuant to an assumption reinsurance arrangement upon consent of the TSA contractholders and/or participants. The purchase price (ceding commission) at closing is expected to be approximately $70 million. It is anticipated that it will take several months (perhaps six to nine months) to obtain the necessary approvals and otherwise close the sale. There is no guarantee that the sale will close. Historical results of the TSA business included in UNUM's Consolidated Statements of Income were as follows:
------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, (DOLLARS IN MILLIONS, EXCEPT ---------------------- PER COMMON SHARE DATA) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------ Revenues........................................................................................ $247.6 $238.1 $250.2 Net income...................................................................................... $ 31.1 $ 29.9 $ 24.7 Net income per common share..................................................................... $ 0.43 $ 0.40 $ 0.31
NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS Fair values are based on quoted market prices, when available. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These valuation techniques require management to develop a significant number of assumptions, including discount rates and estimates of future cash flow. Derived fair value estimates cannot be substantiated by comparison to independent markets or to disclosures by other companies with similar financial instruments. These fair value disclosures do not purport to be the amount that could be realized in immediate settlement of the financial instrument. 56 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) The following table summarizes the carrying amounts and fair values of UNUM's financial instruments at December 31, 1995, and 1994:
------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------ 1995 1994 -------------------- -------------------- CARRYING FAIR CARRYING FAIR (DOLLARS IN MILLIONS) AMOUNT VALUE AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------------------------ Financial assets: Fixed maturities: Available for sale............................................................ $ 9,135.4 $ 9,135.4 $ 1,640.6 $ 1,640.6 Held to maturity.............................................................. -- -- 6,227.2 6,168.6 Equity securities available for sale............................................ 25.2 25.2 627.9 627.9 Mortgage loans.................................................................. 1,163.4 1,274.9 1,216.3 1,265.4 Policy loans.................................................................... 219.2 219.2 201.0 201.0 Short-term investments.......................................................... 896.7 896.7 291.9 291.9 Cash............................................................................ 42.5 42.5 36.1 36.1 Accrued investment income....................................................... 208.5 208.5 195.9 195.9 Financial liabilities: Other policyholder funds: Investment-type insurance contracts: With defined maturities..................................................... $ 400.0 $ 440.0 $ 667.0 $ 685.0 With no defined maturities.................................................. 3,031.0 2,967.0 3,013.0 2,948.0 Individual annuities and supplementary contracts not involving life contingencies................................................................ 81.4 81.4 84.6 84.6 Notes payable................................................................... 583.8 610.8 428.7 414.5
The following methods and assumptions were used in estimating fair value disclosures for financial instruments: FIXED MATURITIES: Fair values for fixed maturities are based on quoted market prices, where available. If quoted market prices are not available, fair values are estimated using values obtained from independent pricing services or, in the case of private placements, are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality and maturity of the investments. EQUITY SECURITIES AVAILABLE FOR SALE: Fair values for equity securities available for sale are based on quoted market prices and are reported in the Consolidated Balance Sheets at these values. MORTGAGE LOANS: Fair values for mortgage loans are estimated based on discounted cash flow analyses using interest rates currently being offered for similar mortgage loans to borrowers with similar credit ratings and maturities. Mortgage loans with similar characteristics are aggregated for purposes of the calculations. POLICY LOANS, SHORT-TERM INVESTMENTS, CASH AND ACCRUED INVESTMENT INCOME: Fair values for these instruments approximate the carrying amounts reported in the Consolidated Balance Sheets. INVESTMENT-TYPE INSURANCE CONTRACTS: Fair values for liabilities under investment-type insurance contracts with defined maturities are estimated using discounted cash flow calculations based on interest rates that would be offered currently for similar contracts with maturities consistent with those remaining for the contracts being valued. Fair values for liabilities under investment-type insurance contracts with no defined maturities are the amounts payable on demand after surrender charges at the balance sheet date. The estimated fair values of liabilities under all insurance contracts (investment-type and other than investment-type) are taken into consideration in UNUM's overall management of interest rate risk, which minimizes exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts. 57 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) INDIVIDUAL ANNUITIES AND SUPPLEMENTARY CONTRACTS NOT INVOLVING LIFE CONTINGENCIES: Fair values approximate the carrying amounts reported in other policyholder funds in the Consolidated Balance Sheets. NOTES PAYABLE: Fair values of short-term borrowings approximate the carrying amount. Fair values of long-term notes are estimated using discounted cash flow analyses based on UNUM's current incremental borrowing rates for similar types of borrowing arrangements. NOTE 16. SEGMENT INFORMATION UNUM's markets for its insurance, special risk and retirement income products are the United States, its principal market, Canada, the United Kingdom and the Pacific Rim. Through its affiliates, UNUM is the leading provider of group long term disability insurance, its principal product, in the United States and the United Kingdom. Products are marketed through sales personnel, independent contractors and brokers, and specialty agents. UNUM targets sales of its disability products to executive, administrative and management personnel, and other professionals such as doctors, attorneys, accountants and engineers. To more clearly reflect UNUM's management of its businesses and to more appropriately group its product portfolios, UNUM began reporting its operations, effective January 1, 1995, principally in four business segments: Disability Insurance, Special Risk Insurance, Colonial Products and Retirement Products. For comparative purposes, prior period information has been restated to reflect reporting in these segments. The Disability Insurance segment includes disability products offered in North America, the United Kingdom and Japan including: group long term disability, individual disability, group short term disability, association group disability, disability reinsurance and long term care insurance. The Special Risk Insurance segment includes group life, special risk accident insurance, non-disability reinsurance operations, reinsurance underwriting management operations and other special risk insurance products. The Colonial Products segment includes Colonial Companies, Inc. and subsidiaries, which offer payroll-deducted, voluntary employee benefits including personal accident and sickness, cancer and life insurance products to employees at their worksites. The Retirements Products segment includes tax sheltered annuities and products which are no longer actively marketed by UNUM including guaranteed investment contracts, deposit administration accounts and 401(k) plans. Corporate includes transactions that are generally non-insurance related. Investment income and net realized investment gains are allocated to the segments based on designation of ownership of assets identified to the segments. Operating expenses are allocated to the segments based on direct association with a product whenever possible. If, however, the expense cannot be readily associated with a particular product, the costs are allocated based on ratios of the relative time spent, extent of usage or varying volume of work performed for each segment. 58 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16. SEGMENT INFORMATION (CONTINUED) Summarized financial information for the four business segments and Corporate is as follows:
------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, ---------------------------------- (DOLLARS IN MILLIONS) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ Revenues: Disability Insurance.................................................................... $ 2,472.8 $ 2,116.5 $ 1,917.7 Special Risk Insurance.................................................................. 750.7 647.8 594.2 Colonial Products....................................................................... 527.3 473.9 448.8 Retirement Products..................................................................... 357.8 369.4 430.1 Corporate............................................................................... 14.3 5.0 6.2 ---------- ---------- ---------- Total revenues........................................................................ $ 4,122.9 $ 3,612.6 $ 3,397.0 ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes and cumulative effects of accounting changes: Disability Insurance.................................................................... $ 217.0 $ 56.2 $ 314.1 Special Risk Insurance.................................................................. 60.3 65.9 38.9 Colonial Products....................................................................... 87.7 62.7 70.4 Retirement Products..................................................................... 45.5 42.0 54.3 Corporate............................................................................... (28.6) (28.2) (17.4) ---------- ---------- ---------- Income before income taxes and cumulative effects of accounting changes............... 381.9 198.6 460.3 Income taxes.............................................................................. 100.8 43.9 148.3 ---------- ---------- ---------- Income before cumulative effects of accounting changes.................................... 281.1 154.7 312.0 Cumulative effects of accounting changes.................................................. -- -- (12.1) ---------- ---------- ---------- Net income............................................................................ $ 281.1 $ 154.7 $ 299.9 ---------- ---------- ---------- ---------- ---------- ----------
------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, ---------------------------------- (DOLLARS IN MILLIONS) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ Identifiable Assets: Disability Insurance.................................................................... $ 7,280.3 $ 6,131.9 $ 5,403.0 Special Risk Insurance.................................................................. 1,056.5 846.8 735.4 Colonial Products....................................................................... 996.5 846.2 819.2 Retirement Products..................................................................... 4,717.4 4,504.0 4,684.6 Corporate............................................................................... 372.9 451.3 452.3 Individual Participating Life and Annuity...................................................................... 364.2 347.0 342.8 ---------- ---------- ---------- Total assets.......................................................................... $ 14,787.8 $ 13,127.2 $ 12,437.3 ---------- ---------- ---------- ---------- ---------- ----------
59 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of unaudited quarterly results of operations for 1995 and 1994:
------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------- 1995 ------------------------------ (DOLLARS IN MILLIONS, EXCEPT PER COMMON SHARE DATA) 4TH 3RD 2ND 1ST - ------------------------------------------------------------------------------------------------------------------------------------ Premiums............................................................................................ $817.0 $738.0 $729.2 $734.0 Investment income................................................................................... 207.3 207.8 199.3 191.9 Net realized investment gains....................................................................... 3.2 2.9 208.1 10.9 Benefits to policyholders........................................................................... 634.8 568.7 717.7 571.8 Net income.......................................................................................... $ 62.1 $ 66.7 $ 88.9 $ 63.4 ------ ------ ------ ------ ------ ------ ------ ------ Net income per common share......................................................................... $ 0.85 $ 0.92 $ 1.22 $ 0.87 ------ ------ ------ ------ ------ ------ ------ ------
1994 ------------------------------ 4TH 3RD 2ND 1ST - ------------------------------------------------------------------------------------------------------------------------------------ Premiums............................................................................................ $702.6 $667.4 $698.6 $652.7 Investment income................................................................................... 194.4 192.3 192.4 191.1 Net realized investment gains....................................................................... 9.6 11.6 12.5 11.9 Benefits to policyholders........................................................................... 537.5 705.7 516.5 479.3 Net income (loss)................................................................................... $ 54.0 $(61.7) $ 85.3 $ 77.1 ------ ------ ------ ------ ------ ------ ------ ------ Net income (loss) per common share.................................................................. $ 0.75 $(0.84) $ 1.14 $ 1.02 ------ ------ ------ ------ ------ ------ ------ ------
60 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure have been reported on a Form 8-K during the past two years prior to the date of the most recent financial statements. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT A. DIRECTORS OF THE REGISTRANT The information under the caption "Election of Directors" included in UNUM's proxy statement dated March 25, 1996, is incorporated by reference. B. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of UNUM are as follows:
AGE (AS OF AN OFFICER NAME MARCH 22, 1996) POSITION HELD WITH UNUM SINCE - ----------------------- ------------------- ------------------------------------------------------------------ ---------- James F. Orr III 53 Chairman, President and Chief Executive Officer 1986 Thomas G. Brown 51 Executive Vice President 1992 Stephen B. Center 58 Executive Vice President 1972 Robert W. Crispin 49 Executive Vice President and Chief Financial Officer 1995 Peter J. Moynihan 52 Senior Vice President 1979 Kevin P. O'Connell 50 Executive Vice President 1987 Elaine D. Rosen* 43 Executive Vice President, UNUM America 1983 Robert E. Staton* 49 Chairman and Chief Executive Officer, Colonial Life 1993
- ------------ *Denotes an officer of a subsidiary who is not an officer of the Corporation but who is considered an "executive officer" under regulations of the Securities and Exchange Commission. The officers are elected annually and hold office until their respective successors have been chosen and qualified, or until death, resignation or removal. The UNUM Board may also appoint or delegate the appointment of officers, assistant officers and agents as it may deem necessary for such periods as the By-Laws, the UNUM Board, or the delegatee may prescribe. Mr. Orr was elected Chairman of the Board of UNUM in February 1988. In addition, he has served as President and Chief Executive Officer since September 1987. He joined UNUM in 1986. Mr. Brown was elected Executive Vice President of UNUM in January 1995. In addition, he continues to serve as Chairman of the Board, President and Chief Executive Officer of Duncanson & Holt, Inc. ("D&H"), a post he has held since 1987. D&H became a wholly-owned subsidiary of UNUM in July 1992. Mr. Center was elected President of UNUM America and Executive Vice President of UNUM in September 1992. Previously, he served as Group Executive Vice President of UNUM America from May 1990 to August 1992. He joined UNUM America in 1963. Mr. Crispin was elected Executive Vice President of UNUM in January 1995 and additionally as Chief Financial Officer in August 1995. Prior to joining UNUM, Mr. Crispin served as Vice Chairman and Chief Investment Officer of The Travelers Insurance Companies, from July 1991 to January 1995 and as Executive Vice President of Lincoln National Corporation from 1986 to 1991. Mr. Moynihan was elected Senior Vice President of UNUM in September 1993 and Senior Vice President of UNUM America in October 1987. He joined UNUM America in 1973. 61 Mr. O'Connell was elected Executive Vice President of UNUM America in May 1995 and Executive Vice President of UNUM in February 1996. Previously, he served as Senior Vice President of UNUM America from November 1988 to May 1995. He joined UNUM America in 1968. Ms. Rosen was elected Executive Vice President of UNUM America in May 1995. Previously, she served as Senior Vice President of UNUM America from November 1988 to May 1995. She joined UNUM America in 1975. Mr. Staton was elected Chairman of Colonial Companies in December 1993 and additionally as Chief Executive Officer in July 1995. Previously, he served as Senior Vice President from February 1990 to December 1993 and Vice President from August 1985 to February 1990; and additionally as General Counsel from August 1985 to November 1993, and Corporate Secretary from February 1992 to August 1993. Colonial Companies merged with UNUM in March 1993. ITEM 11. EXECUTIVE COMPENSATION The information under the captions "Compensation of Directors", "Board Compensation Report on Executive Compensation", and "Executive Compensation" included in UNUM's proxy statement dated March 25, 1996, is incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the caption "Security Ownership" included in UNUM's proxy statement dated March 25, 1996, is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the captions "Executive Compensation" and "Other Agreements and Transactions" included in UNUM's proxy statement dated March 25, 1996, is incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Index of documents filed as part of this report: 1. The following Consolidated Financial Statements of UNUM Corporation and subsidiaries are included in Item 8.
PAGE OF THIS REPORT ----------- Report of Independent Accountants................................................................... 32 Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993.............. 33 Consolidated Balance Sheets as of December 31, 1995 and 1994........................................ 34 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993............................................................................................... 35 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993.......... 36 Notes to Consolidated Financial Statements.......................................................... 37
2. Financial Statement Schedules II Condensed Financial Information of UNUM Corporation (Registrant)............................... 64 III Supplementary Insurance Information............................................................ 68 IV Reinsurance.................................................................................... 69
3. Exhibits. See Index to Exhibits on page 70 of this report. (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Registrant during the fourth quarter of 1995. Schedules and exhibits required by Article 7 of Regulation S-X other than those listed are omitted because they are not required, are not applicable, or equivalent information has been included in the financial statements, and notes thereto, or elsewhere herein. 62 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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, IN THE CITY OF PORTLAND, STATE OF MAINE, ON MARCH 27, 1996. UNUM Corporation By /s/ JAMES F. ORR III ------------------------------------ James F. Orr III (Chairman, President and Chief Executive Officer) PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED.
NAME TITLE DATE - --------------------------------------------------------- --------------------------------------------------------- -------------- /s/ JAMES F. ORR III Chairman, President and Chief Executive Officer March 27, 1996 ------------------------------------------- (James F. Orr III) /s/ ROBERT W. CRISPIN Executive Vice President and Chief Financial Officer March 27, 1996 ------------------------------------------- (Robert W. Crispin) /s/ STEPHEN D. ROBERTS Vice President and Corporate Controller March 27, 1996 ------------------------------------------- (Stephen D. Roberts) * Director March 27, 1996 ------------------------------------------- (Gayle O. Averyt) * Director March 27, 1996 ------------------------------------------- (Robert E. Dillon, Jr.) * Director March 27, 1996 ------------------------------------------- (Gwain H. Gillespie) * Director March 27, 1996 ------------------------------------------- (Ronald E. Goldsberry) * Director March 27, 1996 ------------------------------------------- (Donald W. Harward) * Director March 27, 1996 ------------------------------------------- (George J. Mitchell) * Director March 27, 1996 ------------------------------------------- (Cynthia A. Montgomery) * Director March 27, 1996 ------------------------------------------- (James L. Moody, Jr.) * Director March 27, 1996 ------------------------------------------- (Lawrence R. Pugh) * Director March 27, 1996 ------------------------------------------- (Lois Dickson Rice) Director March 27, 1996 ------------------------------------------- (John W. Rowe) */s/ JOHN-PAUL DEROSA ------------------------------------------- (John-Paul DeRosa, as Attorney-in-fact for each of the persons indicated) (Assistant Secretary)
63 UNUM CORPORATION (PARENT COMPANY) SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME (DOLLARS IN MILLIONS)
- ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------- 1995 1994 1993 - ---------------------------------------------------------------------------------------------- Revenues Dividends from subsidiaries*........................................ $ 23.6 $102.0 $131.8 Investment income................................................... 0.4 0.1 0.2 Interest income on loans to subsidiaries*........................... 5.5 -- -- Fees and other income............................................... 0.3 0.8 -- ------ ------ ------ Total revenues.................................................. 29.8 102.9 132.0 Expenses Operating expenses.................................................. 2.3 8.7 11.6 Interest expense.................................................... 37.2 18.6 12.4 Interest expense on loans from subsidiaries*........................ 3.9 2.3 0.1 ------ ------ ------ Total expenses.................................................. 43.4 29.6 24.1 ------ ------ ------ Income (loss) before income taxes..................................... (13.6) 73.3 107.9 Income tax benefit.................................................... 13.1 6.2 5.7 ------ ------ ------ Income (loss) before equity in undistributed net income of subsidiaries......................................................... (0.5) 79.5 113.6 Equity in undistributed net income of subsidiaries*................... 281.6 75.2 186.3 ------ ------ ------ Net income............................................................ $281.1 $154.7 $299.9 ------ ------ ------ ------ ------ ------
- ------------ *Eliminated in consolidation See note to condensed financial statements. 64 UNUM CORPORATION (PARENT COMPANY) SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS (DOLLARS IN MILLIONS)
- ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- DECEMBER 31, ------------------ 1995 1994 - ---------------------------------------------------------------------------------------------------- Assets Investments Investment in subsidiaries*................................................. $2,836.1 $2,386.0 Short-term investments...................................................... 0.6 0.5 -------- -------- Total investments......................................................... 2,836.7 2,386.5 Cash.......................................................................... -- 2.0 Amounts receivable from subsidiaries, net*.................................... 6.6 18.4 Notes receivable from subsidiary*............................................. 50.0 -- Property and equipment, net................................................... 18.1 16.7 -------- -------- Total assets.............................................................. $2,911.4 $2,423.6 -------- -------- -------- -------- Liabilities and Stockholders' Equity Liabilities Notes payable............................................................... $ 583.8 $ 427.4 Notes payable to subsidiary*................................................ 10.0 60.0 Income taxes................................................................ 4.8 2.7 Other liabilities........................................................... 9.9 18.1 -------- -------- Total liabilities......................................................... 608.5 508.2 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 120,000,000 shares, issued 99,987,958 shares................................................... 10.0 10.0 Additional paid-in capital.................................................. 1,065.7 1,062.4 Unrealized gains on available for sale securities of subsidiaries, net...... 235.6 67.7 Unrealized foreign currency translation adjustment.......................... (23.1) (23.7) Retained earnings (including undistributed earnings of subsidiaries of $1,395.9 million and $1,114.3 million in 1995 and 1994, respectively)...... 1,713.2 1,507.2 -------- -------- 3,001.4 2,623.6 Less: Treasury stock, at cost (1995-26,980,331 shares; 1994-27,575,430 shares)................................................................... 691.6 706.6 Restricted stock deferred compensation.................................... 6.9 1.6 -------- -------- Total stockholders' equity................................................ 2,302.9 1,915.4 -------- -------- Total liabilities and stockholders' equity................................ $2,911.4 $2,423.6 -------- -------- -------- -------- - ------------ *Eliminated in consolidation
See note to condensed financial statements. 65 UNUM CORPORATION (PARENT COMPANY) SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)
------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------- 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------- Operating activities: Net income.................................................................... $ 281.1 $ 154.7 $ 299.9 Adjustments to reconcile net income to net cash provided by operating activities: Increase in income tax liability............................................ 2.1 0.4 2.3 (Increase) decrease in amounts due to/from subsidiaries*.................... 11.8 (6.0) 7.5 Other....................................................................... (3.1) 11.1 4.6 Equity in undistributed net income of subsidiaries*......................... (281.6) (75.2) (186.3) ------- ------- ------- Net cash provided by operating activities................................. 10.3 85.0 128.0 ------- ------- ------- Investing activities: Purchases of investments...................................................... -- -- 0.3 Investment in subsidiaries, net*.............................................. (1.1) (30.6) 0.9 Issuance of notes receivable from subsidiaries*............................... (100.0) -- -- Repayment of notes receivable from subsidiaries*.............................. 50.0 -- -- Net (increase) decrease in short-term investments............................. (0.1) 3.9 (2.3) Net additions to property and equipment....................................... (5.4) (3.3) (2.4) ------- ------- ------- Net cash used in investing activities..................................... (56.6) (30.0) (3.5) ------- ------- ------- Financing activities: Dividends to stockholders..................................................... (75.1) (68.3) (61.4) Treasury stock acquired....................................................... -- (183.3) (192.5) Proceeds from notes payable................................................... 291.5 54.7 51.5 Repayment of notes payable.................................................... -- -- (50.0) Net increase (decrease) in short-term debt.................................... (135.1) 136.7 58.1 Proceeds from notes payable to subsidiaries*.................................. -- -- 60.0 Repayment of notes payable to subsidiaries*................................... (50.0) -- -- Other......................................................................... 13.0 5.9 10.4 ------- ------- ------- Net cash provided by (used in) financing activities....................... 44.3 (54.3) (123.9) ------- ------- ------- Net increase (decrease) in cash................................................. (2.0) 0.7 0.6 Cash at beginning of year....................................................... 2.0 1.3 0.7 ------- ------- ------- Cash at end of year............................................................. $ -- $ 2.0 $ 1.3 ------- ------- ------- ------- ------- ------- Supplemental disclosures of cash flow information: Cash paid (received) during the year for: Income taxes................................................................ $ (15.1) $ (6.6) $ (8.1) Interest.................................................................... $ 36.2 $ 18.1 $ 12.1 Interest to subsidiaries*................................................... $ 4.0 $ 2.2 $ --
- ------------ *Eliminated in consolidation See note to condensed financial statements. 66 UNUM CORPORATION (PARENT COMPANY) SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTE TO CONDENSED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes of UNUM Corporation and subsidiaries, which are included in Item 8. 67 UNUM CORPORATION AND SUBSIDIARIES SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION (DOLLARS IN MILLIONS)
------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------- (1)(2) FUTURE POLICY AMORTIZATION BENEFITS, BENEFITS TO OF DEFERRED AND UNPAID (4)(5) POLICYHOLDERS DEFERRED (5) POLICY CLAIMS AND (3) NET AND POLICY OTHER (6) ACQUISITION CLAIM PREMIUM INVESTMENT INTEREST ACQUISITION OPERATING PREMIUMS SEGMENT COSTS EXPENSES REVENUE INCOME CREDITED COSTS EXPENSES WRITTEN - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1995 Disability Insurance... $ 758.3 $5,130.6 $1,879.9 $ 592.9 $1,711.2 $ 90.6 $454.0 $1,853.2 Special Risk Insurance............. 99.8 476.5 702.3 48.4 492.3 35.5 162.6 223.6 Colonial Products...... 250.5 372.0 475.1 52.2 241.6 66.7 131.3 417.5 Retirement Products.... 33.7 596.0 34.1 323.7 275.3 0.8 36.2 23.3 Corporate.............. -- -- 0.1 14.2 -- -- 42.9 -- ----------- ------------ ---------- ----------- ----------- ---------- --------- ---------- Total................ $1,142.3 $6,575.1 $3,091.5 $1,031.4 $2,720.4 $193.6 $827.0 $2,517.6 ----------- ------------ ---------- ----------- ----------- ---------- --------- ---------- ----------- ------------ ---------- ----------- ----------- ---------- --------- ---------- Year Ended December 31, 1994 Disability Insurance... $ 695.6 $4,175.9 $1,716.2 $ 400.3 $1,572.1 $ 70.7 $417.5 $1,705.5 Special Risk Insurance............. 84.1 357.7 607.1 40.7 394.4 19.2 168.3 156.8 Colonial Products...... 224.8 330.5 441.3 32.6 226.1 60.6 124.5 388.1 Retirement Products.... 30.7 581.9 31.4 338.0 289.1 2.3 36.0 21.6 Corporate.............. -- (0.5) 0.8 4.2 -- -- 33.2 -- ----------- ------------ ---------- ----------- ----------- ---------- --------- ---------- Total................ $1,035.2 $5,445.5 $2,796.8 $ 815.8 $2,481.7 $152.8 $779.5 $2,272.0 ----------- ------------ ---------- ----------- ----------- ---------- --------- ---------- ----------- ------------ ---------- ----------- ----------- ---------- --------- ---------- Year Ended December 31, 1993 Disability Insurance... $ 572.8 $3,526.0 $1,547.9 $ 369.8 $1,144.9 $ 68.1 $390.6 $1,528.7 Special Risk Insurance............. 70.9 324.9 559.4 34.8 366.0 11.4 177.9 149.5 Colonial Products...... 206.0 282.2 407.4 41.4 211.7 56.1 110.6 365.4 Retirement Products.... 29.4 571.4 42.5 387.6 334.1 12.1 29.6 26.1 Corporate.............. -- (0.5) -- 6.2 -- -- 23.6 -- ----------- ------------ ---------- ----------- ----------- ---------- --------- ---------- Total................ $ 879.1 $4,704.0 $2,557.2 $ 839.8 $2,056.7 $147.7 $732.3 $2,069.7 ----------- ------------ ---------- ----------- ----------- ---------- --------- ---------- ----------- ------------ ---------- ----------- ----------- ---------- --------- ---------- - ------------- (1) Excludes other policyholder funds, as follows:
------------------------------------------------- ------------------------------------------------------------- DECEMBER 31, ------------------------------------ SEGMENT 1995 1994 1993 - -------------------------------------------------------------------- Disability Insurance.......... $ 3.1 $ 2.1 $ 2.0 Special Risk Insurance........ 14.6 8.4 8.9 Colonial Products............. 128.0 100.1 76.0 Retirement Products........... 3,694.6 3,948.2 4,163.8 ---------- ---------- ---------- Total..................... $ 3,840.3 $ 4,058.8 $ 4,250.7 ---------- ---------- ---------- ---------- ---------- ---------- (2) Includes unearned premiums, other policy claims and benefits payable. (3) Includes fees and other income (expense). (4) Includes investment income (expense) and net realized investment gains. (5) Investment income and net realized investment gains are allocated to the segments based on designation of ownership of assets identified to the segments. Operating expenses are allocated to the segments based on direct association with a product whenever possible. If, however, the expense cannot be readily associated with a particular product, the costs are allocated based on ratios of the relative time spent, extent of usage or varying volume of work performed for each segment. (6) Premiums written for health and disability income policies.
Certain 1994 and 1993 amounts have been reclassified in 1995 for comparative purposes. 68 UNUM CORPORATION AND SUBSIDIARIES SCHEDULE IV -- REINSURANCE (DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- ASSUMED PERCENTAGE CEDED TO FROM OF AMOUNT GROSS OTHER OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET - --------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1995 Life insurance in force..................... $164,478.4 $4,119.5 $ -- $160,358.9 -- ---------- --------- ------ ---------- ---------- --------- ------ ---------- Premiums Life insurance and individual annuities... $ 571.4 $ 19.3 $ 2.0 $ 554.1 0.4% Accident and health insurance............. 2,248.4 46.9 239.5 2,441.0 9.8% Group annuities........................... 23.1 -- -- 23.1 -- ---------- --------- ------ ---------- Total premiums........................ $ 2,842.9 $ 66.2 $ 241.5 $ 3,018.2 ---------- --------- ------ ---------- ---------- --------- ------ ---------- Year Ended December 31, 1994 Life insurance in force................... $145,425.9 $4,425.3 $ -- $141,000.6 -- ---------- --------- ------ ---------- ---------- --------- ------ ---------- Premiums Life insurance and individual annuities... $ 517.9 $ 15.7 $ 1.6 $ 503.8 0.3% Accident and health insurance............. 2,123.9 96.8 169.1 2,196.2 7.7% Group annuities........................... 21.3 -- -- 21.3 -- ---------- --------- ------ ---------- Total premiums........................ $ 2,663.1 $ 112.5 $ 170.7 $ 2,721.3 ---------- --------- ------ ---------- ---------- --------- ------ ---------- Year Ended December 31, 1993 Life insurance in force..................... $130,323.4 $2,247.9 $ -- $128,075.5 -- ---------- --------- ------ ---------- ---------- --------- ------ ---------- Premiums Life insurance and individual annuities... $ 487.2 $ 11.9 $ 1.6 $ 476.9 0.3% Accident and health insurance............. 1,818.6 38.1 191.0 1,971.5 9.7% Group annuities........................... 25.7 -- -- 25.7 -- ---------- --------- ------ ---------- Total premiums........................ $ 2,331.5 $ 50.0 $ 192.6 $ 2,474.1 ---------- --------- ------ ---------- ---------- --------- ------ ---------- Certain 1994 amounts have been reclassified in 1995 for comparative purposes.
69 UNUM CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS
NUMBER DESCRIPTION METHOD OF FILING PAGE NO. - --------- -------------------------------------------------- -------------------------------------------------- -------- 3.1 Certificate of Incorporation of UNUM Corporation, Filed as Exhibit 3.1 to the Registrant's Annual as amended Report on Form 10-K dated March 25, 1992, and incorporated herein by reference. 3.2 By-Laws of UNUM Corporation Filed as Exhibit 3.2 to the Registrant's Annual Report on Form 10-K dated March 25, 1992, and incorporated herein by reference. 4 Rights Agreement Filed as Exhibit 1 to the Registrant's Current Report on Form 8-K dated March 18, 1992, and incorporated herein by reference. 10.1 Deferred Compensation Plan Filed herewith. 10.2 Annual Incentive Plan Filed as Exhibit 10.2 to the Registrant's Annual Report on Form 10-K dated March 29, 1993, and incorporated herein by reference. 10.2.1 Annual Incentive Plan-Summary of Significant Filed herewith. Changes 10.3 1987 Executive Stock Option Plan Filed herewith. 10.4 1990 Long-Term Stock Incentive Plan Filed herewith. 10.5 1996 Long-Term Stock Incentive Plan Filed herewith. 10.6 Supplementary Retirement Plan Filed as Exhibit 10.4 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-6571) dated June 18, 1986, and incorporated herein by reference. 10.7 Supplemental Executive Retirement Plan Filed as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K dated March 26, 1991, and incorporated herein by reference. 10.8 Form of Executive Severance Agreement Filed as Exhibit 10.7 to the Registrant's Annual Report on Form 10-K dated March 25, 1992, and incorporated herein by reference. 10.9 Employment Agreement Filed herewith. 10.10 Employment Letter Filed herewith. 10.11 $500 Million Revolving Credit Agreement Filed as Exhibit 10.9 to the Registrant's Annual Report on Form 10-K dated March 24, 1995, and incorporated herein by reference. 10.12 Asset Transfer and Acquisition Agreement Filed herewith. 12 Computation of Ratio of Earnings to Fixed Charges Filed herewith. 21 Subsidiaries of UNUM Corporation Filed herewith. 23 Consent of Independent Accountants Filed herewith. 24 Power of Attorney Filed herewith. 27 Financial Data Schedule Filed herewith.
70 EX-10.1 2 EXHIBIT 10.1 EXHIBIT 10.1 UNUM LIFE INSURANCE COMPANY OF AMERICA 1996 DEFERRED COMPENSATION PLAN I. OBJECTIVE To provide a method whereby a select group of highly compensated employees may receive compensation in a manner most meaningful to them. II. PROGRAM DESCRIPTION Under a non qualified deferred compensation plan, the Employee and the Company may agree to allow the deferral of receipt of current compensation. Under current regulations, the amounts deferred are not subject to income tax until received. Total salary including amounts being deferred are, however, subject to applicable social Security taxes in the year of the deferral. Amounts deferred become part of the general assets of the Company and are credited with interest monthly at a rate equal to the UNUM Life Insurance Company of America Fixed Income Portfolio Rate. The accounts kept for each participant are for record keeping purposes only and are not backed by any funds or guarantees. Should the company experience financial difficulties, a participant's status is that of an unsecured creditor. III. EMPLOYEE ELIGIBILITY - - All officers with a minimum annual base salary of $100,000* - - Sales employees whose annual salary (excluding bonus) or draw is equivalent each year to a minimum annual salary of $100,000* *Base annual salary will be indexed annually to the Super Highly compensated employee definition used in the Internal Revenue Code. IV. AGREEMENT A written agreement between the Employee and the Company shall be executed at the time of the initial election to defer compensation. The agreement specifies in detail: - - the amount and type of the deferral - - the method of interest calculation - - the time and manner of payment For subsequent years in which the Employee qualifies for participation in the Plan, elections for deferrals may be made in writing by the Employee and agreed to by the Company. V. ADMINISTRATION ELECTIONS: In December of each year, eligible employees may elect to defer amounts from the next calendar year's salary. This deferral amount will be based on the base annual salary as of 1/1 of the year in which the compensation would otherwise be paid. Eligible field employees may elect to defer production compensation to be earned in the next calendar year and paid in that year or the following year. On January 1 of the appropriate calendar year, the elections will be put into effect. - -Biweekly pay is adjusted to reflect amounts from salary or draw that are being deferred - -Results Sharing Plan and production bonus amounts are adjusted according to elections Deferral elections are effective for one calendar year only. If no subsequent deferral is elected, the participant's biweekly pay will be adjusted after 12/31 of the deferral year to reflect full annual salary. Deferral elections will be suspended for 12 months immediately following any hardship withdrawal the Employee receives from the Company's 401(k) plan (the Retirement Savings Plan). This restriction applies only to deferrals and not to payments from the non qualified deferred compensation plan that are scheduled to occur during those same 12 months. SALARY RELATED BENEFITS: TOTAL SALARY - - Flex Comp., Long Term Disability and Results Sharing Plan are based on total salary (i.e. includes deferred amounts). REDUCED SALARY - - Pension benefits and 401(k) Plan contributions are based on reduced salary (i.e. total salary minus deferred amounts). The calculation of Final Average Earnings in the Pension Plan uses the highest consecutive five years of earnings out of the last ten. Pensionable earnings that are deferred during that five year period are not included in the calculation and thus may reduce the participant's pension benefit. Amounts of previously deferred compensation which the participant receives during this five year period will be included in final average earnings only to the extent that such payments do not exceed amounts deferred from compensation during this same period. RECORDS: Personnel Accounting maintains all records concerning the plan. They will furnish each participant with a summary of "account" activity annually. EX-10.2-1 3 EXHIBIT 10.2.1 EXHIBIT 10.2.1 ANNUAL INCENTIVE PLAN - SUMMARY OF SIGNIFICANT CHANGES The following provides a summary of the significant changes to the Annual Incentive Plan for 1996, which have been approved by the UNUM Life Insurance Company of America Board of Directors. - - A change in the incentive target payout percentages for our senior management group; - - For Enterprise Staff employees, a change in the weightings of the performance components from 60% based on Enterprise results and 40% based on Division results to 70% based on Enterprise results and 30% based on Division results. - - For Enterprise Line employees, a change in the weightings of the performance components from 40% based on Enterprise results and 60% based on Division results to 30% based on Enterprise results and 70% based on Division results - - For Enterprise Staff and Enterprise Line employees, the ability for the Business Unit/Divisional performance component to pay out independent of Enterprise results. - - For UNUM America employees, the weighting on the Business Unit/Division performance component has been eliminated, so now the payout is based only on Enterprise and UNUM America results. A listing of the incentive target payout percentage targets and performance component weightings for all eligible employees follows. The revised incentive targets for the senior management group appear in bands A through G. ORGANIZATION: UNUM AMERICA ENTERPRISE ENTERPRISE STAFF UNITS LINE UNITS Band Payout % Weightings ---------------- ---------------------------------------- Ent U/A Ent BU/ Ent BU/ Min Trgt Max Div Div 1-12 5% 10% 20% 20% 80% 70% 30% 30% 70% 13-16 10% 20% 40% 20% 80% 70% 30% 30% 70% 17-19 15% 30% 60% 20% 80% 70% 30% 30% 70% 20 17.5% 35% 70% 30% 70% 70% 30% 30% 70% G 20% 40% 80% 30% 70% 70% 30% 30% 70% E-F 22.5% 45% 90% 30% 70% 70% 30% 30% 70% D* 25% 50% 100% 30% 70% 70% 30% 30% 70% C 27.5% 55% 110% 30% 70% 70% 30% 30% 70% B 30% 60% 120% 100% 100% 100% A 40% 80% 160% 100% 100% 100% *Note:The weightings of the performance components for the Chief Investment Officer are 40% Enterprise & 60% Investment results. EX-10.3 4 EXHIBIT 10.3 UNUM CORPORATION 1987 EXECUTIVE STOCK OPTION PLAN 1. PURPOSE. This plan shall be known as the UNUM 1987 Stock Option Plan (the "Plan"). The purpose of the Plan shall be to promote the profitability of UNUM CORPORATION and its subsidiaries (the "Company") by providing certain key employees with incentives to contribute to the success of the Company and by enabling the Company to attract, retain, and reward the best available personnel for positions of substantial responsibility. The terms "subsidiary" and "subsidiaries" as used herein shall mean corporations, a majority of the outstanding shares of voting stock of which is owned by the Company directly or indirectly. For purposes of the Plan, an Incentive Stock Option shall have the meaning set forth in Section 422A of the Internal Revenue Code of 1954, as amended (the "Code"); a Nonqualified Stock Option shall mean any stock option for shares other than an Incentive Stock Option. 2. ADMINISTRATION. The Plan shall be administered by the Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board"). Each member of the Committee shall be a person who is not eligible, and has not at any time within one year prior to his or her appointment to the Committee been eligible, for selection as a person to whom stock may be allocated or to whom stock options or stock appreciation rights may be granted pursuant to the Plan or any other plan of the Company or any of its subsidiaries. Subject to the provisions of the Plan, the Committee shall be authorized to interpret the Plan and may from time to time adopt, amend, or rescind such rules and regulations for carrying out the Plan as it may deem appropriate. Decisions of the Committee on all matters relating to the Plan shall be in the Committee's sole discretion and shall be conclusive and binding on all parties, including the Company, the shareholders, and the Participants. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of Delaware and applicable Federal law. 3. SHARES AVAILABLE FOR THE PLAN. Subject to adjustments as provided in Section 6, an aggregate of 2,500,000 shares of common stock of $.10 par value of UNUM Corporation ("Shares") may be issued pursuant to the Plan. Such Shares may represent either previously unissued shares or treasury shares. If any option granted under the Plan shall expire or terminate unexercised or for any reason become unexercisable as to any shares, such unpurchased shares shall thereafter be available for further grants under the Plan unless the related Stock Appreciation Rights are exercised. 4. PARTICIPATION. (a) Participation in this Plan shall be limited to those key employees of the Company selected at the sole discretion of the Committee. Nothing in the Plan or in any option or right granted thereunder shall confer any right on an employee to continue in the employ of the Company or shall interfere in any way with the right of the Company to terminate employment at any time. (b) Directors who are also employees and officers of the Company shall be eligible to receive options and rights under the Plan. Members of the Board of Directors who are not also employees of the Company and all members of the Committee shall be ineligible to receive either options or rights under the Plan. (c) Options and rights may be granted to such persons and for such respective number of shares as the Committee, in its absolute discretion, shall determine (such individuals to whom options and rights are granted are being herein called "Optionees"). A grant of an option or right in any one year to an eligible employee shall neither guarantee nor preclude a grant to such employee in subsequent years. 5. TERMS AND CONDITIONS OF OPTIONS. The Committee may from time to time select key employees to whom stock options shall be granted as Incentive Stock Options within the meaning of Section 422A of the Code or as Nonqualified Stock Options or any combination thereof as the Committee shall decide. The options granted shall take such form as the Committee shall determine, subject to the following terms and conditions. (a) PRICE. The purchase price per share deliverable upon the exercise of each option shall not be less than 100% of the Fair Market Value of the shares on the date the option is granted. Fair Market Value shall be the average price of the high and low sale prices of the shares on the New York Stock Exchange composite tape or such other recognized market source as determined by the Committee from time to time on the date the option is granted, or, if there is no sale on such date, then such average price on the last previous day on which a sale is reported. In the case of the grant of any Incentive Stock Option to an employee who, at the time of the grant, owns more than 10% of the total combined voting power of all classes of stock of UNUM Corporation or any of its subsidiaries, such price per share shall not be less than 110% of the Fair Market Value of the shares on the date the option is granted. (b) PAYMENT. Options may be exercised only upon payment of the purchase price thereof in full. With respect to a Nonqualified Stock Option, such payment shall be made in cash or, at the discretion of the Committee, in shares, which shall have a value at least equal to the aggregate exercise price of the shares being purchased, or a combination of cash and shares. 2 The value of shares so tendered shall be established in accordance with methods determined by the Committee. With respect to an Incentive Stock Option, payment of the exercise price shall be made in cash. The Optionee shall be entitled to elect to pay all or a portion of the exercise price for options granted under this Plan and any withholding taxes in connection with such exercise by having the shares of Common Stock to be issued by UNUM Corporation pursuant to such exercise sold by a broker-dealer under circumstances meeting the requirements of 12 C.F.R. Section 220. (c) TERMS OF OPTIONS. The term during which options may be exercised shall be determined by the Committee. Except as otherwise provided in this Section 5(c), in no event shall an option be exercisable in whole or in part less than one year, or more than ten years from the date it is granted, provided further that, in the case of the grant of an Incentive Stock Option to an employee who at the time of the grant, owns more than 10% of the total combined voting power of all classes of stock of UNUM Corporation or any of its subsidiaries, in no event shall such option be exercisable more than five years from the date of the grant. All rights to purchase shares pursuant to an option shall, unless sooner terminated, expire at the date designated by the Committee. The Committee shall determine the date on which each option shall become exercisable and may provide that an option shall become exercisable in installments. The shares comprising each installment may be purchased in whole or in part at any time after such installment becomes exercisable, except that the exercise of an Incentive Stock Option shall be further restricted as set forth herein. The Committee may, in its sole discretion, accelerate the time at which any option may be exercised in whole or in part. In the case of the death, disability or retirement of an optionee, the Committee may exercise such discretion to accelerate the time at which any option may be exercised to a date less than one year from the date of grant, provided however, that in no event may a Stock Appreciation Right become exercisable less than six months from the date of grant. The option agreement evidencing an option granted under the Plan may contain such provisions limiting the acceleration of the exercise of options as the Committee deems appropriate to ensure that the penalty provisions of Section 4999 of the Code, or any successor thereto in effect at the time of such acceleration, will not apply to any stock or cash received by the holder from the Company. Unless otherwise provided herein, an Optionee may exercise an option only if he or she is, and has continuously been since the date the option was granted, an employee of the Company. Prior to the exercise of the option and delivery of the stock represented thereby, the Optionee shall have no rights to any dividends nor be entitled to any voting rights on any stock represented by outstanding options. 3 Notwithstanding anything to the contrary contained herein, and notwithstanding any contrary waiting period or installment period in any option agreement or in the Plan, each outstanding option granted under the Plan shall become exercisable in full for the aggregate number of shares covered thereby in the event of a Change in Control (as hereinafter defined). For purposes of this Plan, a Change in Control shall be deemed to have occurred upon the first to occur of the following events: (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 40% of the number of the Company's then outstanding securities; (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in Subsection 5(c)(i), (iii) or (iv) of this Section 5(c)) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 60% of the number of outstanding securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. 4 (d) LIMITATIONS ON GRANTS. The aggregate Fair Market Value (determined as of the date the Incentive Stock Option is granted) of the shares of stock with respect to which Incentive Stock Options are exercisable for the first time by an optionee during any calendar year may not exceed $100,000. (e) TERMINATION OF EMPLOYMENT. Except as provided below, if an Optionee ceases to be an employee other than by reason of death, retirement or disability, any then outstanding options may be exercised any time before their expiration date or within three months after the date of termination, whichever is earlier, but only to the extent that such options were exercisable when employment ceased, absent a determination by the Committee to the contrary; provided, however, that if a Participant is terminated for cause the Committee may determine that no option may be exercised at any time after the termination date. If an Optionee's employment terminates because of death or disability, all then outstanding options previously granted to the Optionee will become exercisable. In the case of death of the Optionee, such options may be exercised at any time before their expiration date or within three years after the date of termination, whichever is earlier. In the case of permanent disability, such options may be exercised at any time before their expiration date. If an Optionee's employment terminates because of retirement prior to January 1, 1995, any then outstanding options may be exercised any time before their expiration or within three years after the date of termination, whichever is earlier, but only to the extent that such options were exercisable when employment ceased, absent a determination by the Committee to the contrary. If an Optionee's employment terminates because of retirement on or after January 1, 1995, any then outstanding options may be exercised any time before their expiration or within five years after the date of termination, whichever is earlier, but only to the extent that such options were exercisable when employment ceased, absent a determination by the Committee to the contrary. (f) TRANSFERABILITY. No option or right shall be transferable by an employee otherwise than by will or the laws of descent and distribution, and during the lifetime of the employee to whom an option or right is granted it may be exercised only by him or his guardian or legal representative, but Incentive Stock Options may be exercised by such guardian or legal representative only if permitted by Section 422A and related sections of the Code and any regulations promulgated thereunder. (g) LISTING AND REGISTRATION. Each option shall be subject to the requirement that if at any time the Committee shall determine, in its discretion, the listing, registration, or qualification of the shares subject to such option 5 upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such option or the issue or purchase or Shares thereunder, no such option may be exercised in whole or in part unless such listing, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. (h) OPTION AGREEMENT. Each employee to whom an option may be granted shall enter into an agreement with the Company, which shall contain such provisions, consistent with the provisions of the Plan, as may be established by the Committee. (i) WITHHOLDING. The Company shall have the right to require a payment from an optionee to cover any applicable withholding or other employment taxes due upon the exercise of an option. (j) STOCK OPTIONS. In no event shall any stock option granted after May 15, 1989 be exercisable through payment of the exercise price in cash during the period of one year following a hardship distribution under the UNUM Employees Retirement Savings Plan and Trust, as defined therein. 6. ADJUSTMENTS. In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, distribution of assets, or any other change in the corporate structure or shares of the Company, the Committee shall make such adjustments as it deems appropriate in the number and kind of shares authorized by the Plan, in the number and kind of shares covered by the options granted, and in the purchase price of outstanding options. In the event of any merger, consolidation or other reorganization in which the Company is not the surviving or continuing corporation, all options and Stock Appreciation Rights granted hereunder and outstanding on the date of such event shall be assumed by the surviving or continuing corporation with appropriate adjustment as to the number and kind of shares and purchase price of the shares. 7. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS. The Committee shall have the authority to grant Stock Appreciation Rights in connection with the grant of options under this Plan to any Optionee. The exercise of an option shall result in an immediate forfeiture of its corresponding right, and the exercise of a right shall cause an immediate forfeiture of its corresponding option. Stock Appreciation Rights shall be subject to such other terms and conditions as the Committee may specify. A Stock Appreciation Right granted in relation to an Incentive Stock Option shall expire at the same time as the related option expires and shall be transferable only when the related option is transferable, and under the same conditions. 6 8. EXERCISE OF STOCK APPRECIATION RIGHTS. (a) Stock Appreciation Rights granted in connection with Incentive Stock Options and, unless otherwise provided by the Committee, all other Stock Appreciation Rights granted under this Plan shall be exercisable only to the extent the related option is exercisable and only in accordance with the instrument evidencing such right. No Stock Appreciation Right may be exercised unless the Fair Market Value of a share on the date of exercise exceeds the purchase price per share under the option to which the Stock Appreciation Right corresponds. (b) Upon the exercise of a Stock Appreciation Right, the Optionee shall be entitled to a distribution in an amount equal to the difference between the Fair Market Value of a Share on the date of exercise as determined by the Committee, less the purchase price per Share under the option to which the Stock Appreciation Right corresponds. The Committee, in its sole discretion, shall decide whether such distribution shall be in cash or in Shares. In the event distribution is made in Shares, any fractional shares due shall be disregarded. (c) The Company shall have the right to require a payment from an employee to cover any applicable withholding or other employment taxes due upon the exercise of a Stock Appreciation Right. (d) The provisions of this subsection shall apply to Optionees who are or who hereafter may be subject to Section 16(b) of the Securities Exchange Act of 1934. No Stock Appreciation Right shall be exercised for cash in complete or partial settlement of such right unless such exercise shall occur during the period beginning on the third business day following the date of release for publication by the Company of quarterly and annual summary statements of sales and earnings and ending on the twelfth business day following such date. No Stock Appreciation Right or related option may be exercised for cash in complete or partial settlement of such right during the first six months of its term, except in the event the death or disability of the holder occurs prior to the expiration of such six month period. 8A. An Optionee who is required under Section 5(i) or 8(c) of this Plan to make any payment to the Company to cover withholding or other employment taxes may elect to satisfy such obligation by tendering to the Company the number of Shares to the Company's common stock whose Fair Market Value equals the amount required to be withheld. 9. TERMS AND CONDITIONS OF LIMITED RIGHTS. (a) The Committee shall have the authority to grant Limited Rights in connection with the grant of options under this Plan to any Optionee, and such rights may be granted either at or after the time of the grant of such option. 7 Limited Rights or any applicable portion thereof granted with respect to a given option shall terminate and no longer be exercisable upon the termination of the related option. Upon the exercise of an option, the related Limited Right shall cease to be exercisable to the extent of the Shares with respect to which such option is exercised. A Limited Right related to an option may be exercised by an Optionee, in accordance with this Section 9, by surrendering the applicable portion of the related option. Upon such exercise and surrender, the Optionee shall be entitled to receive an amount determined in the manner prescribed in this Section 9. (b) Limited Rights shall only be exercisable during the 30 day period following a Change in Control and only to the extent that the options to which they relate shall be exercisable in accordance with the provisions of the Plan; provided, however, that no Limited Right shall be exercisable during the first six months of the term of the Limited Right (except that this additional limitation shall not apply in the event of death or disability of the Optionee prior to the expiration of the six-month period). (c) Upon the exercise of a Limited Right related to an option, an Optionee shall be entitled to receive an amount in cash equal in value to the excess of the higher of (i) the highest price per share paid in connection with the Change in Control or (ii) the highest fair market value per share as reported in the Wall Street Journal at any time during the 60 day period preceding the Change in Control of one share over the option price per share specified in the related option, such excess to be multiplied by the number of shares in respect of which the Limited Right shall have been exercised. (d) Limited Rights shall be subject to such other terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee. This Section 9 shall be interpreted in accordance and consistent with the principles set forth in Rule 16b-3 of the Securities Exchange Act of 1934. 10. TERMINATION AND MODIFICATION OF THE PLAN. The Board of Directors, without further approval of the shareholders, may modify or terminate this Plan and from time to time may suspend, and if suspended, may reinstate any or all of the provisions of this Plan except that no modification or termination of this Plan may, without the consent of the Optionee, alter or impair any option previously granted under this Plan and that no modification shall become effective without prior approval of the shareholders which would (a) increase (except as provided in Section 6) the maximum number of shares for which options may be granted under the Plan; (b) reduce the option price which may be established under the Plan; (c) extend the maximum option term under the Plan beyond ten years, or (d) change the Plan's eligibility requirements. The Chief Executive Officer shall be authorized to make minor or 8 administrative modifications to the Plan as well as modification to the Plan which may be dictated by requirements of federal or state statutes applicable to the Company or authorized or made desirable by such statutes. No modification or termination of the Plan shall, without the Optionee's consent, alter or impair any of their rights or obligations under any option or right theretofore granted to him or her under the Plan. Unless previously terminated, the Plan shall terminate on December 31, 1996. 11. EFFECTIVE DATE. The effective date of the Plan shall be January 1, 1987. 9 EX-10.4 5 EXHIBIT 10.4 UNUM CORPORATION 1990 LONG-TERM STOCK INCENTIVE PLAN SECTION 1. PURPOSE. The purpose of the UNUM Corporation 1990 Long-Term Stock Incentive Plan (the "Plan") is to promote the interests of UNUM Corporation and its stockholders by (i) attracting and retaining executive officers, other key employees and corporation directors of outstanding ability; (ii) motivating such individuals, by means of performance-related incentives, to achieve longer-range performance goals; and (iii) enabling such individuals to participate in the long-term growth and financial success of UNUM Corporation. SECTION 2. DEFINITIONS. "Affiliate" shall mean any corporation or other entity which is not a Subsidiary but as to which the Corporation possesses a direct or indirect ownership interest and has representation on the board of directors or any similar governing body. "Award" shall mean a grant or award under Sections 6 through 10, inclusive, of the Plan, as evidenced in a written document delivered to a Participant. "Board" shall mean the Board of Directors of the Corporation. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Committee" shall mean the Compensation Committee of the Board. "Common Stock" or "Stock" shall mean the common stock, $.10 par value, of the Corporation. "Corporation" shall mean UNUM Corporation. "Employee" shall mean any employee of the Employer. "Employer" shall mean the Corporation and any Subsidiary or Affiliate. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. "Fair Market Value" shall mean the average of the highest and lowest sales prices reported for consolidated trading of the Stock on the New York Stock Exchange on the date in question, or, if the Stock shall not have been traded on such date, the average of such highest and lowest sales prices on the first day prior thereto on which the Stock was so traded. "Fiscal Year" shall mean the fiscal year of the Corporation. "Incentive Stock Option" shall mean a stock option granted under Section 6 which is intended to meet the requirements of Section 422A of the Code. "Limited Right" shall mean a limited stock appreciation right granted under Section 8. "Non-Qualified Stock Option" shall mean a stock option granted under Section 6 which is not intended to be an Incentive Stock Option. "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option. "Participant" shall mean an Employee who is selected by the Committee to receive an Award under the Plan. "Restricted Period" shall mean the period of years selected by the Committee during which a grant of Restricted Stock may be forfeited to the Corporation. "Restricted Stock" shall mean shares of Common Stock contingently granted to a Participant under Section 9 of the Plan. "Subsidiary" shall mean any business entity in which the Corporation possesses directly or indirectly fifty percent (50%) or more of the total combined voting power. SECTION 3. ADMINISTRATION. Except as provided in Section 10, the Committee shall have full power to interpret and administer the Plan and full authority to select the individuals to whom Awards will be granted and to determine the type and amount of Award(s) to be granted to each Participant, the terms and conditions of Awards granted under the Plan and the terms and conditions of the agreements which will be entered into with Participants. As to the selection and grant of Awards to Participants who are not subject to Sections 16(a) and 16(b) of the Exchange Act, or any successor sections, the Committee may delegate its responsibilities to members of the Company's management consistent with applicable law. The Committee shall have the authority to adopt, alter and repeal such rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any agreements relating thereto); to direct employees of the Corporation and its subsidiaries or other advisors to prepare such materials or perform such analysis as the Committee deems necessary or appropriate; and otherwise to supervise the administration of the Plan. 2 Any interpretation and administration of the Plan by the Committee, and all actions of the Committee, shall be final, binding and conclusive on the Corporation, its stockholders, Subsidiaries, Affiliates, all Participants, their respective legal representatives, successors and assigns and upon all persons claiming under or through any of them. No member of the Board or of the Committee shall incur any liability for any action taken or omitted, or any determination made, in good faith in connection with the Plan. SECTION 4. ELIGIBILITY. Participation in the Plan shall be limited to those key employees of the Corporation and any Subsidiary and Affiliate selected at the sole discretion of the Committee. SECTION 5. MAXIMUM AMOUNT AVAILABLE FOR AWARDS. Subject to adjustment as provided in Section 12(j), the maximum number of shares of Stock in respect of which Awards may be made under the Plan shall be a total of 6,800,000 shares of Common Stock. Shares of Common Stock may be made available from the authorized but unissued shares of the Corporation or from shares reacquired by the Corporation, including shares purchased in the open market. In the event that (i) an Option, or Stock Appreciation Right, or Limited Right expires or is cancelled unexercised as to any shares of Common Stock covered thereby, or (ii) any Award in respect of shares is forfeited for any reason under the Plan, such shares shall thereafter be again available for award pursuant to the Plan. SECTION 6. STOCK OPTIONS. (a) GRANT. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees to whom Options shall be granted, the number of shares to be covered by each Option, the Option Price, as defined below, therefor and the conditions and limitations applicable to the exercise of the Option. The Committee shall have the authority to grant Incentive Stock Options, or to grant Non-Qualified Stock Options, or to grant both types of Options. In the case of Incentive Stock Options, the terms and conditions of such grants shall be subject to and comply with such rules as may be prescribed by Section 422A of the Code and any regulations implementing Section 422A. (b) OPTION PRICE. The Committee shall establish the exercise price of the Option (the "Option Price") at the time each Option is granted, which Option Price shall not be less than 100% of the Fair Market Value of the Common Stock on the date of grant. 3 (c) EXERCISE. (1) Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion, specify in the applicable Award or thereafter; provided, however, that in no event may any Option granted hereunder be exercisable after the expiration of ten years from the date of grant. The Committee may impose such conditions with respect to the exercise of Options, including without limitation, any relating to the application of federal or state securities laws, as it may deem necessary or advisable. (2) No shares shall be delivered pursuant to any exercise of an Option until payment in full of the Option Price therefor is received by the Corporation. Such payment may be made in cash, or its equivalent, or, subject to such rules and guidelines as the Committee may establish, by exchanging shares of Common Stock owned by the optionee (which are not the subject of any pledge or other security interest), or by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the Fair Market Value of any such Common Stock so tendered to the Corporation, valued as of the date of such tender, is at least equal to such Option Price. (d) TERMINATION OF EMPLOYMENT. (1) Except as provided below, if a Participant ceases to be an Employee other than by reason of death, retirement or disability, any then outstanding Options may be exercised any time before their expiration date or within three months after the date of termination, whichever is earlier, but only to the extent that such Options were exercisable when employment ceased, absent a determination by the Committee to the contrary; provided, however, that a Participant is terminated for cause the Committee may determine that no Option may be exercised at any time after the termination date. (2) If a Participant's employment terminates because of death or disability, all then outstanding Options previously granted to the Participant will become exercisable. In the case of death of the Participant, such Options may be exercised at any time before their expiration date or within three years after the date of termination, whichever is earlier. In the case of permanent disability, such Options may be exercised at any time before their expiration date. (3) If a Participant's employment terminates because of retirement prior to January 1, 1995, any then outstanding Options may be exercised any time before their expiration date or within three years after the date of termination, whichever is earlier, but only to the extent that such Options were exercisable when employment ceased absent a determination by the Committee to the contrary. If a Participant's employment terminates because of retirement on or after January 1, 4 1995, any then outstanding Options may be exercised any time before their expiration date or within five years after the date of termination, whichever is earlier, but only to the extent that such Options were exercisable when employment ceased absent a determination by the Committee to the contrary. SECTION 7. STOCK APPRECIATION RIGHTS. (a) The Committee shall have the authority to grant Stock Appreciation Rights in tandem with the grant of an Option or freestanding and unrelated to an Option. Stock Appreciation Rights granted in tandem with an Option may be granted either at or after the time of the grant of such Option. Stock Appreciation Rights or any applicable portion thereof granted in tandem with a given Option shall only be exercisable to the extent that the related Option is exercisable and shall terminate and no longer be exercisable upon the expiration or cancellation of the related Option. The exercise of an Option shall result in an immediate forfeiture of any Stock Appreciation Right granted in tandem with that Option, and the exercise of such Stock Appreciation Right shall cause an immediate forfeiture of its related Option. Stock Appreciation Rights shall not be exercisable after the expiration of ten years from date of grant. A Stock Appreciation Right granted in tandem with an Option may be exercised by an optionee, in accordance with this Section 7, by surrendering the applicable portion of the related Option. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in this Section 7. (b) A Stock Appreciation Right shall entitle the Participant to receive from the Corporation an amount equal to the excess of the Fair Market Value of a share of Common Stock on the date of the exercise of the Stock Appreciation Right over the grant price thereof, provided that the Committee may for administrative convenience determine that, for any Stock Appreciation Right which is not related to an Incentive Stock Option and can only be exercised during limited periods of time in order to satisfy the conditions of certain rules of the Securities and Exchange Commission, the exercise of any such Stock Appreciation Right for cash during such limited period shall be deemed to occur for all purposes hereunder on the day during such limited period on which the Fair Market Value of the Stock is the highest. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted prior to such determination as well as Stock Appreciation Rights thereafter granted. The Committee shall determine whether Stock Appreciation Rights shall be settled in cash, shares of Common Stock or a combination of cash and shares of Common Stock. 5 SECTION 8. LIMITED RIGHTS. (a) The Committee shall have the authority to grant Limited Rights in tandem with the grant of an Option or freestanding and unrelated to an Option. Limited Rights granted in tandem with an Option may be granted either at or after the time of the grant of such Option. Limited Rights or any applicable portion thereof granted in tandem with a given Option shall terminate and no longer be exercisable upon the expiration or cancellation of the related Option. The exercise of an Option shall result in an immediate forfeiture of any Limited Right granted in tandem with that Option, and the exercise of such Limited Right shall cause an immediate forfeiture of its related Option. A Limited Right granted in tandem with an Option may be exercised by an optionee, in accordance with this Section 8, by surrendering the applicable portion of the related Option. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in this Section 8. (b) Limited Rights shall only be exercisable during the 30 day period following a Change in Control as defined in Section 11 and shall not be exercisable after the expiration of ten years from the date of grant. (c) Upon the exercise of a Limited Right, an optionee shall be entitled to receive from the Corporation an amount in cash equal in value to the excess of (i) the higher of (A) the highest price per share paid in connection with the Change in Control or (B) the highest Fair Market Value per share as reported in the Wall Street Journal at any time during the 60 day period preceding the Change in Control over (ii) in the case of a Limited Right granted in tandem with an Option, the Option Price per share specified in the related Option and in the case of all other Limited Rights, the price per share established in the grant of the Limited Right, such excess to be multiplied by the number of shares in respect of which the Limited Right shall have been exercised; provided, however, that upon the exercise of a Limited Right granted in tandem with an Incentive Stock Option, the amount set forth in clause (i) shall not exceed the Fair Market Value of a share on the date of exercise of the Limited Right. (d) Limited Rights shall be subject to such other terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee. This Section 8 shall be interpreted in accordance and consistent with the principles set forth in Rule 16b-3 of the Exchange Act. 6 SECTION 9. RESTRICTED STOCK. (a) Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees to whom shares of Restricted Stock shall be granted, the number of shares of Restricted Stock to be granted to each Participant, the duration of the Restricted Period during which, and the conditions under which, the Restricted Stock may be forfeited to the Corporation, and the other terms and conditions of such Awards. The Committee may determine that the Restricted Period applicable to a particular grant may vary depending upon the attainment of particular conditions, such as corporate earnings, share price or other targets set by the Committee. (b) Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, except as herein provided, during the Restricted Period. Certificates issued in respect of shares of Restricted Stock shall be registered in the name of the Participant and deposited by such Participant, together with a stock power endorsed in blank, with the Corporation. At the expiration of the Restricted Period, the Corporation shall deliver such certificates to the Participant or the Participant's legal representative. (c) If a Participant's employment terminates by reasons of disability or death, any Restricted Stock held by such Participant shall thereafter vest and any restriction lapse, to the extent such Restricted Stock would have become vested and no longer subject to such restrictions within one year from the time of termination had the Participant continued to fulfill all of the conditions of the Restricted Stock during such period (or on such accelerated basis as the Committee may determine at or after grant). Unless otherwise determined by the Committee, if a Participant's employment terminates for any reasons other than permanent disability or death, any Restricted Stock which is unvested or subject to restriction shall thereupon be forfeited. SECTION 10. NON-EMPLOYEE DIRECTOR OPTIONS. Notwithstanding any of the other provisions of the Plan to the contrary, the provisions of this Section 10 shall only apply to a non-employee member of the Board. The other provisions of the Plan shall apply to grants of Options under this Section 10 to the extent not inconsistent with the provisions of this Section. (a) This Section 10 shall be administered by the Board. (b) Each non-employee member of the Board shall receive Non-Qualified Stock Options in accordance with the provisions of this Section 10. 7 (c) (i) Recipients of Options under this Section 10 shall enter into a stock option agreement with the Corporation, which agreement shall set forth, among other things, the exercise price of the Option, the term of the Option and provisions regarding exercisability of the Option granted thereunder. (ii) On the Effective Date (as defined below) each non-employee member of the Board of the Corporation shall receive Options to purchase 2,000 shares of Common Stock. Beginning in 1991, on the date after each annual stockholders meeting of the Corporation each continuing non- employee member of the Board shall be granted an Option to purchase 1,000 shares of Common Stock and, beginning in 1990, each newly elected non-employee director shall be granted an Option to purchase 2,000 shares of Common Stock. The Option Price per share of Common Stock purchasable under such Options shall be equal to the Fair Market Value of the Common Stock on the date of grant. Such Option shall remain exercisable until the earlier of ten years from the date of grant or the termination of any post-directorship consultancy agreement with the Corporation; PROVIDED, HOWEVER, that if such consultancy agreement terminates by reason of death or disability any then outstanding Options may be exercised (x) at any time before their expiration date or (y), if such termination is by reason of death, within three years of the date of death, whichever is earlier. Such Options shall be exercisable one year from the date of grant by payment in full in cash or in shares of Common Stock having a Fair Market Value equal to the Option Price or in a combination of cash and such shares. (d) The Board may not amend, alter, or discontinue this Section 10 without the approval of the stockholders of the Corporation. SECTION 11. CHANGE OF CONTROL. Notwithstanding anything to the contrary contained herein, and notwithstanding any contrary waiting period or installment period in any agreement relating to an Award or in the Plan, each outstanding Option, Stock Appreciation Right and Limited Right granted under the Plan shall become exercisable in full for the aggregate number of shares covered thereby, and any restriction or deferral limitation applicable to any Restricted Stock shall lapse and such shares and Awards shall be deemed fully vested, in the event of a Change in Control (as hereinafter defined). For purposes of this Plan, a Change in Control shall be deemed to have occurred upon the first to occur of the following events: (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Corporation or any corporation owned, directly or indirectly, by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation), is or becomes the "beneficial 8 owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing more than 40% of the number of the Corporation's then outstanding securities; (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in Subsection 11(i), (iii) or (iv) of this Section 11) whose election by the Board or nomination for election by the Corporation's stockholders was approved by a vote of at least two- thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Corporation approve a merger or consolidation of the Corporation with any other corporation, other than a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities of the surviving entity) more than 60% of the number of outstanding securities of the Corporation or such surviving entity outstanding immediately after such merger or consolidation; or (iv) the stockholders of the Corporation approve a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets. SECTION 12. GENERAL PROVISIONS. (a) WITHHOLDING. The Employer shall have the right to deduct from all amounts paid to a Participant in cash (whether under this Plan or otherwise) any taxes required by law to be withheld in respect of Awards under this Plan. In the case of payments of Awards in the form of Common Stock, at the Committee's discretion the Participant may be required to pay to the Employer the amount of any taxes required to be withheld with respect to such Common Stock, or, in lieu thereof, to the extent permitted by applicable federal and state securities laws, the Employer shall have the right to retain (or the Participant may be offered the opportunity to elect to tender) the number of shares of Common Stock whose Fair Market Value equals the amount required to be withheld. The Optionee shall be entitled to elect to pay all or a portion of the exercise price for options granted under this Plan and any withholding taxes in connection with such exercise by having the shares of Common Stock to be issued by UNUM Corporation pursuant to such exercise sold by a broker-dealer under circumstances meeting the requirements of 12 C.F.R. Section 220. 9 (b) NONTRANSFERABILITY. No Award shall be assignable or transferable, and no right or interest of any Participant shall be subject to any lien, obligation or liability of the Participant, except by will or the laws of descent and distribution. (c) NO RIGHT TO EMPLOYMENT. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Employer. Further, the Employer expressly reserves the right at any time to dismiss a Participant free from any liability, or any claim under the Plan, except as provided herein or in any agreement entered into with respect to an Award. (d) NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the applicable Award, no Participant or transferee of an Option shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed under the Plan until he or she has become the holder thereof. Notwithstanding the foregoing, in connection with each grant of Restricted Stock hereunder, the applicable Award shall specify if and to what extent the Participant shall not be entitled to the rights of a stockholder in respect of such Restricted Stock. (e) CONSTRUCTION OF THE PLAN. The validity, construction, interpretation, administration and effect of the Plan and of its rules and regulations, and rights relating to the Plan, shall be determined solely in accordance with the laws of the State of Delaware. (f) EFFECTIVE DATE. Subject to the approval of the stockholders of the Corporation, the Plan shall be effective on February 9, 1990 (the "Effective Date"). No Options or Awards may be granted under the Plan after February 9, 2000. (g) AMENDMENT OF PLAN. The Board may amend, suspend or terminate the Plan or any portion thereof at any time, provided that no amendment shall be made without stockholder approval if such approval is necessary to comply with any tax or regulatory requirement, including for these purposes any approval requirement which is a prerequisite for exemptive relief under Section 16(b) of the Exchange Act. Notwithstanding anything to the contrary contained herein, the Committee may amend the Plan in such manner as may be necessary so as to have the Plan conform with local rules and regulations. The Chief Executive Officer shall be authorized to make minor or administrative modifications to the Plan as well as modification to the Plan which may be dictated by requirements of federal or state statutes applicable to the Corporation or authorized or made desirable by such statutes. No modification or termination of the Plan shall, without the optionee's consent, alter or impair any of his or her rights or obligations under any Option, Stock Appreciation Right or Limited Right theretofore granted to him or her under the Plan. (h) AMENDMENT OF AWARD. The Committee may amend, modify or terminate any outstanding Award with the Participant's consent at any time prior to payment or exercise in any manner not inconsistent with the terms of the Plan, including without 10 limitation, (i) to change the date or dates as of which (A) an Option, Stock Appreciation Right or Limited Right becomes exercisable; (B) Restricted Stock becomes nonforfeitable; or (ii) to cancel and reissue an Award under such different terms and conditions as it determines appropriate. (i) HARDSHIP DISTRIBUTIONS. In no event shall any Option granted under this Plan be exercisable through payment of the Option Price in cash during the period of one year following a hardship distribution under the UNUM Employees Retirement Savings Plan and Trust, as defined therein. (j) ADJUSTMENTS AND ASSUMPTION. In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, distribution of assets, or any other change in the corporate structure or shares of the Corporation, the Committee shall make such adjustments as it deems appropriate in the number and kind of shares authorized by the Plan, in the number and kind of shares covered by the Awards granted, and in the purchase price of outstanding Options. In the event of any merger, consolidation or other reorganization in which the Corporation is not the surviving or continuing corporation, all Awards granted hereunder and outstanding on the date of such event shall be assumed by the surviving or continuing corporation with appropriate adjustment as to the number and kind of shares and purchase price of the shares. (k) In addition to the purposes set forth in Section 1, the Committee may grant Awards to eligible Participants in order to compensate such Participants to surrender existing rights to receive benefits from the Employer under this or any other benefit plan or arrangement. 11 EX-10.5 6 EXHIBIT 10.5 UNUM CORPORATION 1996 LONG-TERM STOCK INCENTIVE PLAN SECTION 1. PURPOSE. The purpose of the UNUM Corporation 1996 Long-Term Stock Incentive Plan (the "Plan") is to promote the interests of UNUM Corporation and its stockholders by (i) attracting and retaining executive officers and other key employees of outstanding ability; (ii) motivating such individuals, by means of performance- related incentives, to achieve longer-range performance goals; and (iii) enabling such individuals to participate in the long-term growth and financial success of UNUM Corporation. SECTION 2. DEFINITIONS. "Affiliate" shall mean any corporation or other entity which is not a Subsidiary but as to which the Corporation possesses a direct or indirect ownership interest and has representation on the board of directors or any similar governing body. "Award" shall mean a grant or award under Sections 6 through 10, inclusive, of the Plan, as evidenced in a written document delivered to a Participant. "Board" shall mean the Board of Directors of the Corporation. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Committee" shall mean the Compensation Committee of the Board, or, to the extent necessary to satisfy the requirements of Section 162(m) of the Code, a subcommittee thereof. "Common Stock" or "Stock" shall mean the common stock, $.10 par value, of the Corporation. "Corporation" shall mean UNUM Corporation. "Employee" shall mean any employee of the Employer. "Employer" shall mean the Corporation and any Subsidiary or Affiliate. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. -2- "Fair Market Value" shall mean the average of the highest and lowest sales prices reported for consolidated trading of the Stock on the New York Stock Exchange on the date in question, or, if the Stock shall not have been traded on such date, the average of such highest and lowest sales prices on the first day prior thereto on which the Stock was so traded. "Fiscal Year" shall mean the fiscal year of the Corporation. "Incentive Stock Option" shall mean a stock option granted under Section 6 which is intended to meet the requirements of Section 422 of the Code. "Limited Right" shall mean a limited stock appreciation right granted under Section 8. "Non-Qualified Stock Option" shall mean a stock option granted under Section 6 which is not intended to be an Incentive Stock Option. "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option. "Participant" shall mean an Employee who is selected by the Committee to receive an Award under the Plan. "Performance Measures" shall mean the criteria and objectives, established by the Committee, which shall be satisfied as a condition to the receipt of shares by a Participant under a Restricted Stock Award, or to the payment or receipt of shares or cash under a Performance Share Award. With respect to any Restricted Stock or Performance Share Award which the Committee designates as being intended to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder, such criteria and objectives shall be based on one or more of the following: the market price of a share of the Common Stock; earnings per share, return to stockholders (including dividends), return on equity, earnings of the Corporation on a GAAP or statutory accounting basis, revenues, market share, cash flow or cost reduction goals, underwriting margin, or any combination of the foregoing. Such criteria and objectives may be expressed on either an absolute basis or relative to the performance of a peer group selected by the Committee. In the case of any Restricted Stock or Performance Share Award which the Committee does not designate as being intended to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder, such criteria and objectives, if any, may include one or more of the criteria and objectives referred to above or such other criteria and objectives as the Committee may determine. -3- "Performance Period" shall mean a period designated by the Committee during which the Performance Measures applicable to a Performance Share Award shall be measured. "Performance Share" shall mean a right, granted to a Participant under Section 10 of this Plan, contingent upon the attainment of specified Performance Measures within a specified Performance Period, to receive one share of Common Stock, which may be Restricted Stock, or in lieu thereof, the Fair Market Value of such Performance Share in cash. "Restricted Stock" shall mean shares of Common Stock contingently granted to a Participant under Section 9 of this Plan. "Restriction Period" shall mean a period designated by the Committee during which the Performance Measures and other conditions applicable to a Restricted Stock Award or Performance Share Award shall be measured. "Stock Appreciation Right" shall mean an Award granted under Section 7 of the Plan. "Subsidiary" shall mean any business entity in which the Corporation possesses directly or indirectly fifty percent (50%) or more of the total combined voting power. "Voting Securities" shall mean securities which are entitled to cast votes as to general corporate matters, including the election of directors. SECTION 3. ADMINISTRATION. The Committee shall have full power to interpret and administer the Plan and full authority to select the individuals to whom Awards will be granted and to determine the type and amount of Award(s) to be granted to each Participant, the terms and conditions of Awards granted under the Plan and the terms and conditions of the agreements which will be entered into with Participants. The Committee shall have the authority to adopt, alter and repeal such rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any agreements relating thereto); to direct employees of the Corporation and its subsidiaries or other advisors to prepare such materials or perform such analysis as the Committee deems necessary or appropriate; and otherwise to supervise the administration of the Plan. The Committee may delegate such of its responsibilities set forth above to members of the Corporation's management as the Committee may determine, with regard to the grant, amendment, interpretation and administration of Awards to Participants who are not subject to Sections 16(a) and 16(b) of the Exchange Act, and except with respect -4- to Awards which are designed to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder. Any interpretation and action under this Plan by the Committee, or members of the Corporation's management acting under authority delegated by the Committee, shall be final, binding and conclusive on the Corporation, its stockholders, Subsidiaries, Affiliates, all Participants, their respective legal representatives, successors and assigns and upon all persons claiming under or through any of them. Neither any member of the Board of Directors or of the Committee nor any member of the Corporation's management acting under authority delegated by the Committee shall incur any liability for any action taken or omitted, or any determination made, in good faith in connection with the Plan. SECTION 4. ELIGIBILITY. Participation in the Plan shall be limited to those key employees of the Corporation and any Subsidiary and Affiliate selected at the sole discretion of the Committee. SECTION 5. MAXIMUM AMOUNT AVAILABLE FOR AWARDS. Subject to adjustment as provided in Section 12(j), the maximum number of shares of Stock in respect of which Awards may be made under the Plan shall be a total of 3,500,000 shares of Common Stock, provided that during any single calendar year (i) Options shall not be granted to any individual Participant to purchase more than 200,000 shares of the Common Stock, and (ii) the sum of all shares of Restricted Stock plus all Performance Shares granted to any individual Participant shall not exceed 100,000. Common Stock may be made available from the authorized but unissued shares of the Corporation or from shares reacquired by the Corporation, including shares purchased in the open market. In the event that (i) an Option, or Stock Appreciation Right, or Limited Right expires, terminates, or is canceled, surrendered or exchanged unexercised as to any shares of Common Stock covered thereby, or (ii) any other Award in respect of shares is forfeited for any reason under the Plan, such shares shall thereafter be again available for award pursuant to the Plan. SECTION 6. STOCK OPTIONS. (a) GRANT. The Committee may, in its discretion, grant Options to such eligible Participants as it may select. The Committee shall determine the number of shares to be covered by each Option, the Option Price, as defined below, therefor -5- and the conditions and limitations applicable to the exercise of the Option. The Committee shall have the authority to grant Incentive Stock Options, or to grant Non-Qualified Stock Options, or to grant both types of Options. In the case of Incentive Stock Options, the terms and conditions of such grants shall be subject to and comply with such rules as may be prescribed by Section 422 of the Code and any regulations implementing Section 422. (b) OPTION PRICE. The Committee shall establish the exercise price of the Option (the "Option Price") at the time each Option is granted, which Option Price shall not be less than 100% of the Fair Market Value of the Common Stock on the date of grant. (c) EXERCISE. (1) Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion, specify in the applicable Award or thereafter; provided, however, that in no event may any Option granted hereunder be exercisable after the expiration of ten years from the date of grant. The Committee may impose such conditions with respect to the exercise of Options, including without limitation, any relating to the application of federal or state securities laws, as it may deem necessary or advisable. (2) No shares shall be delivered pursuant to any exercise of an Option until payment in full of the Option Price therefor is received by the Corporation. Such payment may be made in cash, or its equivalent, or, subject to such rules and guidelines as the Committee may establish, by exchanging shares of Common Stock owned by the optionee (which are not the subject of any pledge or other security interest), or by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the Fair Market Value of any such Common Stock so tendered to the Corporation, valued as of the date of such tender, is at least equal to such Option Price. (d) TERMINATION OF EMPLOYMENT. (1) If a Participant ceases to be an Employee other than by reason of death, retirement or permanent disability, any then outstanding Options may be exercised at any time before their expiration date or within three months after the date of termination, whichever is earlier, but only (unless otherwise determined by the Committee) to the extent that such Options were exercisable when employment ceased, and to the extent not so exercisable, the Option shall terminate on the date employment ceases; provided, -6- however, that if a Participant is terminated for cause the Committee may determine that no Option may be exercised at any time after the termination date. (2) If a Participant's employment terminates because of death or permanent disability, all then outstanding Options previously granted to the Participant will become exercisable. In the case of death of the Participant, such Options may be exercised at any time before their expiration date or within three years after the date of termination, whichever is earlier. In the case of permanent disability, such Options may be exercised at any time before their expiration date. (3) If a Participant's employment terminates because of retirement, any then outstanding Options may be exercised at any time before their expiration date or within five years after the date of termination, whichever is earlier, but only (unless otherwise determined by the Committee) to the extent that such Options were exercisable when employment ceased, and to the extent not so exercisable, the Option shall terminate on the date employment ceases. SECTION 7. STOCK APPRECIATION RIGHTS. (a) The Committee shall have the authority to grant Stock Appreciation Rights in tandem with the grant of an Option or freestanding and unrelated to an Option. Stock Appreciation Rights granted in tandem with an Option may be granted either at or after the time of the grant of such Option. Stock Appreciation Rights or any applicable portion thereof granted in tandem with a given Option shall only be exercisable to the extent that the related Option is exercisable and shall terminate and no longer be exercisable upon the expiration, termination, or cancellation of the related Option. The exercise of an Option shall result in an immediate forfeiture of any Stock Appreciation Right granted in tandem with that Option, and the exercise of such Stock Appreciation Right shall cause an immediate forfeiture of its related Option. Stock Appreciation Rights shall not be exercisable after the expiration of ten years from date of grant. A Stock Appreciation Right granted in tandem with an Option may be exercised by an optionee, in accordance with this Section 7, by surrendering the applicable portion of the related Option. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in this Section 7. -7- (b) A Stock Appreciation Right shall entitle the Participant to receive from the Corporation an amount equal to the excess of the Fair Market Value of a share of Common Stock on the date of the exercise of the Stock Appreciation Right over the grant price thereof, provided that the Committee may for administrative convenience determine that, for any Stock Appreciation Right which is not related to an Incentive Stock Option and can only be exercised during limited periods of time in order to satisfy the conditions of certain rules of the Securities and Exchange Commission, the exercise of any such Stock Appreciation Right for cash during such limited period shall be deemed to occur for all purposes hereunder on the day during such limited period on which the Fair Market Value of the Stock is the highest. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted prior to such determination as well as Stock Appreciation Rights thereafter granted. The Committee shall determine whether Stock Appreciation Rights shall be settled in cash, shares of Common Stock or a combination of cash and shares of Common Stock. SECTION 8. LIMITED RIGHTS. (a) The Committee shall have the authority to grant Limited Rights in tandem with the grant of an Option or freestanding and unrelated to an Option. Limited Rights granted in tandem with an Option may be granted either at or after the time of the grant of such Option. Limited Rights or any applicable portion thereof granted in tandem with a given Option shall terminate and no longer be exercisable upon the expiration, termination or cancellation of the related Option. The exercise of an Option shall result in an immediate forfeiture of any Limited Right granted in tandem with that Option, and the exercise of such Limited Right shall cause an immediate forfeiture of its related Option. A Limited Right granted in tandem with an Option may be exercised by an optionee, in accordance with this Section 8, by surrendering the applicable portion of the related Option. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in this Section 8. (b) Limited Rights shall only be exercisable during the 30 day period following a Change in Control as defined in Section 11 and shall not be exercisable after the expiration of ten years from the date of grant. (c) Upon the exercise of a Limited Right, an optionee shall be entitled to receive from the Corporation an amount in cash equal in value to the excess of (i) the higher of -8- (A) the highest price per share paid in connection with the Change in Control or (B) the highest Fair Market Value per share as reported in the Wall Street Journal at any time during the 60 day period preceding the Change in Control over (ii) in the case of a Limited Right granted in tandem with an Option, the Option Price per share specified in the related Option and in the case of all other Limited Rights, the price per share established in the grant of the Limited Right (which shall not be less than the Fair Market Value of a share of Common Stock on the date of grant), such excess to be multiplied by the number of shares in respect of which the Limited Right shall have been exercised; provided, however, that upon the exercise of a Limited Right granted in tandem with an Incentive Stock Option, the amount set forth in clause (i) shall not exceed the Fair Market Value of a share on the date of exercise of the Limited Right. (d) Limited Rights shall be subject to such other terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee. This Section 8 shall be interpreted in accordance and consistent with the principles set forth in Rule 16b-3 of the Exchange Act. SECTION 9. RESTRICTED STOCK. (a) GRANT. The Committee may, in its discretion, grant shares of Restricted Stock to such eligible Participants as it may select. The Committee shall determine the number of shares of Restricted Stock to be granted to each Participant, whether or not the Restricted Stock Award is designed to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder, the duration of the Restriction Period ( if any) during which, and the conditions under which, the Restricted Stock may be forfeited to the Corporation, and the other terms and conditions of such Awards. The Committee may condition the vesting of shares of Restricted Stock on Performance Measures to be attained by the Corporation and/or the Participant over a stated Performance Period. (b) ASSIGNABILITY. Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, except as herein provided, during the Restriction Period. (c) DIVIDENDS. The Committee shall determine whether dividends payable on shares of Restricted Stock shall be paid to the Participant during the Restriction Period or held in a suspense account for payment (with or without interest) to the Participant only in the event of the vesting of the underlying shares of Restricted Stock. -9- (d) TERMINATION OF EMPLOYMENT. Subject to Section 11 of this Plan, all of the provisions governing the satisfaction of Performance Measures and the termination of the Restriction Period relating to a Restricted Stock Award, or any cancellation or forfeiture of shares of Restricted Stock upon termination of employment of the Participant, whether by reason of death, permanent disability, retirement, or otherwise, shall be set forth in the Agreement relating to such Restricted Stock Award, or in guidelines established by the Committee and made applicable to such Restricted Stock Award. SECTION 10. PERFORMANCE SHARE AWARDS (a) GRANT. The Committee may, in its discretion, grant Performance Share Awards to such eligible Participants as it may select. The Committee shall determine the number of Performance Shares to be granted to each Participant, whether or not the Performance Share Award is designed to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder, the Performance Measures and Performance Period applicable to each grant, and any other terms and conditions relating to each grant, not inconsistent with the terms of this Plan, as the Committee shall deem advisable. (b) SETTLEMENT. The Agreement relating to a Performance Share Award (i) shall specify whether such award may be settled in shares of Common Stock (including shares of Restricted Stock) or cash or a combination thereof; and (ii) may specify whether the holder thereof shall be entitled to receive, on a current or deferred basis, dividend equivalents, and if determined by the Committee, interest on any deferred dividend equivalents with respect to the number of shares of Common Stock subject to such Award. Prior to the settlement of a Performance Share Award in shares of Common Stock, including Restricted Stock, the holders of such award shall have no rights as a stockholder of the Corporation with respect to the shares of Common Stock subject to such Award. (c) TERMINATION OF EMPLOYMENT. Subject to Section 11 of this Plan, all of the terms relating the satisfaction of Performance Measures and the termination of the Performance Period relating to a Performance Share Award, or any cancellation or forfeiture of such Performance Share Award upon a termination of employment, whether by reason of death, disability, retirement, or otherwise, shall be set forth in the Agreement relating to such Performance Share Award, or in guidelines established by the Committee and made applicable to such Performance Share Award. SECTION 11. CHANGE OF CONTROL. -10- Notwithstanding anything to the contrary contained herein, and notwithstanding any contrary waiting period or installment period in any agreement relating to an Award or in the Plan, in the event of a Change in Control (as hereinafter defined), (i) each outstanding Option, Stock Appreciation Right and Limited Right granted under the Plan shall become exercisable in full for the aggregate number of shares covered thereby; (ii) any Performance Measure relating to any Restricted Stock or Performance Share Award (including any Restricted Stock already granted or to be granted in satisfaction of a Performance Share Award) shall be deemed to be satisfied at the maximum level; and (iii) any Restriction Period and/or Performance Period relating to any Restricted Stock or Performance Share Award (including any Restricted Stock already granted or to be granted in satisfaction of a Performance Share Award) shall lapse (and any other conditions pertaining to the vesting of any such Award shall be waived) and such shares and Awards shall be deemed fully vested. For purposes of this Plan, a Change in Control shall be deemed to have occurred upon the first to occur of the following events: (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Corporation, a trustee or other fiduciary holding Voting Securities under an employee benefit plan of the Corporation, or any corporation owned, directly or indirectly, by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing more than 40% of the number of the Corporation's then outstanding Voting Securities, excluding any "person" who becomes such a beneficial owner in connection with an Excluded Transaction described in clause (iii) below; (ii) the following individuals cease for any reason to constitute a majority of the directors then serving: individuals who on January 1, 1996, constitute the Board, and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Corporation) whose appointment or election by the Board or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on January 1, 1996 or whose appointment or election or nomination for election was previously so approved; (iii) there is consummated a merger or consolidation of the Corporation (or any direct or indirect wholly-owned Subsidiary of the Corporation) with any other -11- corporation, other than a merger or consolidation which would result in the Voting Securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities of the surviving entity or any parent thereof) more than 60% of the combined voting power of the Voting Securities of the Corporation (or the voting securities of such surviving entity or any parent thereof) outstanding immediately after such merger or consolidation (an Excluded Transaction"); or (iv) the stockholders of the Corporation approve a plan of complete liquidation of the Corporation or there is consummated an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets. SECTION 12. GENERAL PROVISIONS. (a) WITHHOLDING. The Employer shall have the right to deduct from all amounts paid to a Participant in cash (whether under this Plan or otherwise) any taxes required by law to be withheld in respect of Awards under this Plan. In the case of payments of Awards in the form of Common Stock, at the Committee's discretion the Participant may be required to pay to the Employer the amount of any taxes required to be withheld with respect to such Common Stock, or, in lieu thereof, to the extent permitted by applicable federal and state securities laws, the Employer shall have the right to retain (or the Participant may be offered the opportunity to elect to tender) the number of shares of Common Stock whose Fair Market Value equals the amount required to be withheld. The Optionee shall be entitled to elect to pay all or a portion of the exercise price for options granted under this Plan and any withholding taxes in connection with such exercise by having the shares of Common Stock to be issued by the Corporation pursuant to such exercise sold by a broker-dealer under circumstances meeting the requirements of 12 C.F.R. Section 220. (b) NONTRANSFERABILITY. Unless so provided in the Agreement with respect to such Award, no Award shall be assignable or transferable, and no right or interest of any Participant shall be subject to any lien, obligation or liability of the Participant, except by will or the laws of descent and distribution. (c) NO RIGHT TO EMPLOYMENT. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Employer. Further, the Employer expressly reserves the right at any time to dismiss a Participant free from any -12- liability, or any claim under the Plan, except as provided herein or in any agreement entered into with respect to an Award. (d) NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the applicable Award, no Participant or transferee of an Option shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed under the Plan until he or she has become the holder thereof. Notwithstanding the foregoing, in connection with each grant of Restricted Stock hereunder, the applicable Award shall specify if and to what extent the Participant shall not be entitled to the rights of a stockholder in respect of such Restricted Stock. (e) CONSTRUCTION OF THE PLAN. The validity, construction, interpretation, administration and effect of the Plan and of its rules and regulations, and rights relating to the Plan, shall be determined solely in accordance with the laws of the State of Delaware. (f) EFFECTIVE DATE. Subject to the approval of the stockholders of the Corporation, the Plan shall be effective on March 8, 1996 (the "Effective Date"). No Options or Awards may be granted under the Plan after March 7, 2006. (g) AMENDMENT OF PLAN. The Board may amend, suspend or terminate the Plan or any portion thereof at any time. The Chief Executive Officer shall be authorized to make minor or administrative modifications to the Plan as well as modifications to the Plan which may be dictated by requirements of federal or state statutes applicable to the Corporation or authorized or made desirable by such statutes. No modification or termination of the Plan shall, without the optionee's consent, alter or impair any of his or her rights or obligations under any Award theretofore granted to him or her under the Plan. (h) AMENDMENT OF AWARD. The Committee may amend, modify or terminate any outstanding Award with the Participant's consent at any time prior to payment or exercise in any manner not inconsistent with the terms of the Plan, including without limitation, (i) to change the date or dates as of which (A) an Option, Stock Appreciation Right or Limited Right becomes exercisable, or (B) shares of Restricted Stock or Performance Share Awards become nonforfeitable; or (ii) to cancel and reissue an Award under such different terms and conditions as it determines appropriate. (i) HARDSHIP DISTRIBUTIONS. In no event shall any Option granted under this Plan be exercisable through payment of the Option Price in cash during the period of one year following a hardship distribution under the UNUM Employees Retirement Savings Plan and Trust, as defined therein. -13- (j) ADJUSTMENTS AND ASSUMPTION. In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, distribution of assets, or any other change in the corporate structure or shares of the Corporation, the Committee shall make such adjustments as it deems appropriate in the number and kind of shares authorized by the Plan, in the number and kind of shares or Performance Shares covered by the Awards granted, in the maximum number of Options, Restricted Stock and Performance Shares which may be granted to any individual Participant in a single calendar year, and in the purchase price of outstanding Options. In the event of any merger, consolidation or other reorganization in which the Corporation is not the surviving or continuing corporation, unless otherwise provided for in the documents governing such merger, consolidation or other reorganization, all Awards granted hereunder and outstanding on the date of such event shall be assumed by the surviving or continuing corporation with appropriate adjustment as to the number and kind of shares and purchase price of the shares. EX-10.9 7 EXHIBIT 10.9 EXHIBIT 10.9 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, made and entered into as of the 30th day of July, 1992, by and among UNUM CORPORATION, a corporation incorporated and existing under the laws of the State of Delaware ("UNUM"), DUNCANSON & HOLT, INC., a corporation incorporated and existing under the laws of the State of New York ("Employer"), and Thomas G. Brown, an individual residing in the State of New York ("Employee"); WITNESSETH: WHEREAS, Employee has heretofore been a stockholder, director, officer and employee of Employer; and WHEREAS, pursuant to a Stock Purchase Agreement dated May 8, 1992 to which UNUM and Employee, among others, are parties (the "Purchase Agreement"), UNUM has purchased all of the issued and outstanding shares of all classes of capital stock of Employer; and WHEREAS, pursuant to the Purchase Agreement and as a condition to the Closing thereunder, Employee is to be employed by Employer upon the terms and conditions hereinafter set forth and, by virtue of such employment, Employee will render services and make other contributions of a valuable and unique nature to Employer; and WHEREAS, Employee's prior position of responsibility with Employer has given him, and his position with Employer hereafter will give him, access to and familiarity with the confidential information, trade secrets and proprietary business methods of Employer and UNUM including but not limited to one or more of the following: operating techniques, marketing programs, administrative organization, specific computer software technology, customer relationships and relationships with Pool Participants of Employer, the Pools and UNUM (as those terms are hereinafter defined); and WHEREAS, Employer and UNUM would be irreparably injured, and the goodwill of Employer and UNUM would be irreparably damaged, if Employee were to disclose (otherwise than as permitted by this Employment Agreement) any of the trade secrets, confidential information and proprietary business methods of Employer and UNUM which Employee has acquired and will acquire in his position of responsibility with Employer, or if Employee were to solicit Pool Participants or customers of Employer or UNUM Pool Participants in competition with the business of Employer or UNUM or if Employee were otherwise to impair the goodwill of Employer or UNUM; and WHEREAS, Employer desires to employ Employee and Employee desires to accept employment with Employer under the terms and conditions hereinafter set forth; 1 NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the mutual receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. DUTIES OF EMPLOYEE. Employer hereby employs Employee as the Chairman, President and Chief Executive Officer of Employer. Employee will perform the duties of such offices and such other duties for Employer as directed from time to time by the Board of Directors of Employer (the "Board"), including, without limitation, participation in the evaluation of Employer's services and in the planning and evaluation of future products and services and market opportunities. The precise duties of Employee may be extended or curtailed by the Board; provided, that: (a) such duties as changed shall be commensurate with the position recited above in which Employee serves under this Agreement and for senior vice presidents of UNUM Life Insurance Company of America and (b) Employee shall have no obligation or duty to relocate his place of employment outside the greater New York metropolitan area. UNUM agrees to vote to elect Employee to serve on the Board during the term of this Agreement. 2. PERFORMANCE OF DUTIES. Employee hereby accepts such employment and agrees with Employer that: (a) he will undertake and perform the stated duties in accordance with the supervision and direction of the Board and subject to the performance standards mutually agreed upon by Employee and the Board at the beginning of each year; (b) he will diligently and faithfully devote all of his business time, attention, knowledge, experience and skills and his best efforts to the performance of all such duties and to the business activities of Employer and, if requested, UNUM, and (c) he will not engage in any other occupation, employment or business activity, whether or not for gain, profit or other pecuniary advantage, without the express written consent of the Board; provided, however, that this provision shall not be construed to prevent Employee from investing his assets in any enterprise in such form or manner as does not violate any other provision of this Agreement and will not require the rendering of any substantial services by Employee. Employee agrees that this Employment Agreement supersedes all prior employment agreements, arrangements or understandings with Employer, all of which are hereby terminated, and Employee hereby releases any and all claims, causes of actions, rights or privileges of any kind or nature whatsoever under or arising out of all such agreements, arrangements or understandings. Employee represents and warrants to Employer that he is free to accept employment with Employer as contemplated herein and that he has no prior or other obligations or commitments of any kind to anyone which would in any way conflict, hinder or interfere with his acceptance of, or the full performance of, his obligations hereunder. Employee agrees to serve as a Director of Employer when elected. 3. COMPENSATION. (a) BASE SALARY. In consideration of the covenants of Employee hereunder, during the term of this Agreement, Employee shall be paid Three Hundred Thousand Dollars ($300,000.00) per year, payable in equal installments over 2 twenty-six (26) regular pay periods ("Base Salary"). After March 31, 1994, Employee's Base Salary may be increased (but not decreased) by the Board based upon Employee's annual salary review in accordance with UNUM's general policies. (b) EMPLOYEE BENEFITS. As additional compensation during the term of this Agreement, Employee will receive the employee benefits which Employer provides for its officers generally. In addition, Employee shall have the use of a company car and driver reasonably satisfactory to Employee, and the choice of travel and accommodation arrangements for business travel. (c) BONUS COMPENSATION. In addition to the foregoing, Employee shall be entitled to participate in the following in accordance with the respective terms thereof: (i) Employer's Underwriting Management Incentive Plan, (ii) Employer's Pool/Retrocession Participation Incentive Plan, and (iii) a specially designed annual incentive plan (AIP) having the principal features outlined on Schedule 1 attached hereto. Employee shall also receive for the term hereof 2% of annual profit commissions earned by Employer in each fiscal year (based on the audited annual financial statements for such year used for purposes of awards made under the Underwriting Management Incentive Plan), and shall be eligible for UNUM's senior management long-term incentive plans, including the stock option and restricted stock plans at the next grant date. (d) COMPENSATION FOR EMPLOYEE COVENANTS. As additional consideration for Employee's covenants contained in Section 5 below, and in addition to the compensation payable under Sections 3 (a), (b) and (c) above, Employee shall be paid Two Hundred Thousand Dollars ($200,000.00) at the end of each calendar quarter over the term of this Agreement. (e) INCOME TAX WITHHOLDING AND REPORTING. All compensation payable hereunder shall be subject to withholding for appropriate items, including Federal, State and local income taxes, FICA, FUTA, voluntary contribution and other payroll deductions. All salary, bonuses and other compensation payable hereunder and deductible by Employer and all non- competition payments made to Employee by Employer shall be reported as ordinary income for Federal income tax purposes. (f) JOINT AND SEVERAL LIABILITY. UNUM and Employer shall be jointly and severally liable for amounts to be paid Employee under this Agreement. 4. TERM OF AGREEMENT; TERMINATION. This Agreement shall continue in full force and effect until the fifth anniversary of the date hereof unless terminated earlier as follows: (a) BREACH BY EMPLOYER; TERMINATION WITHOUT CAUSE. Employee may, upon sixty (60) days prior written notice to Employer, terminate this Agreement in the event Employer materially breaches or defaults under any of the terms or conditions of this Agreement (and such breach or default, if reasonable conducive to being cured, is not 3 cured within thirty (30) days after receipt of notice of breach from Employee). Employer may at any time terminate Employee without cause. (b) EMPLOYEE'S REMEDIES. Upon termination of this Agreement by Employee or Employer pursuant to Subsection 4(a): (i) Employee's obligations under Section 1 and 2 shall cease; (ii) Employer's obligation to provide to Employee the compensation set forth in Section 3(a) shall continue through the fifth anniversary of the date hereof as if Employee continued as an employee hereunder and no such termination occurred; (iii) Employer's obligation to provide to Employee the compensation set forth in Section 3(c) shall cease; (iv) Employer shall pay Employee $750,000 at the end of each year for the remaining term of this Agreement, except that, in the year in which any such termination occurs, such payment shall be reduced by any bonus compensation already paid under Section 3(c) for that year; (v) Employee shall continue to receive the employee benefits referred to in Section 3(b) to the extent permitted under the terms and conditions of the applicable plans; and (iv) Employer shall continue to pay Employee the payments set forth in Section 3(d), and Employee shall continue to be bound by the covenants set forth in Section 5(c), through the fifth anniversary of the date hereof plus two years. (c) BREACH BY EMPLOYEE; VOLUNTARY TERMINATION BY EMPLOYEE. Employer or UNUM may, upon sixty (60) days prior written notice to Employee, terminate this Agreement in whole or in part in the event Employee: (i) knowingly and materially breaches or defaults under any of the material representations, warranties, terms and conditions of the Purchase Agreement or any Ancillary Agreement (as defined in the Purchase Agreement) to which Employee is a party (and such breach or default, if reasonably conducive to being cured, is not cured within thirty (30) days after receipt of notice of breach from Employer); (ii) knowingly and materially breaches or defaults under any of the representations, warranties, terms or conditions of this Agreement (and such breach or default, if reasonably conductive to being cured, is not cured within thirty (30) days after receipt of notice of breach from Employer) including, without limitation, the material failure of Employee to perform the duties and obligations under Section 1 of this Agreement in accordance with the performance standards described in Section 2 hereof (determined after giving due consideration to historical performance of Employee); (iii) violates the reasonable directions of the Board (and such violation, if reasonably conducive to being cured, is not cured within thirty (30) days after receipt of notice of the violation from Employer); (iv) is convicted of a felony under Federal, State or local laws; or (v) conducts himself in a manner which materially harms or causes material injury to the reputation or goodwill of Employer or UNUM or both. Employee may voluntarily terminate his employment under this Agreement at any time. (d) EMPLOYER'S REMEDIES. Upon termination of this Agreement by Employer for Employee's breach pursuant to clauses (i) through (v) of Subsection 4(c), Employer's obligations to provide to Employee the compensation and other benefits set forth in Section 3(a), (b), (c) and (d) shall cease immediately upon such termination; provided, that: (i) Employer may continue to make the payments set forth in Section 3(d) 4 above at Employer's option for any period of time, and, in such event, Employee shall remain obligated to perform the covenants under Section 5(c) for the length of such period plus two years; and (ii) in the event Employer elects not to continue such payments, Employee shall remain bound to perform the covenants under Section 5(c) for a period of two years following termination. In the event Employee voluntarily terminates his employment, the same conditions as stated above shall apply; except that, in the event Employee voluntarily terminates his employment prior to the second anniversary of this Agreement, Employer's obligation to make payments under Section 3(d) shall immediately cease and Employer may stop making such payments (in which event Employee shall continue to remain obligated under Section 5(c) for two years) or Employer may continue to make payments set forth in Section 3(d) above at Employer's option for any period of time and, in such event Employee shall remain obligated under Section 5(c) for the length of such period plus two years; and, in the event Employee voluntarily terminates his employment on a date after the second anniversary of this Agreement, Employee shall continue to receive payments under Section 3(d) for the balance of the term of this Agreement, and shall continue to be bound by his obligations under Section 5(c) through the fifth anniversary of this Agreement plus two years. (e) DEATH OF EMPLOYEE. This Agreement shall terminate immediately upon the death of Employee. If this Agreement is terminated because Employee dies, Employee's estate will continue to receive the compensation set forth in Section 3(a) of this Agreement until the final day of the month in which his death occurs, and Section 3(c) and 3(b) of this Agreement, to the extent provided under the terms and conditions of the applicable plans. (f) SURVIVAL OF OBLIGATIONS. It is expressly understood and agreed that termination of this Agreement in whole or in part shall not deprive the parties hereto of any rights nor release them of any obligations which under the terms and provisions of this Agreement are to survive such termination, including, by way of example and not limitation, the rights and obligations of Employee set forth in Section 5 of this Agreement. 5. COVENANTS OF EMPLOYEE. In consideration of the covenants of Employer set forth herein, particularly, the compensation terms as set forth in Section 3, Employee hereby covenants, represents and warrants that: (a) ACKNOWLEDGEMENT. He has read carefully all of the terms and provisions of this Section 5, given careful consideration to the restrictions imposed upon him hereby and agrees that the same are reasonable with respect to the subject matter thereof and are necessary for the reasonable and proper protection of the confidential information, legitimate business interests and goodwill of Employer and UNUM. He acknowledges that Employer and UNUM have agreed to enter into this Agreement, in part, in reliance on the representations, agreements, and covenants of Employee to abide by and be bound by such terms and provisions of Section 5 of this Agreement. All references to UNUM or Employer, as the case may be, in this Agreement shall mean and 5 include each direct and indirect subsidiary thereof (other than Employer and its direct or indirect subsidiaries in the case of a reference to UNUM). (b) DISCLOSURE OF CONFIDENTIAL INFORMATION. (i) Employee acknowledges that the nature of the business of Employer and UNUM is such that information, data, "know-how," plans, studies, procedures and processes of the kinds described in this Section 5(b) ("Confidential Information") are sufficiently secret to derive economic value, actual or potential, from not being generally known to other persons who can obtain economic value from disclosure or use thereof, and are therefore of a confidential and proprietary nature, and that each of the categories set forth in Section 5(b) (ii) and 5(b) (iii), separately as well as collectively, contain in whole or in part information considered by UNUM and Employer to be trade secrets. Accordingly, Employee agrees that, subject to the exceptions set forth below, he shall not for the period specified, directly or indirectly, reveal, divulge, publish or otherwise make known to any other person, firm, association, corporation, partnership or other legal entity (a "Third Party") and shall not use or permit any Third Party within his control, authority or under his supervision to use any Confidential Information, whether of a technical or commercial nature: (A) unless specifically authorized to do so in writing by the Board with respect to Employer or by duly authorized action of an executive officer of UNUM with respect to UNUM, (B) unless the specific item of Confidential Information becomes generally available to the public without violation of this Agreement or any other confidentiality agreement among Employee, Employer or UNUM or any other confidentiality agreement to which Employee is a party, (C) unless such disclosure is compelled by law, in which event Employee agrees to give UNUM immediate written notice of any disclosure to be made pursuant to this Subsection (C), and Employee shall, at Employer's expense, cooperate fully with Employer to obtain protective orders, confidential treatment or other such protective action as may be available to preserve the confidentiality of the information required to be disclosed, or (D) unless and to the extent that disclosure of any such Confidential Information is (I) necessary and appropriate in connection with the submission of bids by Employer in the ordinary course of business or (II) required pursuant to Employer's marketing efforts directed at specific clients or prospective clients, offers to allow inspection of its systems or services to potential clients or licensees of Employer or the provisions of services to existing clients in the ordinary course of business. (ii) Employee agrees that he shall be obligated under Section 5(b) (i) for the term of this Agreement with Company plus three (3) years with respect to any of the following types of information: pricing, underwriting, actuarial analyses, claims criteria, operating procedures, techniques, systems and methods employed by Employer or any Pool, general information relating to past, present and prospective participants in the reinsurance pools and reinsurers of such pools of the Employer and its subsidiaries ("Pool Participants"), ceding insurance company clients of Employer and its subsidiaries or, customers or treaty holders of Employer or UNUM, general information concerning employees of Employer and UNUM, other commercial "know-how" relating to the 6 business of Employer and UNUM, record keeping techniques, current expansion plans, general overviews of contemplated products or services and generally, without limiting the foregoing, any information not available to the public generally and pertaining to the business or financial operations of Employer and UNUM, as now or hereafter conducted. (iii) Employee agrees that the Board, with respect to Employer, or duly authorized executive officer of UNUM, with respect to UNUM, shall have the right, in the reasonable exercise of its or his discretion, to designate information or data as Confidential Information. (iv) Employee further agrees not to copy, reproduce, record, make facsimiles, duplicate in any fashion, abstract, summarize, remove, use, keep or otherwise improperly deal in or with any papers, records, reports, books, manuals, electronic media or written or recorded information of any kind, or any other property of any kind owned or used in Employer's or UNUM's business, transferred to Employer or UNUM or hereafter owned or used by Employer or UNUM, except as required in furtherance of the business of Employer or UNUM or as may be expressly permitted in writing by the Board with respect to Employer or by duly authorized action of an executive officer of UNUM with respect to UNUM. Employee shall surrender all such materials to Employer or UNUM immediately upon the request of Employer or UNUM. (c) COVENANT NOT TO COMPETE. Employee agrees that, unless otherwise authorized in writing by the Board with respect to Employer, or by duly authorized action of an executive officer of UNUM with respect to UNUM, he will not, during the term of this Agreement plus two (2) years from the date of the termination thereof (regardless of the reason for such termination): (i) engage, either directly or indirectly, as an officer, director, employee, agent, consultant, shareholder, owner, partner or principal, or in any other capacity, in a business venture (the "Venture") which competes directly or indirectly with UNUM or Employer in the business described below in Subsection 5(e) within the United States, Canada, the United Kingdom, Malaysia, Japan, and any other country in which Employer or UNUM then conducts such business or has made material preparations to conduct such business; (ii) in any manner solicit, induce or attempt to induce, or assist others to solicit, induce or attempt to induce, any Pool Participant, customer, client, purchaser, supplier, employee, agent, representative or other person associated with the Company at such time or, in the case of any Pool Participant or customer, in the prior year, to terminate its, his or her association with UNUM or Employer, or in any other manner, directly or indirectly, interfere with any relationship between UNUM or Employer and any such person; or (iii) hire or attempt to hire, either directly or indirectly, any individual employed by UNUM or Employer during their employment or for a period of 7 six (6) months (or, in the case of members of the Executive Committee of Employer at the date hereof, one year) following said employee's cessation of such employment. (d) Nothing in this Section 5 shall prohibit Employee from being a passive owner in the aggregate of not more than five per cent (5%) of the outstanding stock of any class of a corporation which is publicly traded, provided that Employee does not actively participate in any capacity or in any manner in the business or affairs of such corporation. (e) The business subject to this Section 5 shall be the business of Employer as conducted by Employer during the term of this Agreement and any business of UNUM of a substantially similar nature or related to the business of the Employer and shall include, but not be limited to the following activities. (i) The underwriting, offering, marketing and/or selling of reinsurance products and services; and the management of reinsurance and retrocession pools, including without limitation pools operating in the accident and health, kidnap and ransom, contingency, London Market excess and other accident and health reinsurance and retrocession business. For purpose of this subsection, "accident and health reinsurance" includes but is not limited to the following types of reinsurance: special risk, disability, medical and long term care; (ii) any activities for which Employer provides or has provided services to UNUM; and (iii) any activities with respect to which Employee possesses Confidential Information obtained from UNUM. This Section 5 shall apply with respect to the business as conducted by Employer with any Pool Participant, any customer of UNUM, Employer, or any Pool or any other entity or persons with which Employee has done business on behalf of Employer or UNUM. (f) INVENTIONS, DISCOVERIES, IDEAS. Employee agrees to promptly disclose in writing to Employer (and to no one else) all improvements, discoveries, ideas, developments, designs, techniques, methods and inventions (hereinafter referred to as "Inventions") made or conceived alone or in conjunction with others while in the employment of Employer, if resulting from or related to such employment (whether or not copyrightable or patentable, whether or not made or conceived at the request of Employer during or out of usual hours of work or in or about the premises of Employer or elsewhere, and whether made or conceived prior or subsequent to the execution of this Agreement). Any and all such Inventions shall be the sole and exclusive property of Employer and are hereby assigned to Employer, its successors and assigns, including any and all copyright or patent rights 8 inherent therein. At the request of Employer and at Employer's cost, Employee will assist Employer, or any person or persons from time to time designated by Employer, in preparing and prosecuting applications for letters patent of the United States and such foreign countries as Employer may select or for copyright protection in Employer's name or to take such other action as is deemed necessary to vest, perfect, or maintain in Employer all right, title and interest in and to such Inventions, or to defend the same, in the United States or in such other country or countries as may be designated by Employer. In connection therewith, Employee agrees to execute such applications, statements or other documents, furnish such information and data and take all such other action (including, but not limited to, the giving of testimony) as Employer may from time to time reasonably request at Employer's sole expense. (g) REMEDIES FOR BREACH. (i) Employee agrees and acknowledges that money damages may not be an adequate remedy for his breach of any of the provisions of Subsection (b), (c), or (f) of this Section 5; therefore, in the event of the breach by Employee of any of the provisions of Subsection (b), (c) or (f) of this Section, Employer or UNUM, or either of them, in addition and supplementary to other rights and remedies existing in their favor, may apply to any court of competent jurisdiction at law or equity, for specific performance or injunctive relief or both or other equitable relief in order to enforce or prevent any violations of the provisions hereof. (ii) If, at the time of enforcement of this Agreement, a court shall hold that the duration, scope or area restrictions stated herein are unreasonable under circumstances then existing, the parties agree that the maximum duration, scope or area reasonable under such circumstances shall be substituted for the stated duration, scope or area. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law. 6. NO LIMITATION OR WAIVER OF RIGHTS. Each right, power or privilege of any party hereto specified or referred to in this Agreement is in addition to, and not a limitation of, any other rights, powers and privileges that such party may otherwise have or acquire by operation of law, by contract or otherwise. No course of dealing on the part of, nor any omission or delay by, such party with respect to the exercise of any right, power or privilege shall operate as a waiver of any other right, power or privilege, and such party may exercise each such right, power or privilege either independently or concurrently with the others, as often and in such order as such party desires. 7. OTHER AGREEMENTS. The parties hereto understand and agree that this Agreement is conditioned upon the Closing under the Purchase Agreement, and that if the closing under the Purchase Agreement shall not occur, none of the parties hereunder shall have any obligation to any other party hereto and this Agreement shall have no force or effect. 9 8. MODIFICATION. No term or provision hereof may be changed, modified, terminated or discharged, in whole or in part, except by a writing which is dated and signed by all parties hereto. No waiver of any of the provisions or conditions of this Agreement or of any of the rights, powers or privileges of a party hereto shall be effective or binding unless in writing and signed by the party claimed to have given or consented to such waiver. 9. INVALIDITY OF TERMS. it is mutually understood and agreed that, except for Sections 1 and 2 of this Agreement, all agreements and covenants contained herein are severable and that, in the event or to the extent any of them, with the exception of said Sections 1 and 2, shall be held to be invalid in whole or in part by any competent court, this Agreement shall be interpreted as if such invalid agreements or covenants, or portions thereof, were not contained herein. 10. BINDING EFFECT OF PROVISIONS; ASSIGNMENT. The terms and provisions of this Agreement shall be binding on and inure to the benefit of Employee, his heirs at law, legatees, executors, administrators and other legal representatives, transferees, successors and permitted assigns and shall be binding on and inure to the benefit of Employer and UNUM, their respective subsidiaries and affiliates, and their respective successors and assigns. Employee may not assign, pledge or encumber in any way all or any part of his interest under this Agreement without the prior written consent of Employer. This Agreement shall not be assignable by Employer other than to UNUM or a UNUM affiliate without Employee's prior written consent. If Employee gives such consent, the assignee shall assume all Employer's obligations hereunder, but such assignment shall not relieve UNUM of any of its obligations under Section 3(f). 11. APPLICABLE LAW. This Agreement shall be construed in all respect in accordance with and shall be governed by the laws of the State of New York (without giving effect to the principles of conflict of laws thereof). 12. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 13. CAPTIONS. The captions in this Agreement are for convenience only and shall not be considered a part of, or effect the construction or interpretation of any provision of, this Agreement. 14. SERVICE OF NOTICES. Any notice, instrument or communication required or permitted under this Agreement shall be deemed to have been effectively given and made if in writing and if served either by personal delivery to the party for whom it is intended, or by being deposited, postage prepaid, registered or certified mail, return receipt requested, in the United States mail, addressed to the party for whom it is intended at the address shown on this Agreement, or at such other address as may be hereafter from 10 time to time submitted in writing by any party to the other party or parties in accordance with Section 8 hereof. If to Employee: Thomas G. Brown One Hillview Court Peekskill, New York 10566 With a copy to: Richards Spears Kibbe & Orbe 140 Broadway, 21st Floor New York, New York 10005 Attn: William Q. Orbe, Esquire If to Employer or to UNUM: UNUM Corporation - Legal Division 2211 Congress Street Portland, Maine 04122 Attn: Dale J. Denno, Esquire With a copy to: Bryan Cave 700 Thirteenth Street, N.W. Suite 700 Washington, D.C. 20005 Attn: Thomas F. Dowd, Esquire 15. Notwithstanding any provision of this Agreement to the contrary, Employee is authorized and permitted (and such shall not constitute a violation of any provision of this Agreement) to be a director of the Preferred Life Insurance Company of New York and of Trafalgar Underwriting of London, and to be a director and officer of, and hold an ownership interest in, Rochdale Insurance Company and its parent, and Legend Insurance Company and its parent, and to conduct all business as heretofore conducted by such entities and such business as contemplated by the Ancillary Agreements (including the Participation Agreements); provided, that Employee shall not devote any business time to the business and affairs of those entities. 11 IN WITNESS WHEREOF, Employee has executed this Agreement and Employer and UNUM have caused this Agreement to be executed by their respective duly authorized representative as of the date and year first above written. In the presence of: EMPLOYEE: /s/ Kevin P. Walker /s/ Thomas G. Brown - ----------------------------- ----------------------------------- Thomas G. Brown Duncanson & Holt, Inc. /s/ Thomas G. Brown By: /s/ Kevin P. Walker - ----------------------------- ----------------------------------- Kevin P. Walker Chief Financial Officer, Treasurer and Secretary UNUM CORPORATION /s/ Joan Sarles Lee By: /s/ W. Francis Brennan - ----------------------------- ----------------------------------- W. Francis Brennan Executive Vice President 12 SCHEDULE 1 TO EMPLOYMENT AGREEMENT Employee shall be eligible to participate in UNUM's Annual Incentive Plan (AIP) program according to the terms thereof, subject to the following specific terms and modifications: 1. Awards to Employee under the AIP will depend on the achievement by UNUM Corporation of specified, targeted financial results as measured by Net Earnings Per Share, and on the criteria set forth in Paragraph 4 below. The term "Net Earnings Per Share" is defined, for any fiscal year of UNUM, as the income of UNUM Corporation for such fiscal year (as shown on UNUM's audited financial statements at the end of such fiscal year), after taking into account realized capital gains and losses, divided by the average number of issued and outstanding shares of UNUM Corporation as of the end of such fiscal year. 2. The financial targets, for purposes of determining awards to Employee under AIP, will be set annually by the UNUM Board, and will include: (a) a "Minimum Threshold" for Net Earnings Per Share, below which no award will be made to Employee under the AIP; (b) a "Target threshold" for Net Earnings Per Share, the achievement of which will permit the Board to award Employee 20% of Employee's actual base salary earnings for the plan year under the AIP; (c) a "Maximum Threshold" for Net Earnings Per Share, the achievement of which will permit the Board to award Employee up to 40% of Employee's actual base salary earnings for the plan year under the AIP. For 1992, these financial targets are as follows: Threshold Net Earnings Per Share --------- ---------------------- Minimum $3.00 Target $3.32 Maximum $3.70 13 3. The amount awarded in any year may range from 0 to 40% of Employee's actual base salary earnings, depending on the above criteria and those set forth in Paragraph 4 below. Employee's maximum award under the AIP in any year shall be 40% of actual base salary earnings. 4. The amount of any award to Employee under the AIP shall be determined by, in addition to the achievement of the financial targets set forth above, a qualitative assessment of the performance of both UNUM and Employee over the relevant fiscal year. For 1992, this assessment will include consideration of Employee's support of vision and values, affirmative action efforts, corporate marketing strategy, teamwork and collaboration. 5. All awards under the AIP are subject to UNUM Board approval. 6. Employee must be actively working for Employer at the time any award is made under the AIP. 14 EX-10.10 8 EXHIBIT 10.10 EXHIBIT 10.10 EMPLOYMENT LETTER TO ROBERT W. CRISPIN EXECUTIVE VICE PRESIDENT, UNUM CORPORATION TOTAL COMPENSATION PLAN A. BASE ANNUAL SALARY COMPENSATION RATE: $500,000 To be effective first day of active employment in 1995 through annual review cycle of March 1996. Any recommendation for increase would be based on demonstrated performance in position and be part of our regular salary review process. B. ANNUAL INCENTIVE: 1. OFFICER ANNUAL INCENTIVE COMPENSATION PLAN: 1995 Participation...(Payout March 1996). Currently, the targeted award is 50% of base salary. The plan is designed to provide a range of opportunity based on performance generally from 50% to 200% of target (25% to 100% of base salary). The plan payout would be based upon the attainment of Corporate Goals. AS PART OF YOUR HIRING AGREEMENT WE WILL GUARANTEE A PAYMENT OF $250,000, payable in February of 1996. If Company performance would warrant a higher payment you will receive the payment called for under the terms of the plan. Starting in 1996 you will participate in the Annual Incentive Plan that may apply to executives at your level. 2. ANNUAL RESTRICTED STOCK GRANT: 1990 LONG TERM STOCK INCENTIVE PLAN During each annual cycle (typically March of each year) you will participate in this program. For the March 1995 cycle only, AS PART OF YOUR HIRING AGREEMENT, YOU WILL BE AWARDED A RESTRICTED STOCK GRANT VALUED AT $250,000 which will result in a minimum grant of 7,000 shares of restricted stock. This grant will be vested on a time lapse (rather than performance) basis with restrictions lapsing in March of 1998. Starting in 1996 you will participate in the restricted stock program (or any successor plan) that may apply to executives at your level. Currently the restricted stock program is a (3) year performance plan, with restrictions lapsing contingent upon attainment of established ROE targets for the three year period. For example: the grant which will occur in 1995 for other executives will vest in 1998, contingent upon the attainment of an average annual ROE target for the three year period of 1995-1997. The target is approved by the Board of Directors immediately prior to the grant. You should also be aware that the shares are issued in your name and you will receive all dividends during the vesting period. C. LONG TERM INCENTIVE: UNUM CORPORATION EXECUTIVE STOCK OPTION PLAN During each annual cycle,(March of each year) you will be awarded stock options (actual number is contingent upon stock price at the time and a Black Scholes evaluation). YOUR FIRST GRANT UNDER THIS PLAN WILL AT LEAST 15,000 SHARES These options currently have a life of ten years, and vest after one year, subject to the terms of the plan. In future years you will participate in this plan as other executives at your level. D. SEVERANCE: Absent a change of control of UNUM Corporation, if you terminate from UNUM for any reason other than resignation or cause during your first five years of employment, you will receive a severance payment equivalent to two years base salary, and UNUM's standard executive out placement support. After five years, if you terminate for any reason other than resignation or cause, you will receive the standard severance package in effect at the time. Restricted stock in your name and stock options, as well as other employee benefits, will be governed by the terms of the applicable plan or program. E. CHANGE IN CONTROL: In the event of a change of control of UNUM Corporation, if within two years thereafter your employment is terminated without cause or if you leave for "good reason", you would receive a severance payment equal to three years salary plus incentive, plus a lump sum payment equal to the present value of three years extra credit under your retirement plan. In addition you would continue to be provided for three years with life, disability, and accident & health benefits, except to the extent that equivalent benefits are provided by a subsequent employer. In addition, all unvested stock options and restricted stock in your name will immediately vest. F. PENSION: For the first ten years of employment with UNUM, you will receive two years credit for each year of employment. A portion of this benefit will be covered under a non-qualified plan. Please be aware, however, that in order to have any vested benefit, you must be employed at UNUM for five years. G. FINANCIAL PLANNING: You will be provided the services of a Financial Counselor (currently the Colony Group) or reimbursement to procure the services of a Counselor of your choosing ($5,300 for 1995, and $3,500/year thereafter, plus $2,500/year reimbursement for related items (will preparation, tax returns, etc.). SPECIAL HIRING CONSIDERATIONS A. HIRING BONUS: $660,000 This amount is payable as follows: - $220,000 to be paid on first day of active employment; - $220,000 to be paid on anniversary date of active employment during 1996 and 1997. B. STOCK OPTIONS: On your first day of active employment, you will receive a grant of 40,000 stock options. These options will vest over a (4) year period as follows: - 25% on your first anniversary date; - 25% at each of your next three anniversaries, if you are employed by UNUM on these dates. C. TIME LAPSE RESTRICTED STOCK GRANT: On the first day of employment you will be granted a grant of 8,000 shares of time lapse restricted stock. These shares carry a four year cliff vesting provision making them fully vested on the fourth anniversary from the date of grant. Dividends are paid currently. D. FORFEITURE PROVISIONS: If you are separated by the Company for any reason other than resignation, cause (defined as willful refusal to perform duties, unlawful acts to enrich yourself at the Company's expense, material violation of your duties to the Company, or gross misconduct), or performance (defined as a substantial and documented failure to perform or to make a good faith effort to correct any performance issues), during the first five years of employment, any unvested portion of this package will vest or be paid. E. RELOCATION: UNUM will purchase your Connecticut home at market appraised value and will provide you with up to $200,000 protection on loss on sale of your home. Please be aware that purchase by UNUM must occur within the first twelve months of employment. In addition to our regular relocation policy, as requested, UNUM will transport your Corvette and will pay for extra insurance needed to cover the value of your antiques and other valuables. Louise Delafield, manager of our relocation package will work with you to ensure proper coverage. F. OTHER UNUM will provide appropriate temporary housing until your new residence is closed in the Portland area (up to nine months). UNUM will provide for weekly trips home utilizing commercial carrier or company plane (based upon availability). STANDARD UNUM BENEFIT PROGRAMS You have already received information on UNUM's benefits package, however if you have any further questions please feel free to contact Eileen or me. I have enclosed UNUM's Conflict of Interest Policy. Your acceptance of employment with UNUM Corporation will constitute your agreement to abide by the terms of this policy. Also included are copies of UNUM's Officer agreement and a personal statement regarding Conflict of Interest. Please sign and return these along with a signed copy of this agreement. Please sign below to indicate your acceptance of these terms. /s/ James F. Orr III December 8, 1994 - --------------------------------------------------------------------- James F. Orr, III Date /s/ Robert W. Crispin December 19, 1994 - --------------------------------------------------------------------- Robert Crispin Date EX-10.12 9 EXHIBIT 10.12 - -------------------------------------------------------------------------------- EXHIBIT 10.12 AMENDED AND RESTATED ASSET TRANSFER AND ACQUISITION AGREEMENT By and Between UNUM LIFE INSURANCE COMPANY OF AMERICA and THE LINCOLN NATIONAL LIFE INSURANCE COMPANY Dated as of January 24, 1996 - -------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE ---- ARTICLE I DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.01. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Accrued Liabilities . . . . . . . . . . . . . . . . . . . . . 4 Administrative Services Agreement . . . . . . . . . . . . . . 4 Affected Employees. . . . . . . . . . . . . . . . . . . . . . 4 Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Ancillary Agreements. . . . . . . . . . . . . . . . . . . . . 4 Annual Rate . . . . . . . . . . . . . . . . . . . . . . . . . 4 Antitrust Division. . . . . . . . . . . . . . . . . . . . . . 4 Asserted Liability. . . . . . . . . . . . . . . . . . . . . . 4 Assignable Licensed Principally Used Software . . . . . . . . 5 Assigned and Assumed Contracts. . . . . . . . . . . . . . . . 5 Assumption Reinsurance Agreements . . . . . . . . . . . . . . 5 Band 1 Employees. . . . . . . . . . . . . . . . . . . . . . . 5 Band 2 Employees. . . . . . . . . . . . . . . . . . . . . . . 5 Baseline Balance Sheet. . . . . . . . . . . . . . . . . . . . 5 Baseline Customer Asset Value . . . . . . . . . . . . . . . . 5 Baseline Purchase Price . . . . . . . . . . . . . . . . . . . 5 Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . 5 Benefits Affected Employee. . . . . . . . . . . . . . . . . . 5 Benefits Information Schedule . . . . . . . . . . . . . . . . 5 Bill of Sale. . . . . . . . . . . . . . . . . . . . . . . . . 5 Books and Records . . . . . . . . . . . . . . . . . . . . . . 5 Business. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Business Day. . . . . . . . . . . . . . . . . . . . . . . . . 6 Cash Equivalents. . . . . . . . . . . . . . . . . . . . . . . 6 Claims Notice . . . . . . . . . . . . . . . . . . . . . . . . 6 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Closing Balance Sheet . . . . . . . . . . . . . . . . . . . . 7 Closing Date. . . . . . . . . . . . . . . . . . . . . . . . . 7 COBRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Code. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Coinsurance and Assumption Agreement. . . . . . . . . . . . . 7 Combined Business . . . . . . . . . . . . . . . . . . . . . . 7 Commission. . . . . . . . . . . . . . . . . . . . . . . . . . 7 Contract Employees. . . . . . . . . . . . . . . . . . . . . . 7 Contractholder. . . . . . . . . . . . . . . . . . . . . . . . 7 Contractholder Affiliate. . . . . . . . . . . . . . . . . . . 7 -i- TABLE OF CONTENTS (CONT'D) PAGE ---- Core Insurance Contracts. . . . . . . . . . . . . . . . . . . 7 Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Custodian Agreement . . . . . . . . . . . . . . . . . . . . . 8 Customer Asset Value. . . . . . . . . . . . . . . . . . . . . 8 Effective Date. . . . . . . . . . . . . . . . . . . . . . . . 9 Employer Claim. . . . . . . . . . . . . . . . . . . . . . . . 9 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Executive Officer . . . . . . . . . . . . . . . . . . . . . . 9 Extra Contractual Obligations . . . . . . . . . . . . . . . . 9 FAS 87. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 FAS 106 . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Final Balance Sheet . . . . . . . . . . . . . . . . . . . . . 10 Final Customer Asset Value. . . . . . . . . . . . . . . . . . 10 Final Purchase Price. . . . . . . . . . . . . . . . . . . . . 10 First UNUM. . . . . . . . . . . . . . . . . . . . . . . . . . 10 401(a) Contract . . . . . . . . . . . . . . . . . . . . . . . 10 403(b) Contract . . . . . . . . . . . . . . . . . . . . . . . 10 403(b) Contractholder . . . . . . . . . . . . . . . . . . . . 10 FTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 GAAP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 General Account Reserves. . . . . . . . . . . . . . . . . . . 11 General Assignment Agreements . . . . . . . . . . . . . . . . 11 HSR Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Indemnified Party . . . . . . . . . . . . . . . . . . . . . . 11 Indemnifying Party. . . . . . . . . . . . . . . . . . . . . . 11 Indemnity Reinsurance Agreements. . . . . . . . . . . . . . . 11 Insurance Contracts . . . . . . . . . . . . . . . . . . . . . 11 Insurance Liabilities . . . . . . . . . . . . . . . . . . . . 12 Interim Purchaser Financial Statements. . . . . . . . . . . . 12 IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . 12 License Agreements. . . . . . . . . . . . . . . . . . . . . . 12 Licensed Generally Used Software. . . . . . . . . . . . . . . 13 Licensed Principally Used Software. . . . . . . . . . . . . . 13 Losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Maine SAP . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Maine Severance Pay Law . . . . . . . . . . . . . . . . . . . 13 Material Adverse Effect . . . . . . . . . . . . . . . . . . . 14 1940 Act. . . . . . . . . . . . . . . . . . . . . . . . . . . 14 NAIC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 -ii- TABLE OF CONTENTS (CONT'D) PAGE ---- 90-Day Treasury Rate. . . . . . . . . . . . . . . . . . . . . 14 Newco . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Newco Assumption Reinsurance Agreement. . . . . . . . . . . . 14 Newco Indemnity Reinsurance Agreement . . . . . . . . . . . . 14 Newco Separate Accounts . . . . . . . . . . . . . . . . . . . 15 Newco Trust Agreement . . . . . . . . . . . . . . . . . . . . 15 Non-Compete Period. . . . . . . . . . . . . . . . . . . . . . 15 Owned Generally Used Software . . . . . . . . . . . . . . . . 15 Owned Principally Used Software . . . . . . . . . . . . . . . 15 Participant . . . . . . . . . . . . . . . . . . . . . . . . . 15 Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . 15 Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Person. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Preliminary Purchase Price. . . . . . . . . . . . . . . . . . 16 Pre-Paid Items and Receivables. . . . . . . . . . . . . . . . 16 premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . 16 previously disclosed. . . . . . . . . . . . . . . . . . . . . 16 Proposed Balance Sheet. . . . . . . . . . . . . . . . . . . . 16 Purchase Price Percentage . . . . . . . . . . . . . . . . . . 16 Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Purchaser Assumption Reinsurance Agreement. . . . . . . . . . 16 Purchaser Financial Statements. . . . . . . . . . . . . . . . 16 Purchaser Indemnity Reinsurance Agreement . . . . . . . . . . 17 Purchaser Separate Accounts . . . . . . . . . . . . . . . . . 17 Purchaser Trust Agreement . . . . . . . . . . . . . . . . . . 17 Purchaser's Defined Benefit Plan. . . . . . . . . . . . . . . 17 Purchaser's 401(k) Plan . . . . . . . . . . . . . . . . . . . 17 Purchaser's Plan. . . . . . . . . . . . . . . . . . . . . . . 17 Purchaser's Retiree Welfare Plans . . . . . . . . . . . . . . 17 Purchaser's SERPs . . . . . . . . . . . . . . . . . . . . . . 17 related to" or "arising in connection with. . . . . . . . . . 17 Retention Bonus . . . . . . . . . . . . . . . . . . . . . . . 17 Securities Act. . . . . . . . . . . . . . . . . . . . . . . . 17 Seller. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Seller Custodian Account. . . . . . . . . . . . . . . . . . . 18 Seller Custodian Agreement. . . . . . . . . . . . . . . . . . 18 Seller Custodian. . . . . . . . . . . . . . . . . . . . . . . 18 Seller Separate Account . . . . . . . . . . . . . . . . . . . 18 Seller's Defined Benefit Plan . . . . . . . . . . . . . . . . 18 Seller's 401(k) Plan. . . . . . . . . . . . . . . . . . . . . 18 -iii- TABLE OF CONTENTS (CONT'D) PAGE ---- Seller's SERP . . . . . . . . . . . . . . . . . . . . . . . . 18 Seller's Employee Welfare Plan. . . . . . . . . . . . . . . . 18 Separate Account Liabilities. . . . . . . . . . . . . . . . . 18 Settlement Notice . . . . . . . . . . . . . . . . . . . . . . 18 Shared Cost Period. . . . . . . . . . . . . . . . . . . . . . 18 Significant Brokers . . . . . . . . . . . . . . . . . . . . . 19 Subsidiary. . . . . . . . . . . . . . . . . . . . . . . . . . 19 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Third Party Accountant. . . . . . . . . . . . . . . . . . . . 19 Third Party Claimant. . . . . . . . . . . . . . . . . . . . . 19 Transferred Assets. . . . . . . . . . . . . . . . . . . . . . 19 Transferred Contract. . . . . . . . . . . . . . . . . . . . . 20 Transition Services Agreement . . . . . . . . . . . . . . . . 20 Trust Accounts. . . . . . . . . . . . . . . . . . . . . . . . 20 Trust Agreements. . . . . . . . . . . . . . . . . . . . . . . 20 Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 WARN Act. . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Welfare Plans . . . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE II TRANSFER AND ACQUISITION OF ASSETS. . . . . . . . . . . . . . 20 2.01. Cash Consideration . . . . . . . . . . . . . . . . . . . . . 20 2.02. Acquisition of Transferred Assets and Assumption of Assumed Liabilities . . . . . . . . . . . . . . 20 2.03. Place and Date of Closing; Balance Sheets. . . . . . . . . . 22 2.04. Post-Closing Adjustments . . . . . . . . . . . . . . . . . . 26 2.05. Closing Items. . . . . . . . . . . . . . . . . . . . . . . . 28 ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER. . . . . . . . . . . 30 3.01. Organization, Standing and Authority of Seller . . . . . . . 30 3.02. Authorization. . . . . . . . . . . . . . . . . . . . . . . . 30 3.03. Actions and Proceedings. . . . . . . . . . . . . . . . . . . 31 3.04. No Conflict or Violation . . . . . . . . . . . . . . . . . . 31 3.05. Consents and Approvals . . . . . . . . . . . . . . . . . . . 32 3.06. Computer Software. . . . . . . . . . . . . . . . . . . . . . 32 3.07. Brokerage and Financial Advisers . . . . . . . . . . . . . . 35 3.08. Compliance with Laws . . . . . . . . . . . . . . . . . . . . 35 3.09. Permits, Licenses and Franchises . . . . . . . . . . . . . . 35 3.10. Annuity Business . . . . . . . . . . . . . . . . . . . . . . 36 -iv- TABLE OF CONTENTS (CONT'D) PAGE ---- 3.11. Regulatory Filings . . . . . . . . . . . . . . . . . . . . . 41 3.12. Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . 42 3.13. Reinsurance. . . . . . . . . . . . . . . . . . . . . . . . . 43 3.14. Banking Arrangements . . . . . . . . . . . . . . . . . . . . 43 3.15. Absence of Certain Changes or Events . . . . . . . . . . . . 43 3.16. Other Sale Arrangement . . . . . . . . . . . . . . . . . . . 44 3.17. Seller Separate Account. . . . . . . . . . . . . . . . . . . 44 3.18. Assigned and Assumed Contracts . . . . . . . . . . . . . . . 45 3.19. Employees. . . . . . . . . . . . . . . . . . . . . . . . . . 45 3.20. Employee Benefit Plans; ERISA. . . . . . . . . . . . . . . . 46 3.21. Labor Relations and Employment . . . . . . . . . . . . . . . 48 3.22. Transferred Assets . . . . . . . . . . . . . . . . . . . . . 49 3.23. Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . 49 3.24. Statutory Statements . . . . . . . . . . . . . . . . . . . . 50 3.25. Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . 51 3.26. Financial Statement Data . . . . . . . . . . . . . . . . . . 51 3.27. Transition Services Agreement. . . . . . . . . . . . . . . . 52 3.28. Crediting Rate . . . . . . . . . . . . . . . . . . . . . . . 52 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER . . . . . . . . . 52 4.01. Organization and Standing. . . . . . . . . . . . . . . . . . 52 4.02. Authorization. . . . . . . . . . . . . . . . . . . . . . . . 53 4.03. Actions and Proceedings. . . . . . . . . . . . . . . . . . . 53 4.04. No Conflict or Violation . . . . . . . . . . . . . . . . . . 54 4.05. Consents and Approvals . . . . . . . . . . . . . . . . . . . 55 4.06. Brokerage and Financial Advisers . . . . . . . . . . . . . . 55 4.07. Compliance with Laws . . . . . . . . . . . . . . . . . . . . 55 4.08. Permits, Licenses and Franchises . . . . . . . . . . . . . . 56 4.09. GAAP Financial Statements. . . . . . . . . . . . . . . . . . 56 4.10. Statutory Statements . . . . . . . . . . . . . . . . . . . . 57 4.11. Absence of Certain Changes or Events . . . . . . . . . . . . 58 4.12. Relations with Investment Companies. . . . . . . . . . . . . 58 -v- TABLE OF CONTENTS (CONT'D) PAGE ---- ARTICLE V COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . 59 5.01. Conduct of Business. . . . . . . . . . . . . . . . . . . . . 59 5.02. Certain Transactions . . . . . . . . . . . . . . . . . . . . 59 5.03. Investigations . . . . . . . . . . . . . . . . . . . . . . . 60 5.04. Continued Access . . . . . . . . . . . . . . . . . . . . . . 60 5.05. HSR Act Filings. . . . . . . . . . . . . . . . . . . . . . . 61 5.06. Consents and Reasonable Efforts. . . . . . . . . . . . . . . 62 5.07. Representations and Warranties . . . . . . . . . . . . . . . 63 5.08. Further Assurances . . . . . . . . . . . . . . . . . . . . . 64 5.09. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 64 5.10. Assumption Reinsurance Agreements. . . . . . . . . . . . . . 65 5.11. Indemnity Reinsurance Agreements . . . . . . . . . . . . . . 65 5.12. Administrative Services Agreement. . . . . . . . . . . . . . 65 5.13. Transition Services Agreement. . . . . . . . . . . . . . . . 66 5.14. Bill of Sale . . . . . . . . . . . . . . . . . . . . . . . . 66 5.15. Trust Agreements . . . . . . . . . . . . . . . . . . . . . . 66 5.16(a). General Assignment Agreement. . . . . . . . . . . . . . . 66 5.16(b). Custodian Agreement . . . . . . . . . . . . . . . . . . . 66 5.17. Coinsurance and Assumption Agreement . . . . . . . . . . . . 66 5.18. Products . . . . . . . . . . . . . . . . . . . . . . . . . . 67 5.19. Employees; Severance Payments. . . . . . . . . . . . . . . . 68 5.20. Employee Benefits. . . . . . . . . . . . . . . . . . . . . . 76 5.21. Allocation of Final Purchase Price . . . . . . . . . . . . . 97 5.22. Newco. . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 5.23. Broker/Dealer Transition . . . . . . . . . . . . . . . . . . 98 5.24. Other Agreements . . . . . . . . . . . . . . . . . . . . . . 99 5.25. Bank Accounts and Lockboxes. . . . . . . . . . . . . . . . . 99 5.26. Computer Systems . . . . . . . . . . . . . . . . . . . . . . 100 5.27. Computer Software. . . . . . . . . . . . . . . . . . . . . . 100 5.28. Contract Administration. . . . . . . . . . . . . . . . . . . 101 5.29. Credit for Reinsurance . . . . . . . . . . . . . . . . . . . 102 5.30. Custodian Account. . . . . . . . . . . . . . . . . . . . . . 103 ARTICLE VI CONDITIONS PRECEDENT TO THE OBLIGATION OF PURCHASER TO CLOSE . . . . . . . . . . . . . . . . . . . . . . 104 6.01. Representations and Covenants. . . . . . . . . . . . . . . . 104 6.02. Other Agreements . . . . . . . . . . . . . . . . . . . . . . 105 6.03. Governmental and Regulatory Consents and Approvals . . . . . 106 -vi- TABLE OF CONTENTS (CONT'D) PAGE ---- 6.04. Third Party Consents . . . . . . . . . . . . . . . . . . . . 106 6.05. Participation Agreements . . . . . . . . . . . . . . . . . . 106 6.06. Possession of Assets; Instruments of Conveyance. . . . . . . 106 6.07. Opinion of Counsel to Seller . . . . . . . . . . . . . . . . 107 6.08. Injunction . . . . . . . . . . . . . . . . . . . . . . . . . 107 6.09. Customer Asset Value . . . . . . . . . . . . . . . . . . . . 107 6.10. Crediting Rates. . . . . . . . . . . . . . . . . . . . . . . 107 6.11. New York Subsidiary. . . . . . . . . . . . . . . . . . . . . 108 6.12. Employment Contracts . . . . . . . . . . . . . . . . . . . . 108 6.13. First UNUM Closing . . . . . . . . . . . . . . . . . . . . . 108 ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATION OF SELLER TO CLOSE. . . . . . . . . . . . . . . . . . . . . . . . 108 7.01. Representations and Covenants. . . . . . . . . . . . . . . . 108 7.02. Other Agreements . . . . . . . . . . . . . . . . . . . . . . 110 7.03. Governmental and Regulatory Consents and Approvals . . . . . 110 7.04. Third Party Consents . . . . . . . . . . . . . . . . . . . . 111 7.05. Purchase Price . . . . . . . . . . . . . . . . . . . . . . . 111 7.06. Opinion of Counsel to Purchaser. . . . . . . . . . . . . . . 111 7.07. Injunction . . . . . . . . . . . . . . . . . . . . . . . . . 112 7.08. Ratings. . . . . . . . . . . . . . . . . . . . . . . . . . . 112 7.09. New York Subsidiary. . . . . . . . . . . . . . . . . . . . . 112 7.10. Principal Underwriter. . . . . . . . . . . . . . . . . . . . 112 7.11. First UNUM Agreement Closing . . . . . . . . . . . . . . . . 113 ARTICLE VIII FURTHER AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 113 8.01. Seller's Non-Compete . . . . . . . . . . . . . . . . . . . . 113 ARTICLE IX SURVIVAL OF REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . 115 9.01. Survival of Representations and Warranties . . . . . . . . . 115 ARTICLE X INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . 116 10.01. Obligation to Indemnify . . . . . . . . . . . . . . . . . . 116 10.02. Claims Notice . . . . . . . . . . . . . . . . . . . . . . . 119 10.03. Right to Contest Claims of Third Parties. . . . . . . . . . 120 -vii- TABLE OF CONTENTS (CONT'D) PAGE ---- 10.04. Section 10.01(a)(ii) Indemnification. . . . . . . . . . . . 122 10.05. Indemnification Payments. . . . . . . . . . . . . . . . . . 133 ARTICLE XI TERMINATION PRIOR TO CLOSING . . . . . . . . . . . . . . . . . . . 133 11.01. Termination of Agreement. . . . . . . . . . . . . . . . . . 133 11.02. Break-up Fee. . . . . . . . . . . . . . . . . . . . . . . . 135 11.03. Survival. . . . . . . . . . . . . . . . . . . . . . . . . . 136 ARTICLE XII MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . 136 12.01. Publicity . . . . . . . . . . . . . . . . . . . . . . . . . 136 12.02. Confidentiality . . . . . . . . . . . . . . . . . . . . . . 136 12.03. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . 137 12.04. Entire Agreement. . . . . . . . . . . . . . . . . . . . . . 138 12.05. Waivers and Amendments; Non-Contractual Remedies; Preservation of Remedies. . . . . . . . . . . . . 138 12.06. Governing Law . . . . . . . . . . . . . . . . . . . . . . . 139 12.07. Binding Effect; Assignment. . . . . . . . . . . . . . . . . 139 12.08. Interpretation. . . . . . . . . . . . . . . . . . . . . . . 139 12.09. No Third Party Beneficiaries. . . . . . . . . . . . . . . . 140 12.10. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . 140 12.11. Other Agreements, Exhibits and Schedules. . . . . . . . . . 140 12.12. Headings. . . . . . . . . . . . . . . . . . . . . . . . . . 141 12.13. Dollar References . . . . . . . . . . . . . . . . . . . . . 141 12.14. Newco Signature Page. . . . . . . . . . . . . . . . . . . . 141 -viii- EXHIBITS Exhibit A-1 - Form of Purchaser Assumption Reinsurance Agreement Exhibit A-2 - Form of Newco Assumption Reinsurance Agreement Exhibit B-1 - Form of Purchaser Indemnity Reinsurance Agreement Exhibit B-2 - Form of Newco Indemnity Reinsurance Agreement Exhibit C - Form of Administrative Services Agreement Exhibit D - Form of Transition Services Agreement Exhibit E - Form of Bill of Sale Exhibit F-1 - Form of Purchaser Trust Agreement Exhibit F-2 - Form of Newco Trust Agreement Exhibit G - Form of General Assignment Agreement Exhibit H - Form of Coinsurance and Assumption Agreement Exhibit I - Form of Opinion of Seller's Counsel Exhibit J - Form of Opinion of Purchaser's Counsel Exhibit K - Form of Custodian Agreement Exhibit L - Form of Newco Signature Page -ix- SCHEDULES Schedule 1.01(A) - Assigned and Assumed Contracts Schedule 1.01(B) - Baseline Balance Sheet Schedule 1.01(C) - Group Annuity Contracts Included in the Insurance Contracts Schedule 1.01(D) - Purchaser Separate Accounts Schedule 1.01(E) - Seller Separate Account Schedule 1.01(F) - Additional Transferred Assets Schedule 3.03 - Actions and Proceedings against Seller Schedule 3.04 - No Conflict or Violation by Seller Schedule 3.05 - Consents and Approvals of Seller Schedule 3.06(A) - Computer Software Used Principally in Conduct of Business Schedule 3.06(B) - Computer Software Used Generally in Conduct of Business Schedule 3.09 - Permits, Licenses and Franchises of Seller Schedule 3.10(A) - Intentions of Termination or Cancellation of Insurance Contracts and Association Servicing Schedule 3.10(B) - Audits in Connection with Section 403(b) Compliance Schedule 3.10(D) - Insurance Contracts with Respect to ERISA Schedule 3.11 - Regulatory Filings Schedule 3.12(A) - Brokers Schedule 3.12(B) - Significant Brokers Schedule 3.14 - Banking Arrangements Schedule 3.15 - Surrenders and Withdrawals -x- Schedule 3.19(A) - Employees Schedule 3.19(B) - "Pay-to-Stay" Arrangements Schedule 3.20(A) - Employee Benefit Plans Schedule 3.20(C) - Welfare Benefit Plans Schedule 3.21 - Labor Relations and Employment Schedule 3.23(A) - Contracts Schedule 3.23(C) - Indemnification Arrangements Schedule 3.23(D) - Crediting Rates Schedule 3.25 - Insurance Contracts Not Pension Plan Contracts Schedule 3.26 - Financial Statement Data Schedule 4.03 - Actions and Proceedings against Purchaser Schedule 4.04 - No Conflict or Violation by Purchaser Schedule 4.05 - Consents and Approvals of Purchaser Schedule 4.07 - Compliance with Laws by Purchaser Schedule 4.08 - Permits, Licenses and Franchises of Purchaser Schedule 4.11 - Absence of Certain Changes or Events with Respect to Purchaser Schedule 5.19(B) - Contract Employees Schedule 5.20 - Purchaser's Plans Schedule 5.23 - Registered Representatives and Selling Agreement Partners Schedule 6.03 - Governmental and Regulatory Consents and Approvals Schedule 6.05 - Investment Companies Schedule 6.12 - Employment Contracts -xi- AMENDED AND RESTATED ASSET TRANSFER AND ACQUISITION AGREEMENT This AMENDED AND RESTATED ASSET TRANSFER AND ACQUISITION AGREEMENT (this "Agreement"), dated as of January 24, 1996, is entered into by and between UNUM Life Insurance Company of America, a stock life insurance company incorporated in Maine ("Seller"), and The Lincoln National Life Insurance Company, a stock life insurance company incorporated in Indiana ("Purchaser") and amends and restates in its entirety the Asset Transfer and Acquisition Agreement entered into by and between Seller and Purchaser on January 24, 1996. RECITALS: A. THE ACQUISITION. Upon the terms and subject to the conditions of this Agreement, Seller wishes to sell, and Purchaser wishes to acquire, certain of the group annuity business of Seller as described below (the "Business"). Such group annuity contracts issued in states other than New York will be assumed by Purchaser. Such group annuity contracts issued in New York will be assumed by a wholly-owned New York domestic life insurance subsidiary of Purchaser ("Newco") to be acquired or organized by Purchaser prior to the Closing Date (as defined below). Following the execution of this Agreement, Purchaser shall enter into an agreement (the "First UNUM Agreement") substantially similar to this Agreement (including substantially similar schedules and exhibits, where appropriate) with First UNUM Life Insurance Company ("First UNUM") whereby Purchaser will agree to cause Newco to acquire certain group annuity contracts issued by First UNUM in New York. B. THE DOCUMENTS. Upon the terms and subject to the conditions of this Agreement, at the Closing (as defined below), the parties hereto and Newco will execute and deliver the following agreements and instruments dated as of the Closing Date or a date prior thereto: (i) Seller and Purchaser and Seller and Newco will enter into the Purchaser Assumption Reinsurance Agreement and the Newco Assumption Reinsurance Agreement (each as defined below), respectively, providing, among other things, for the assumption by Purchaser and Newco of the Insurance Contracts (as defined below); (ii) Seller and Purchaser and Seller and Newco will enter into the Purchaser Indemnity Reinsurance Agreement and the Newco Indemnity Reinsurance Agreement (each as defined below), respectively, providing, among other things, for the indemnity reinsurance as of the Effective Date (as defined below) by Purchaser and Newco of the general account liabilities of Seller under the Insurance Contracts, pending assumption of such contracts by Purchaser and Newco on a novation basis; (iii) Seller and Purchaser will enter into the Administrative Services Agreement (as defined below), providing for the provision by Purchaser of certain administrative services on behalf of Seller with respect to the Insurance Contracts and the Seller Separate Account (as defined below) following the Closing Date; (iv) Seller and Purchaser will enter into the Transition Services Agreement (as defined below), providing for the provision by Seller of certain administrative services to Purchaser during a transition period following the Closing Date; (v) Seller will execute and deliver to Purchaser and Newco the Bill of Sale (as defined below); (vi) Seller, Purchaser and the Trustee (as defined below) and Seller, Newco and the Trustee, will enter into the Purchaser Trust Agreement and the Newco Trust Agreement (each as defined below), respectively, providing for trust accounts into which cash and Cash Equivalents (as defined below) will be -2- transferred on the Closing Date by or at the direction of Seller; (vii) Seller and Purchaser and Seller and Newco, respectively, will enter into the General Assignment Agreements (as defined below) pursuant to which Seller will assign and Purchaser and Newco will assume the Assigned and Assumed Contracts (as defined below) and the Assignable Licensed Principally Used Software (as defined below); (viii) Seller and Purchaser will enter into the Coinsurance and Assumption Agreement (as defined below), providing, among other things, for Purchaser to coinsure contracts of insurance relating to the Business that Seller will issue for up to 18 months from the Closing Date; (ix) Seller and Purchaser and Seller and Newco, respectively, will enter into the License Agreements (as defined below) and (x) Newco and Custodian (as defined below) will enter into the Custodian Agreement (as defined below) pursuant to which the Custodian will hold certain assets of Newco as security for benefit of the New York policyholders of Seller who are beneficiaries of the Seller Custodian Account. NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, and in reliance upon the representations, warranties, conditions and covenants contained herein, and intending to be legally bound hereby, Seller and Purchaser do hereby agree as follows: -3- ARTICLE I DEFINITIONS Section 1.01. DEFINITIONS. The following terms shall have the respective meanings set forth below throughout this Agreement: "ACCRUED LIABILITIES" shall have the meaning set forth in Section 2.03(c) hereof. "ADMINISTRATIVE SERVICES AGREEMENT" means the Administrative Services Agreement which is substantially in the form of Exhibit C hereto. "AFFECTED EMPLOYEES" means, collectively, Band 2 Employees and Contract Employees. "AFFILIATE" means, with respect to any Person, at the time in question, any other Person controlling, controlled by or under common control with such Person. "ANCILLARY AGREEMENTS" means the Assumption Reinsurance Agreements, the Indemnity Reinsurance Agreements, the Administrative Services Agreement, the Transition Services Agreement, the Bill of Sale, the General Assignment Agreements, the Trust Agreements, the Coinsurance and Assumption Agreement, the License Agreements and the Custodian Agreement. "ANNUAL RATE" means the value of r in the expression (1 + r) to the power of n/365 - 1, where "n" is equal to the number of days for which interest is to be computed and the result of the expression is the interest factor for computing the applicable interest amounts. "ANTITRUST DIVISION" shall have the meaning set forth in Section 5.05 hereof. "ASSERTED LIABILITY" shall have the meaning set forth in Section 10.03(a) hereof. -4- "ASSIGNABLE LICENSED PRINCIPALLY USED SOFTWARE" means the Licensed Principally Used Software as to which (i) no consent to the assignment thereof is required or (ii) consent to the assignment thereof has been obtained on or prior to the Closing Date. "ASSIGNED AND ASSUMED CONTRACTS" means those contracts and other agreements to which Seller is a party and which are listed on Schedule 1.01(A). "ASSUMPTION REINSURANCE AGREEMENTS" means the Purchaser Assumption Reinsurance Agreement and the Newco Assumption Reinsurance Agreement. "BAND 1 EMPLOYEES" shall have the meaning set forth in Section 5.19(a). "BAND 2 EMPLOYEES" shall have the meaning set forth in Section 5.19(c). "BASELINE BALANCE SHEET" means the pro forma balance sheet of the Business as at June 30, 1995 attached as Schedule 1.01(B). "BASELINE CUSTOMER ASSET VALUE" means $3,152,400,000, which is the Customer Asset Value reflected on the Baseline Balance Sheet. "BASELINE PURCHASE PRICE" means $68,797,506. "BENEFIT PLANS" shall have the meaning set forth in Section 3.20(a) hereof. "BENEFITS AFFECTED EMPLOYEE" shall have the meaning set forth in Section 5.20 hereof. "BENEFITS INFORMATION SCHEDULE" shall have the meaning set forth in Section 5.20(d). "BILL OF SALE" means the Bill of Sale which is substantially in the form of Exhibit E hereto. "BOOKS AND RECORDS" means the originals or copies of all customer lists, policy information, Insurance Contract forms and rating plans, disclosure and other documents and -5- filings required under applicable securities laws, claim records, sales records, underwriting records, financial records, tax records and compliance records in the possession or control of Seller and relating exclusively to the operation of the Business, including, without limitation, any database, magnetic or optical media (to the extent not subject to licensing restrictions) and any other form of recorded, computer generated or stored information or process, but excluding any such records that are subject to the attorney-client privilege. "BUSINESS" means the issuance and administration of the group annuity contracts set forth on Schedule 1.01(C) hereto and any similar group annuity contracts issued by Seller from the date hereof to the Closing Date, and the other business activities of Seller related thereto. "BUSINESS DAY" means any day other than a Saturday, Sunday, a day on which banking institutions in any of the States of Maine, Indiana or New York are permitted or obligated by law to be closed or a day on which the New York Stock Exchange is closed for trading. "CASH EQUIVALENTS" means, as of any particular date, money market funds, marketable obligations issued or guaranteed by the United States Government, certificates of deposit, bankers' acceptances and other similar liquid investments, in each case with a maturity date of not more than 90 days from the date on which any such instrument is transferred pursuant to the terms of this Agreement, the market value of which as of such date will be counted as equivalent to cash for purposes of satisfying the aggregate amount of cash and Cash Equivalents required to be transferred hereunder on such date. "CLAIMS NOTICE" shall have the meaning set forth in Section 10.02 hereof. "CLOSING" means the closing of the transactions contemplated by this Agreement. -6- "CLOSING BALANCE SHEET" shall have the meaning set forth in Section 2.03(b) hereof. "CLOSING DATE" means the first day of the month following the month in which the last of the conditions set forth in this Agreement has been satisfied or waived in writing, or such other date as the parties may agree to in writing; PROVIDED, HOWEVER, if such date is not a Business Day, the Closing Date shall be the immediately succeeding Business Day. "COBRA" shall have the meaning set forth in Section 3.20(c) hereof. "CODE" means the Internal Revenue Code of 1986, as amended, all final and temporary Treasury Regulations promulgated thereunder and published rulings thereunder. "COINSURANCE AND ASSUMPTION AGREEMENT" means the Coinsurance and Assumption Agreement which is substantially in the form of Exhibit H hereto. "COMBINED BUSINESS" means the Business (as defined herein) and the Business as defined in the First UNUM Agreement. "COMMISSION" means the Securities and Exchange Commission. "CONTRACT EMPLOYEES" shall have the meaning set forth in Section 5.19(b) hereof. "CONTRACTHOLDER" means the holder of a Transferred Contract (as defined below). "CONTRACTHOLDER AFFILIATE" means an entity that is affiliated with a Contractholder by reason of controlling, being controlled by or being under common control with the Contractholder as contemplated under section 414(b), (c), (m) or (o) of the Code or IRS Notice 89-23. "CORE INSURANCE CONTRACTS" means, collectively, those Insurance Contracts issued by Seller and those Insurance Contracts (as defined in the First UNUM Agreement) issued by First UNUM of the Contract Types that are listed on Exhibits 4 and 5 of the UNUM Tax- -7- Sheltered Annuity Business Executive Summary dated October 1995 as prepared by Morgan Stanley & Co. Incorporated. "CUSTODIAN" means the custodian named in the Custodian Agreement and any successor appointed as such pursuant to the terms of the Custodian Agreement. "CUSTODIAN AGREEMENT" means the Custodian Agreement between Newco and the Custodian, which is substantially in the form of Exhibit K hereto. "CUSTOMER ASSET VALUE" means, at any time, an amount equal to the aggregate reserves with respect to the Insurance Contracts in effect at such time that would be shown on a balance sheet of Seller as at such time prepared in accordance with GAAP applied in the same manner as applied in the preparation of the Baseline Balance Sheet; PROVIDED, HOWEVER, that the portion of Customer Asset Value attributable to assets held by Seller in the Seller Separate Account pursuant to variable options under the Insurance Contracts shall be equal to the result of (a) $241,900,000 plus (b) the amount of all participant contributions (including transfers from fixed options) added to the Seller Separate Account, from but not including June 30, 1995 to and including the date as of which Customer Asset Value is calculated minus (c) the amount of all deductions from the Seller Separate Account, from but not including June 30, 1995 to and including the date as of which Customer Asset Value is calculated, for withdrawals (including transfers to fixed options) and for mortality and expense risk charges and annual administration charges, plus (d) imputed investment return at the monthly rate of one percent (1%) applied monthly to the mean balance of such portion of Customer Asset Value as it would have resulted from time to time after June 30, 1995 according to the above calculation of (a) plus (b) minus (c) plus (d) until and including the date as of which Customer Asset Value is calculated; and -8- PROVIDED, FURTHER, that, in determining Customer Asset Value, there shall be excluded from the calculation an amount equal to the aggregate reserves relating to each Insurance Contract as to which Seller has received and processed in the normal conduct of its business, consistent with practices in effect on June 30, 1995, a request from the holder of the Insurance Contract to pay to such holder the amounts on deposit with Seller under such Insurance Contract. "EFFECTIVE DATE" means the Closing Date if such date is the first day of a month and, if not, then the first day of the month in which the Closing Date falls. "EMPLOYER CLAIM" shall have the meaning set forth in Section 10.04 hereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and all final and temporary regulations and interpretive Bulletins and other rulings of general applicability thereunder. "EXECUTIVE OFFICER" means the chairman of the board, chief executive officer, president, any senior or executive vice president, secretary, treasurer or chief financial officer or any other officer or employee having supervisory responsibility for a principal business function. "EXTRA CONTRACTUAL OBLIGATIONS" means all liabilities for consequential, exemplary, punitive or similar damages which relate to or arise in connection with any alleged or actual act, error or omission by Seller or any of its Affiliates prior to the Closing Date, whether intentional or otherwise, or from any reckless conduct or bad faith by Seller or any of its Affiliates, in connection with the handling of any claim under any of the Insurance Contracts or in connection with the issuance, delivery, cancellation or administration of any of the Insurance Contracts (provided that no liability with respect to which Purchaser or Newco shall be entitled to -9- indemnification under Section 10.01(a)(ii) hereof shall be deemed to be an Extra Contractual Obligation). "FAS 87" shall have the meaning set forth in Section 5.20(f) hereof. "FAS 106" shall have the meaning set forth in Section 5.20(f) hereof. "FINAL BALANCE SHEET" shall have the meaning set forth in Section 2.03(c) hereof. "FINAL CUSTOMER ASSET VALUE" shall have the meaning set forth in Section 2.03(c) hereof. "FINAL PURCHASE PRICE" shall mean the product of the Final Customer Asset Value multiplied by the Purchase Price Percentage. "FIRST UNUM" shall have the meaning set forth in the Recitals to this Agreement. "FIRST UNUM AGREEMENT" shall have the meaning set forth in the Recitals to this Agreement. "401(a) CONTRACT" means an Insurance Contract which is a group annuity contract intended by Seller to fund an employee benefit plan qualified under section 401(a) of the Code which is sponsored by a 403(b) Contractholder or a Contractholder Affiliate and which is being transferred to Purchaser or Newco in connection with the transfer of the 403(b) Contracts. "403(b) CONTRACT" means an Insurance Contract which is a group annuity contract intended by Seller to satisfy the requirements of section 403(b) of the Code and which is being transferred to Purchaser or Newco. "403(b) CONTRACTHOLDER" means a holder of a 403(b) Contract. "FTC" shall have the meaning set forth in Section 5.05 hereof. -10- "GAAP" means United States generally accepted accounting principles as in effect from time to time. "GENERAL ACCOUNT RESERVES" means the general account statutory reserves of Seller with respect to the Insurance Contracts determined pursuant to Maine SAP, as such reserves would have been included in line 10.2 or line 10.3 of the Liabilities, Surplus and Other Funds page of the NAIC Annual Statement Blank (1994 format), including (for the avoidance of doubt) any general account statutory reserve adjustments in relation to Separate Account Liabilities. "GENERAL ASSIGNMENT AGREEMENTS" means the General Assignment Agreements between Seller and Purchaser and between Seller and Newco, respectively, each of which is substantially in the form of Exhibit G hereto. "HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder. "INDEMNIFIED PARTY" shall have the meaning set forth in Section 10.02 hereof. "INDEMNIFYING PARTY" shall have the meaning set forth in Section 10.02 hereof. "INDEMNITY REINSURANCE AGREEMENTS" means the Purchaser Indemnity Reinsurance Agreement and the Newco Indemnity Reinsurance Agreement. "INSURANCE CONTRACTS" means the group annuity contracts that are listed on Schedule 1.01(C) hereto and any additional group annuity contracts issued by Seller in connection with the Business after the date hereof and prior to the Closing Date, to the extent that such group annuity contracts are in effect as of the Effective Date, and all certificates and participation agreements in effect as of the Effective Date issued in accordance with the terms -11- of such group annuity contracts (including all supplements, endorsements, riders and ancillary agreements in connection therewith). "INSURANCE LIABILITIES" means all liabilities and obligations arising under the Insurance Contracts (excluding any Extra Contractual Obligations), including, without limitation: (i) all liability for premium Taxes arising on account of premiums paid or annuities purchased on or after the Effective Date, (ii) all amounts payable on or after the Effective Date for returns or refunds of premiums under the Insurance Contracts, (iii) all liability for commission payments and other fees or compensation payable with respect to the Insurance Contracts to or for the benefit of brokers and service providers, to the extent that such amounts are or become payable on or after the Effective Date and (iv) all guaranty fund assessments and similar charges imposed with respect to the Insurance Contracts based on premiums paid on or after the Effective Date. "INTERIM PURCHASER FINANCIAL STATEMENTS" shall have the meaning set forth in Section 4.09 hereof. "IRS" means the United States Internal Revenue Service. "IRS CLAIM" shall have the meaning set forth in Section 10.04(b) hereof. "KNOWLEDGE" means to the best knowledge and belief after reasonable inquiry of (i) any of the Executive Officers of Seller or Purchaser, as the case may be, (ii) in the case of Seller, Sarah Wilkinson, Lawrence Kolkhorst, Susan Peck, Vicki Gordan, Rosemary Moore, Lawrence Miller, Diane Garofalo, Peter Adams, Michael Carter, Donna Wieland and George Young and (iii) in the case of Purchaser, Ian Rolland and Chris Goeglein. "LICENSE AGREEMENTS" means the license agreements to be entered into on or prior to the Closing Date between Seller and Purchaser and Seller and Newco, respectively, pursuant -12- to which (i) Seller will grant, from and after the Closing Date, to Purchaser and Newco a non-exclusive perpetual license to use, solely in connection with the Combined Business, the Owned Generally Used Software, which license will be assignable in connection with any sale of the Business (as defined herein or as defined in the First UNUM Agreement) by Purchaser or Newco, as applicable, (ii) Seller will grant to Purchaser or Newco, as applicable, the right to use Seller's logos, trademarks, copyrights and other intellectual property solely in connection with the administration of the Business pursuant to the Administrative Services Agreement and (iii) Purchaser and Newco, as applicable, will grant, from and after the Closing Date, to Seller and First UNUM a non- exclusive perpetual license to use the Owned Principally Used Software, which license will be assignable in connection with any sale of any business of Seller or First UNUM that utilizes such software. Under each of the License Agreements the licensee shall have the right to make modifications to the licensed software, provided such modification does not adversely affect the use of such software by the licensor. "LICENSED GENERALLY USED SOFTWARE" shall have the meaning set forth in Section 3.06 hereof. "LICENSED PRINCIPALLY USED SOFTWARE" shall have the meaning set forth in Section 3.06 hereof. "LOSSES" shall have the meaning set forth in Section 10.01(a) hereof. "MAINE SAP" means the statutory accounting principles and practices prescribed or permitted by the Bureau of Insurance of the State of Maine. "MAINE SEVERANCE PAY LAW" means 26 M.R.S.A. Section 625-B. -13- "MATERIAL ADVERSE EFFECT" means, as to any Person, any change, effect, event or occurrence that has, or is reasonably likely to have, individually or in the aggregate, a material adverse impact on (i) the business, financial position or results of operations of such Person or (ii) the ability of such Person (or, in the case of the Business, the ability of Seller) to consummate the transactions contemplated by this Agreement; provided that "Material Adverse Effect" shall be deemed to exclude the impact of (i) changes in any statutes, laws, rules and regulations of any governmental entity, or interpretations thereof by any governmental entity, relating to or affecting the businesses which such Person operates and (ii) changes in GAAP or regulatory accounting principles generally applicable to insurance companies and their Affiliates. "1940 ACT" means the Investment Company Act of 1940, as amended, and all rules and regulations thereunder. "NAIC" means the National Association of Insurance Commissioners. "90-DAY TREASURY RATE" means the annual yield rate, on the date to which such 90-Day Treasury Rate relates, of actively traded U.S. Treasury securities having a remaining duration to maturity of three months, as such rate is published under "Treasury Constant Maturities" in Federal Reserve Statistical Release H.15(519). "NEWCO" shall have the meaning set forth in the Recitals to this Agreement. "NEWCO ASSUMPTION REINSURANCE AGREEMENT" means the Assumption Reinsurance Agreement between Seller and Newco, which is substantially in the form of Exhibit A-2 hereto. "NEWCO INDEMNITY REINSURANCE AGREEMENT" means the Indemnity Reinsurance Agreement between Seller and Newco which is substantially in the form of Exhibit B-2 hereto. -14- "NEWCO SEPARATE ACCOUNTS" means one or more separate accounts to be established by Newco prior to the Closing. "NEWCO TRUST AGREEMENT" means the Trust Agreement among Seller, Newco and the Trustee, which is substantially in the form of Exhibit F-2 hereto. "NON-COMPETE PERIOD" shall have the meaning set forth in Section 8.01(a) hereof. "OWNED GENERALLY USED SOFTWARE" shall have the meaning set forth in Section 3.06 hereof. "OWNED PRINCIPALLY USED SOFTWARE" shall have the meaning set forth in Section 3.06 hereof. "PARTICIPANT" means an individual, trust or estate that is an employee or former employee (or beneficiary or alternate payee under a qualified domestic relations order within the meaning of section 401(a)(13) of the Code or section 206(d)(3)(B) of ERISA) of a Contractholder and who (or which) has an interest in a Transferred Contract. "PENSION PLANS" shall have the meaning set forth in Section 3.20(a) hereof. "PERMITS" means all licenses, permits, orders, approvals, registrations, authorizations, qualifications and filings with and under all federal, state, local or foreign laws or governmental or regulatory bodies. "PERSON" means any individual, corporation, partnership, firm, joint venture, association, joint-stock company, trust, unincorporated organization, governmental, judicial or regulatory body, business unit (including, but not limited to, the Business), division or other entity. -15- "PRELIMINARY PURCHASE PRICE" shall mean the product of the Customer Asset Value as of the date of the Closing Balance Sheet multiplied by the Purchase Price Percentage. "PRE-PAID ITEMS AND RECEIVABLES" shall have the meaning set forth in Section 2.03(c) hereof. "PREMIUMS" means premiums and annuity considerations, deposits and similar receipts with respect to the Insurance Contracts. "PREVIOUSLY DISCLOSED" means disclosed prior to the date hereof in a writing or writings specifically identified as constituting previously disclosed information for the purposes of this Agreement. "PROPOSED BALANCE SHEET" shall have the meaning set forth in Section 2.03(c) hereof. "PURCHASE PRICE PERCENTAGE" means 2.1824%, which is the quotient, expressed as a percentage, equal to the Baseline Purchase Price divided by the Baseline Customer Asset Value. "PURCHASER" shall have the meaning set forth in the first paragraph of this Agreement. "PURCHASER ASSUMPTION REINSURANCE AGREEMENT" means the Assumption Reinsurance Agreement between Seller and Purchaser, which is substantially in the form of Exhibit A-1 hereto. "PURCHASER FINANCIAL STATEMENTS" shall have the meaning set forth in Section 4.09 hereof. -16- "PURCHASER INDEMNITY REINSURANCE AGREEMENT" means the Indemnity Reinsurance Agreement between Seller and Purchaser which is substantially in the form of Exhibit B-1 hereto. "PURCHASER SEPARATE ACCOUNTS" means those separate accounts of Purchaser listed on Schedule 1.01(D) hereto. "PURCHASER TRUST AGREEMENT" means the Trust Agreement among Seller, Purchaser and the Trustee, which is substantially in the form of Exhibit F-1 hereto. "PURCHASER'S DEFINED BENEFIT PLAN" shall have the meaning set forth in Section 5.20(d) hereof. "PURCHASER'S 401(k) PLAN" shall have the meaning set forth in Section 5.20(d) hereof. "PURCHASER'S PLAN" shall have the meaning set forth in Section 5.20(a) hereof. "PURCHASER'S RETIREE WELFARE PLANS" shall have the meaning set forth in Section 5.20(c) hereof. "PURCHASER'S SERPs" shall have the meaning set forth in Section 5.20(d) hereof. "RELATED TO" or "ARISING IN CONNECTION WITH" or similar words, as they are used herein, shall be construed to have the broadest most inclusive meaning that can be reasonably ascribed to them. "RETENTION BONUS" means the amount of $2,500. "SECURITIES ACT" means the Securities Act of 1933, as amended, and all rules and regulations thereunder. "SELLER" shall have the meaning set forth in the first paragraph of this Agreement. -17- "SELLER CUSTODIAN ACCOUNT" means the custodian account established under the Seller Custodian Agreement. "SELLER CUSTODIAN AGREEMENT" means the custodian agreement entered into between Seller (as the successor to UNUM Life Insurance Company) and The Bank of New York, approved by Superintendent of Insurance of the State of New York on the 24th day of December, 1991. "SELLER CUSTODIAN" means the custodian named in the Seller Custodian Agreement and any successor custodian appointed as such pursuant to the terms of the Seller Custodian Agreement. "SELLER SEPARATE ACCOUNT" means the separate account of Seller listed on Schedule 1.01(E) hereto. "SELLER'S DEFINED BENEFIT PLAN" shall have the meaning set forth in Section 5.20 hereof. "SELLER'S 401(k) PLAN" shall have the meaning set forth in Section 5.20(d) hereof. "SELLER'S SERP" shall have the meaning set forth in Section 5.20(d) hereof. "SELLER'S EMPLOYEE WELFARE PLAN" shall have the meaning set forth in Section 5.20(c) hereof. "SEPARATE ACCOUNT LIABILITIES" means those Insurance Liabilities that are reflected in the Seller Separate Account. "SETTLEMENT NOTICE" shall have the meaning set forth in Section 10.04(a) hereof. "SHARED COST PERIOD" means the 12-month period commencing on the Closing Date and ending on the day immediately preceding the first anniversary of the Closing Date. -18- "SIGNIFICANT BROKERS" shall have the meaning set forth in Section 3.12 hereof. "SUBSIDIARY" means, with respect to any Person on a given date, (i) any other Person of which a majority of the voting power of the equity securities or equity interests is owned directly or indirectly by such Person and (ii) any other Person the accounts of which, by virtue of an ownership interest in it by such Person would be consolidated, in accordance with GAAP, with those of such Person in its financial statements as of the applicable date. "TAXES" (or "TAX" as the context may require) means all federal, state, county, local, foreign and other taxes, however denominated, of any kind whatsoever (including, without limitation, income taxes, payroll and employee withholding taxes, unemployment insurance, social security taxes (or other similar taxes), estimated taxes, premium taxes, excise taxes, sales taxes, use taxes, transfer taxes, gross receipts taxes, franchise taxes, ad valorem taxes, severance taxes, capital property taxes, import duties and other governmental charges and assessments), and includes interest, additions to tax and penalties with respect thereto, whether disputed or not. "THIRD PARTY ACCOUNTANT" shall have the meaning set forth in Section 2.03(c) hereof. "THIRD PARTY CLAIMANT" shall have the meaning set forth in Section 10.03(a) hereof. "TRANSFERRED ASSETS" means (i) the cash and Cash Equivalents referred to in Section 2.02(b) hereof, (ii) assets held in the Seller Separate Account that relate to the Insurance Contracts and are equal to the Separate Account Liabilities as to which assumption reinsurance is effected, (iii) except as otherwise provided in the Indemnity Reinsurance Agreements, all of Seller's rights and interests under the Insurance Contracts to receive principal and interest paid on contract loans on or after the Closing Date, (iv) the Books and Records, (v) the Assignable Licensed Principally Used Software, (vi) the Owned Principally Used Software, (vii) the -19- Assigned and Assumed Contracts and (viii) those additional assets listed on Schedule 1.01(F) hereto. "TRANSFERRED CONTRACT" means any of the 403(b) Contracts or 401(a) Contracts. "TRANSITION SERVICES AGREEMENT" means the Transition Services Agreement which is substantially in the form of Exhibit D hereto. "TRUST ACCOUNTS" means the trust accounts established pursuant to the Trust Agreements. "TRUST AGREEMENTS" means the Purchaser Trust Agreement and the Newco Trust Agreement. "TRUSTEE" means the trustee named in each Trust Agreement and any successor trustee appointed as such pursuant to the terms of either Trust Agreement. "WARN ACT" means the Worker Adjustment and Retraining and Notification Act. "WELFARE PLANS" shall have the meaning set forth in Section 3.20(a) hereof. ARTICLE II TRANSFER AND ACQUISITION OF ASSETS Section 2.01. CASH CONSIDERATION. Upon the terms and subject to the conditions of this Agreement, Purchaser and Newco shall pay to Seller on the Closing Date an aggregate amount equal to the Preliminary Purchase Price by wire transfer of immediately available funds in U.S. Dollars to the bank account designated to Purchaser in writing by Seller at least two Business Days prior to the Closing Date. Section 2.02. ACQUISITION OF TRANSFERRED ASSETS AND ASSUMPTION OF ASSUMED LIABILITIES. (a) Upon the terms and subject to the conditions of this Agreement and the payment -20- of the Preliminary Purchase Price, on the Closing Date, Seller shall sell, assign and transfer to Purchaser and Newco, as applicable, all of Seller's right, title and interest in the Transferred Assets; PROVIDED, HOWEVER, that, as to the assets held in the Seller Separate Account, such transfers shall be made to the Purchaser Separate Accounts and the Newco Separate Accounts, respectively, and such assets shall be transferred, if at all, at the times specified in the respective Assumption Reinsurance Agreements; and, PROVIDED FURTHER, that the cash and Cash Equivalents shall be determined and transferred in accordance with the provisions of Sections 2.02(b), 2.03 and 2.04 hereof; and, PROVIDED FURTHER, that Seller shall assign and transfer to Purchaser and Newco, as applicable, all of Seller's ownership rights, title and interest in the contract loans under the Insurance Contracts, if at all, at the times specified in the respective Assumption Reinsurance Agreements. All sales, assignments and transfers of the Transferred Assets shall be effected by the Indemnity Reinsurance Agreements, the Assumption Reinsurance Agreements, the Bill of Sale and the General Assignment Agreements. Notwithstanding anything in this Agreement to the contrary, but subject to the provisions of Section 5.04 hereof, Seller shall be entitled to keep and maintain copies of all Books and Records from and after the Closing, and to have access to the originals of the Books and Records in accordance with the terms hereof. (b) Upon the terms and subject to the conditions of this Agreement and the Trust Agreements and the payment of the Preliminary Purchase Price, on the Closing Date, Seller shall transfer (and cause the Seller Custodian to transfer) to the Trust Accounts cash and Cash Equivalents in an aggregate amount equal to (i) the General Account Reserves relating to the Insurance Contracts to be assumed by Purchaser and Newco, respectively, less, in each case, (ii) the amount of any related contract loans, each as reflected on the Closing Balance Sheet. -21- Cash shall be transferred by Seller (and the Seller Custodian) to the Trust Accounts by wire transfer of immediately available funds in U.S. Dollars. Cash Equivalents shall be transferred by such instruments of transfer as are acceptable to the Trustee and reasonably acceptable to Purchaser. All amounts held in trust under the Trust Agreements shall be distributed as provided therein, in the Indemnity Reinsurance Agreements and in the Assumption Reinsurance Agreements. (c) Upon the terms and subject to the conditions of this Agreement, on the Closing Date, Purchaser and Newco shall assume their respective Insurance Liabilities pursuant to the Indemnity Reinsurance Agreements and the Assumption Reinsurance Agreements and Purchaser and Newco shall each assume, pursuant to the General Assignment Agreements, the Assigned and Assumed Contracts listed on Schedules 1.01(A) and the Assignable Licensed Principally Used Software to be assumed by it. (d) Any transfer or sales Tax or other governmentally imposed fees or charges imposed upon the transfer, sale or recording of the Transferred Assets shall be paid one-half by Seller and one-half by Purchaser. Section 2.03. PLACE AND DATE OF CLOSING; BALANCE SHEETS. (a) The Closing shall take place at the offices of LeBoeuf, Lamb, Greene & MacRae, L.L.P., 125 West 55th Street, New York, New York, at 10:00 a.m. New York time on the Closing Date or such other time or place as the parties may mutually agree upon. (b) On the Closing Date, Seller will deliver to Purchaser a balance sheet of the Business as of the end of the second month preceding the month in which the Closing Date falls (the "Closing Balance Sheet"), together with a calculation in reasonable detail of Customer Asset -22- Value as of the date thereof with respect to the Insurance Contracts to be assumed by Purchaser and Newco, respectively, and a certification of the chief financial officer of Seller that (i) the Closing Balance Sheet was prepared from and in accordance with the books and records of Seller and in accordance with Maine SAP applied consistently with the application thereof in the preparation of the statutory data included in Schedule 3.26 to the extent such data relates to the Business, and (ii) the General Account Reserves and Separate Account Liabilities set forth therein (A) were determined in accordance with generally accepted actuarial standards consistently applied, (B) were fairly stated in accordance with sound actuarial principles, (C) were based on actuarial assumptions that were appropriate for Seller's obligations under the related Insurance Contracts, and (D) met the requirements of Maine SAP. Such certification shall also set forth Seller's calculation of Customer Asset Value as of the date of the Closing Balance Sheet and shall certify that such calculation was made in accordance with the definition of Customer Asset Value set forth in Section 1.01 hereof. The Closing Balance Sheet shall reflect (i) the Separate Account Liabilities, (ii) the General Account Reserves, (iii) assets held in the Seller Separate Account equal to the Separate Account Liabilities, (iv) contract loans, and (v) cash and Cash Equivalents in an aggregate amount equal to (A) the General Account Reserves less (B) contract loans. (c) Seller shall, on or before the date that is 30 days after the Closing Date, prepare a proposed balance sheet of the Business as of the close of business on the last day of the month preceding the month in which the Closing Date falls (the "Proposed Balance Sheet"), in the same format as the Closing Balance Sheet, together with a calculation in reasonable detail of Customer Asset Value as of the date of the Proposed Balance Sheet and a certification of the -23- chief financial officer of Seller to the same effect with respect to the Proposed Balance Sheet and the Customer Asset Value as of the date thereof as the certification provided by such officer with respect to the Closing Balance Sheet and Customer Asset Value as of the date thereof pursuant to Section 2.03(b). In addition to the information set forth on the Closing Balance Sheet, the Proposed Balance Sheet shall set forth as to the Business (i) (A) all accrued amounts payable as of the date of the Proposed Balance Sheet under the Assigned and Assumed Contracts and any other similar liability of Seller arising prior to such date that will be paid by Purchaser or Newco after such date, including all amounts referred to under clause (iii) of the definition of "Insurance Liabilities" herein but excluding any other liability under the Insurance Contracts, net of any such amount payable to Seller as of such date, and (B) all liabilities of Seller as reflected in Seller's suspense account with respect to the Insurance Contracts as of the date of the Proposed Balance Sheet that will be paid by Purchaser or Newco after such date, and (ii) (A) all pre- paid expenses determined in accordance with Maine SAP covering periods after the date of the Proposed Balance Sheet and any other similar item paid by Seller which relates to periods after such date, (B) all accrued fees payable to Seller under the Assigned and Assumed Contracts as of the date of the Proposed Balance Sheet that will be paid to Purchaser after such date and (C) the amounts, if any, due Seller that are reflected as debits in Seller's suspense account, if any, with respect to the Insurance Contracts as of the date of the Proposed Balance Sheet that will be received by Purchaser or Newco after such date. Items described in clause (i) of the preceding sentence are referred to herein as "Accrued Liabilities," and items referred to in clause (ii) thereof are referred to herein as "Pre-Paid Items and Receivables." Promptly after its preparation, Seller shall deliver copies of the Proposed Balance Sheet and calculation of -24- Customer Asset Value to Purchaser. Purchaser shall have the right to review such balance sheet and calculation of Customer Asset Value and comment thereon for a period of 45 days after receipt thereof. Seller agrees that Purchaser and its accountants may have access to the accounting records of Seller relating to its preparation of the Proposed Balance Sheet and calculation of Customer Asset Value for the purpose of conducting its review. Any changes in the Proposed Balance Sheet or calculation of Customer Asset Value that are agreed to by Purchaser and Seller within 45 days of the aforementioned delivery of such balance sheet by Seller shall be incorporated into a final balance sheet of the Business as of the close of business on the last day of the month preceding the month in which the Closing Date falls (the "Final Balance Sheet") and a final calculation of Customer Asset Value as of such date (the "Final Customer Asset Value"). In the event that Purchaser and Seller are unable to agree on the manner in which any item or items should be treated in the preparation of the Final Balance Sheet or calculation of Customer Asset Value within such 45-day period, separate written reports of such item or items shall be made in concise form and shall be referred to KPMG Peat Marwick (the "Third Party Accountant"). The Third Party Accountant shall determine within 14 days the manner in which such item or items shall be treated on the Final Balance Sheet or calculation of Customer Asset Value, as the case may be; PROVIDED, HOWEVER, that the dollar amount of each item in dispute shall be determined between the range of dollar amounts proposed by Seller and Purchaser, respectively. The determinations by the Third Party Accountant as to the items in dispute shall be in writing and shall be binding and conclusive on the parties and shall be so reflected in the Final Balance Sheet and the calculation of Final Customer Asset Value. The fees, costs and expenses of retaining the Third Party Accountant -25- shall be allocated by the Third Party Accountant between the parties, in accordance with the Third Party Accountant's judgment as to the relative merits of the parties' proposals in respect of the disputed items. Such determination shall be binding and conclusive on the parties. Following the resolution of all disputed items, Seller shall prepare the Final Balance Sheet and calculation of Final Customer Asset Value and shall deliver copies of such balance sheet and such calculation to Purchaser. Section 2.04. POST-CLOSING ADJUSTMENTS. In the event the aggregate amount of cash and Cash Equivalents reflected on the Closing Balance Sheet and transferred to the Trust Accounts on the Closing Date is less than the amount of General Account Reserves, less the amount of any contract loans, as reflected on the Final Balance Sheet, Seller shall transfer (and/or cause the Seller Custodian to transfer) to one or both of the Trust Accounts, as applicable, additional cash or Cash Equivalents equal to the amount of such difference, together with interest thereon from and including the Closing Date to but not including the date of such transfer computed at an Annual Rate equal to the 90-Day Treasury Rate in effect on the Closing Date. In the event the aggregate amount of cash and Cash Equivalents reflected on the Closing Balance Sheet and transferred to the Trust Accounts on the Closing Date is more than the amount of General Account Reserves, less the amount of any contract loans, as reflected on the Final Balance Sheet, Seller, Purchaser and/or Newco, as applicable, shall direct the Trustee to transfer to Seller (and/or the Seller Custodian Account, as applicable) cash or Cash Equivalents in the amount of such difference, together with interest thereon computed at an Annual Rate as specified above from and including the Closing Date to but not including the date of such transfer. In the event the aggregate amount of Accrued Liabilities reflected on the Final Balance -26- Sheet exceeds the amount of Pre-Paid Items and Receivables reflected thereon, Seller shall transfer to Purchaser and/or Newco, as applicable, cash in the amount of such difference, together with interest thereon computed at an Annual Rate as specified above from and including the Closing Date to but not including the date of such transfer. In the event the aggregate amount of Pre-Paid Items and Receivables reflected on the Final Balance Sheet exceeds the amount of Accrued Liabilities reflected thereon, Purchaser and/or Newco, as applicable, shall transfer to Seller cash in the amount of such difference, together with interest thereon computed at an Annual Rate as specified above from and including the Closing Date to but not including the date of such transfer. In the event the Preliminary Purchase Price exceeds the Final Purchase Price, Seller shall transfer to Purchaser and/or Newco, as applicable, cash in the amount of such difference, together with interest thereon computed at an Annual Rate as specified above from and including the Closing Date to but not including the date of such transfer. In the event the Final Purchase Price exceeds the Preliminary Purchase Price, Purchaser and/or Newco, as applicable, shall transfer to Seller cash in the amount of such difference, together with interest thereon computed at an Annual Rate as specified above from and including the Closing Date to but not including the date of such transfer. Amounts required to be transferred from Purchaser and Newco to Seller or from Seller to Purchaser and Newco pursuant to this Section shall be netted against one another so that only a single net transfer shall be required. Any transfer of cash or Cash Equivalents required under this Section 2.04 shall be made within ten Business Days of the date of the delivery of the Final Balance Sheet and calculation of Final Customer Asset Value to Purchaser. The Final Purchase Price may be further adjusted subsequent to the Closing Date in accordance with Section 5.20 hereof. -27- Section 2.05. CLOSING ITEMS. (a) At the Closing, Seller shall execute (where appropriate) and deliver to Purchaser and Newco, as applicable, the following: (i) the Indemnity Reinsurance Agreements; (ii) the Assumption Reinsurance Agreements; (iii) the Administrative Services Agreement; (iv) the Transition Services Agreement; (v) the Bill of Sale; (vi) the Trust Agreements; (vii) the General Assignment Agreements; (viii) the Coinsurance and Assumption Agreement; (ix) the License Agreements; (x) the opinion of counsel referred to in Section 6.07 hereof; (xi) the certificate of Seller referred to in Section 6.01 hereof; (xii) evidence of compliance with the requirements of the HSR Act; (xiii) evidence of receipt of the Permits described on Schedule 6.03 hereto from the Insurance Departments of the States of Maine and New York; (xiv) evidence of receipt of additional approvals set forth in Schedule 3.05 hereto, to the extent such approvals are required for Closing; (xv) an updated Schedule 3.15, as provided for in Section 3.15 hereof; (xvi) an addendum to Schedule 3.19(A), as provided for in Section 3.19 hereof; and (xvii) the schedule provided for in subsection (c)(ii)(A) of Section 5.19 hereof. -28- Seller shall also (i) transfer (and cause the Seller Custodian to transfer) cash and Cash Equivalents to the Trustee, (ii) transfer certain additional Transferred Assets to Purchaser or Newco, as applicable, in accordance with Section 2.02 hereof and (iii) deliver to Purchaser a true and correct list of all group annuity contracts included in the Insurance Contracts that are in effect as of the Closing Date. (b) At the Closing, Purchaser and Newco, as applicable, shall execute (where appropriate) and deliver to Seller the following: (i) the Indemnity Reinsurance Agreements; (ii) the Assumption Reinsurance Agreements; (iii) the Administrative Services Agreement; (iv) the Transition Services Agreement; (v) the Trust Agreements; (vi) the General Assignment Agreements; (vii) the Coinsurance and Assumption Agreement; (viii) the License Agreements; (ix) the Custodian Agreement; (x) the opinion of counsel referred to in Section 7.06 hereof; (xi) the certificate of Purchaser referred to in Section 7.01 hereof; (xii) evidence of compliance with the requirements of the HSR Act; (xiii) evidence of receipt of the Permits described on Schedule 6.03 hereto from the Commission and from the Insurance Departments of the States of Indiana and New York; -29- (xiv) evidence of receipt of additional approvals set forth on Schedule 4.05 hereto, to the extent such approvals are required for Closing; (xv) evidence of the ratings of Purchaser and Newco set forth in Section 7.08 hereof; (xvi) evidence of the licensing of Newco as set forth in Section 7.09 hereof; and (xvii) the principal underwriter agreements referred to in Section 7.10 hereof, if required pursuant to Section 7.10 hereof. Purchaser and Newco shall also transfer an aggregate amount equal to the Preliminary Purchase Price to Seller. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Purchaser as follows: Section 3.01. ORGANIZATION, STANDING AND AUTHORITY OF SELLER. Seller is duly organized, validly existing and in good standing under the laws of Maine and has all requisite power and authority to carry on the operations of the Business as they are now being conducted. Section 3.02. AUTHORIZATION. Seller has all requisite power and authority to execute, deliver and perform its obligations under this Agreement and under each of the Ancillary Agreements to be executed by it. The execution and delivery by Seller of this Agreement and the Ancillary Agreements to be executed by it, and the performance by Seller of its obligations under such agreements, have been duly authorized. This Agreement has been, and on the Closing Date the Ancillary Agreements executed by Seller will be, duly executed and delivered -30- by Seller; and, subject to the due execution and delivery by the other parties to such agreements, this Agreement is, and the Ancillary Agreements executed by Seller will, upon due execution and delivery, be valid and binding obligations of Seller, enforceable against Seller in accordance with their respective terms. Notwithstanding the foregoing, the obligation of Seller to execute any Ancillary Agreement shall be subject to the terms and conditions of this Agreement. Section 3.03. ACTIONS AND PROCEEDINGS. Except as disclosed on Schedule 3.03 hereto, there are no outstanding orders, decrees or judgments by or with any court, governmental agency, regulatory body or arbitration tribunal before which Seller was a party that, individually or in the aggregate, have a Material Adverse Effect on Seller and/or any of its material Affiliates or have a Material Adverse Effect on the Business. Except as disclosed on Schedule 3.03 hereto, there are no actions, suits, arbitrations or legal, administrative or other proceedings pending or, to Seller's knowledge, threatened against Seller, at law or in equity, or before or by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or before any arbitrator of any kind which, if adversely determined, would, individually or in the aggregate, have a Material Adverse Effect on the Business. Section 3.04. NO CONFLICT OR VIOLATION. Except as disclosed on Schedule 3.04 hereto, the execution, delivery and performance by Seller of this Agreement and the Ancillary Agreements to which it is a party and the consummation of the transactions contemplated hereby and thereby in accordance with the respective terms and conditions hereof and thereof will not (a) violate any provision of the charter, bylaws or other organizational document of Seller, (b) violate, conflict with or result in the breach of any of the terms of, result in any modification -31- of the effect of, otherwise give any other contracting party the right to terminate, or constitute (or with notice or lapse of time or both, constitute) a default under, any contract or other agreement relating to or arising in connection with the Business to which Seller is a party or by or to which it or any of its assets or properties may be bound or subject, (c) violate any order, judgment, injunction, award or decree of any court, arbitrator or governmental or regulatory body against, or binding upon, or any agreement with, or condition imposed by, any governmental or regulatory body, foreign or domestic, binding upon Seller in connection with the Business, (d) violate any statute, law or regulation of any jurisdiction or (e) result in the breach or violation of any of the terms or conditions of, constitute a default under, or otherwise cause an impairment or revocation of, any Permit related to the Business. Section 3.05. CONSENTS AND APPROVALS. Except as required under the HSR Act or as set forth on Schedule 3.05 hereto and except for required Permits of applicable insurance and securities regulatory authorities, the execution, delivery and performance by Seller of this Agreement and the Ancillary Agreements to which it is a party and the consummation of the transactions contemplated hereby and thereby in accordance with the respective terms hereof and thereof do not require Seller to obtain any consent, approval or action of, make any filing with, or give any notice to, any Person. Section 3.06. COMPUTER SOFTWARE. Seller has set forth on Schedule 3.06(A) hereto a true and complete listing of all computer software programs used principally in the conduct of the Business. Schedule 3.06(A) hereto also sets forth whether each such computer software program is (i) owned by Seller (the "Owned Principally Used Software") or (ii) licensed by Seller from a third party (the "Licensed Principally Used Software"). Seller has set forth on -32- Schedule 3.06(B) hereto a true and complete listing of all computer software programs used generally in the conduct of the Seller's businesses as well as in the conduct of the Business. Schedule 3.06(B) hereto also sets forth whether each such computer software program is (i) owned by Seller (the "Owned Generally Used Software") or (ii) licensed by Seller from a third party (the "Licensed Generally Used Software"). Seller has, and on the Closing Date Purchaser or Newco, as applicable, will have (w) the right to use, free and clear of any royalty or other similar payment obligations, claims of infringement or alleged infringement or other lien, charge, claim or other encumbrance of any kind, all Owned Principally Used Software, (x) pursuant to the applicable License Agreement, the right to use, solely in connection with the conduct of the Business, free and clear of any royalty or other similar payment obligations, claims of infringement or alleged infringement or other lien, charge, claim or other encumbrance of any kind, all Owned Generally Used Software, (y) pursuant to an assignment of Seller's rights to the Licensed Principally Used Software or, if an assignment of Seller's rights to such software is not possible, pursuant to one or more new license agreements to be entered into between Purchaser or Newco, as applicable, and the licensors of such software, subject to the terms and conditions of the assigned licenses or the new licenses to the Licensed Principally Used Software, the right to use, free and clear of any royalty or other similar payment obligations payable with respect to the Shared Cost Period, claims of infringement or alleged infringement or other lien, charge, claim or other encumbrance of any kind, other than maintenance fees, the Licensed Principally Used Software, and (z) pursuant to one or more new license agreements to be entered into between Purchaser or Newco, as applicable, and the licensors of such software or pursuant to a sub-license granted by Seller to Purchaser or Newco, as applicable, the right -33- to use during the Shared Cost Period, solely in connection with the conduct of the Business, free and clear of any royalty or other similar payment obligations, other than maintenance fees or Purchaser's or Newco's pro rata share of maintenance fees, as applicable, claims of infringement or alleged infringement or other lien, charge, claim or other encumbrance of any kind, all Licensed Generally Used Software; and Seller is not in conflict with or violation or infringement of, nor has Seller received any notice of any such conflict with, or violation or infringement of, any asserted rights of any other Person with respect to any Owned Principally Used Software, Owned Generally Used Software, Licensed Principally Used Software or Licensed Generally Used Software. Notwithstanding the foregoing, Seller will be deemed not to have made the representation contained in (i) clause (y) of the preceding sentence with respect to any Licensed Principally Used Software which Seller is unable to assign to Purchaser or Newco, as the case may be, due to the refusal of the licensor thereof to consent to the assignment thereof or as to which Purchaser or Newco, as the case may be, fails to enter into a license agreement with the licensor thereof, in either case as a result of (A) Purchaser's or Newco's, as the case may be, failure to cooperate with Seller in obtaining from any such licensor the right for Purchaser or Newco, as the case may be, to operate such software or (B) Purchaser's or Newco's, as the case may be, default under any agreement or other dispute with any such licensor, and (ii) clause (z) of the preceding sentence with respect to any Licensed Generally Used Software as to which Purchaser or Newco, as the case may be, fails to enter into a license agreement with the licensor thereof as a result of (A) Purchaser's or Newco's, as the case may be, failure to cooperate with Seller in obtaining from any such licensor the right for Purchaser or Newco, as the case may -34- be, to operate such software or (B) Purchaser's or Newco's, as the case may be, default under any agreement or other dispute with any such licensor. Section 3.07. BROKERAGE AND FINANCIAL ADVISERS. No broker, finder or financial adviser has acted directly or indirectly as such for, or is entitled to any compensation from, Seller in connection with this Agreement or the transactions contemplated hereby, except Morgan Stanley & Co., whose fees for services rendered in connection with such transactions will be paid by Seller. Section 3.08. COMPLIANCE WITH LAWS. Except as previously disclosed to Purchaser and except with respect to those violations, if any, that will be cured by Seller prior to, or by the act of, Closing or which individually or in the aggregate would not have a Material Adverse Effect on the Business (i) neither Seller nor the Seller Separate Account is in violation of any federal, state, local or foreign law, ordinance or regulation or any other requirement of any governmental or regulatory body, court or arbitrator applicable to the Business nor has Seller received any written notice that any such violation is being alleged and (ii) without limiting the generality of the foregoing, in connection with Seller's pending triennial examination, Seller has not received any notice, nor is aware of the intention to send any notice, from any state regulatory authority alleging any violation of any such law, ordinance or regulation or directing Seller to take any remedial action with respect to such law, ordinance or regulation, in either case relating to the Business. Section 3.09. PERMITS, LICENSES AND FRANCHISES. Schedule 3.09 hereto lists (i) all jurisdictions in which Seller is licensed to issue the Insurance Contracts and (ii) the lines of business in connection with the Business which Seller is authorized to transact in each such -35- jurisdiction. Seller has been duly authorized by the relevant state insurance regulatory authorities to issue the Insurance Contracts that it is currently writing, and was duly authorized to issue the Insurance Contracts that it is not currently writing at the time such Insurance Contracts were issued, in the respective states in which it conducts the Business. Except as set forth on Schedule 3.09, Seller has all other Permits necessary to conduct the Business in the manner and in the areas in which the Business is presently being conducted and all such Permits are valid and in full force and effect, except where the failure to have such a Permit would not individually or in the aggregate have a Material Adverse Effect on the Business. Section 3.10. ANNUITY BUSINESS. (a) The group annuity contracts included in the Insurance Contracts in effect on the date hereof are listed on Schedule 1.01(C) hereto. All Insurance Contracts as now in force are in all respects, to the extent required under applicable law, on forms approved by applicable insurance regulatory authorities or which have been filed and not objected to by such authorities within the period provided for objection, and such forms comply in all material respects with the insurance statutes, regulations and rules applicable thereto, except where the failure to have such approval or non-objection or the failure to so comply would not individually or in the aggregate have a Material Adverse Effect on the Business. To Seller's knowledge, at the time Seller paid commissions to any broker within the past 36 months in connection with the sale of Insurance Contracts, each such broker was duly licensed as an insurance broker (for the type of business sold by such broker) in the particular jurisdiction in which such broker sold such business for Seller, and no such broker violated (or with or without notice or lapse of time or both would have violated) any federal, state, local or foreign law, ordinance or regulation or any other requirement of any governmental or regulatory -36- body, court or arbitrator applicable to the Business, except where the failure to be so licensed or any such violation would not individually or in the aggregate have a Material Adverse Effect on the Business. Except as previously disclosed to Purchaser, (i) neither the manner in which Seller compensates any association or broker involved in the sale or servicing of Insurance Contracts that is not registered as a broker-dealer or insurance agent nor, to Seller's knowledge, the conduct of any such association or broker, renders such association or broker a broker-dealer or insurance agent under any applicable federal or state law and (ii) the manner in which Seller compensates each association or broker involved in the sale or servicing of Insurance Contracts is in compliance with all applicable federal or state laws. Except as set forth on Schedule 3.10(A) hereto, (i) as of the date hereof, no holder of a group annuity contract which constitutes an Insurance Contract has indicated in writing to Seller an intention to cancel or terminate such Insurance Contract and (ii) no association or similar Person involved in the servicing of an Insurance Contract has indicated in writing to Seller an intention to cease such services or to cancel or terminate its agreement or other arrangement with Seller. (b) Except as set forth on Schedule 3.10(B) hereto, to Seller's knowledge, no entity that is a party to an Insurance Contract is undergoing, or has undergone in the past 12 months, an audit by the Internal Revenue Service with respect to its compliance with section 403(b) of the Code, and Seller is not aware of any such proposed audit. (c) Except as previously disclosed by Seller to Purchaser (which disclosure shall not affect or limit in any way Purchaser's or Newco's rights to indemnification under Article X hereof): -37- (i) each 403(b) Contractholder was, at the time the 403(b) Contract was issued, and, to Seller's knowledge and at all relevant times thereafter has been, an entity described in section 403(b)(1)(A) of the Code; (ii) to the extent that by operation of law or written agreement or otherwise Seller is legally responsible therefor, the terms of each Transferred Contract and the administration and operation thereof and of any plan funded in whole or in part through such Transferred Contract comply, and at all relevant times have complied, in all material respects with the applicable provisions of the Code and ERISA; (iii) to the extent that by operation of law or written agreement or otherwise Seller is legally responsible therefor, the terms of each Transferred Contract and the administration and operation thereof and of any plan funded in whole or in part through such Transferred Contract ensure that contributions or payments to such Transferred Contract which are intended to be nontaxable are not taxable; (iv) to the extent that by operation of law or written agreement or otherwise Seller is legally responsible therefor, the terms of all contract loans made under a Transferred Contract, whether outstanding or previously made, and the administration thereof by Seller, at all relevant times have complied in all material respects with all applicable requirements of the Code and ERISA, including but not limited to prohibited transaction rules and the provisions of section 72(p) of the Code, such that such contract loans were not taxable when made or at any time thereafter, except with respect to taxable defaults in repayment of such contract loans; (v) to the extent that by operation of law or written agreement or otherwise Seller is legally responsible therefor, the terms of each Transferred Contract and the -38- administration and operation thereof and of any plan funded in whole or in part through any such contract, to the extent such plan is intended by the Contractholder to limit fiduciary responsibility in accordance with section 404(c) of ERISA, comply in all material respects with all applicable requirements for limiting fiduciary responsibility under section 404(c) of ERISA; (vi) Seller has previously disclosed to Purchaser a complete list of 403(b) Contractholders (A) to whom Seller has provided reductions in fees or increases in contract rates of return based on the volume of contributions made to 403(b) Contracts and (B) whose Transferred Contracts include (through riders or otherwise) provisions for individual retirement accounts or annuities within the meaning of section 408 of the Code; (vii) by the Closing Date Seller will have delivered to Purchaser or Newco, as applicable, with respect to those files delivered to Purchaser in computer imaged or electronic form, paper copies thereof including but not limited to copies of all quarterly Participant statements (as provided to the Participant); (viii) to the extent that by operation of law or written agreement or otherwise Seller is legally responsible therefor, Seller has in place and is operating a system for properly calculating, deducting, accounting for, recording, and reporting to the IRS Participant contract loans under the Transferred Contracts, and, if requested by Purchaser, Seller will cooperate in a commercially reasonable time and manner with Purchaser to establish an automated system to process the foregoing; (ix) to the extent that by operation of law or written agreement or otherwise Seller is legally responsible therefor, Seller has in place and is operating a system for prohibiting transactions involving any Participant account under a Transferred Contract pending a -39- determination (A) in the case of a Transferred Contract subject to the provisions of section 401(a)(13) of the Code or section 206(d)(3)(B) of ERISA, of whether a domestic relations order is a qualified domestic relations order within the meaning of section 414(p) of the Code or section 206(d)(3)(B) of ERISA, and (B) in the case of a Transferred Contract the transfer and attachment of which is subject to state law and not to section 401(a)(13) of the Code or section 206(d)(3)(B) of ERISA, of whether under applicable state law any portion of such Transferred Contract has been transferred or attached under applicable state law; (x) to the extent that by operation of law or written agreement or otherwise Seller is legally responsible to provide any form of testing for compliance with any of the requirements of section 403(b) of the Code, such testing has been provided in a manner (including, but not limited to the solicitation of adequate data with which to perform such testing) that assures, to the extent that data requested by Seller has been provided accurately, that a reliable determination of whether such requirements have been met is obtained; (xi) to the extent that by operation of law or written agreement or otherwise Seller is legally responsible therefor, all minimum required distribution amounts calculated by Seller with respect to each Transferred Contract fully comply with applicable requirements of sections 401(a)(9) and 403(b)(10) of the Code, and, to the extent that by operation of law or written agreement or otherwise Seller is legally responsible therefor, Seller has in place and is operating a system for properly calculating, deducting, accounting for, recording, and reporting to the IRS such minimum required distribution amounts; and -40- (xii) Seller maintains, on an electronic basis, accurate historical records of contributions to the Transferred Contracts relevant for calculating each Participant's exclusion allowance under Code section 403(b)(2). For purposes of this Section 3.10(c), any noncompliance that results in an indemnifiable Loss (as defined in Article X) shall be a failure to comply in all material respects. (d) Schedule 3.10(D) hereto lists all Insurance Contracts that, to Seller's knowledge, are part of or held pursuant to an employee benefit plan within the meaning of section 3(3) of ERISA. Section 3.11. REGULATORY FILINGS. Seller has made available for inspection by Purchaser all material registrations, filings, and submissions made by Seller or by the Seller Separate Account with any governmental or regulatory body and final reports of examinations with respect to Seller or the Seller Separate Account issued by any such governmental or regulatory body to the extent that such registrations, filings, submissions and reports relate to the Business and (i) were made or issued on or subsequent to January 1, 1993, or (ii) represent the most recent of such registrations, filings, submissions and reports with respect to Insurance Contracts currently in effect but in a category of Insurance Contracts not written by Seller after January 1, 1993. Except as listed on Schedule 3.11 hereto, Seller has filed all reports, statements, documents, registrations, filings or submissions (including without limitation any sales material) required to be filed by Seller or the Seller Separate Account with any governmental or regulatory body to the extent they relate to the Business, and UNUM Sales Corporation has filed all sales material required to be filed by it with any governmental or regulatory body to the extent that they relate to the Business except, in each case, where the -41- failure to make such filings would not individually or in the aggregate have a Material Adverse Effect on the Business. Except as listed on Schedule 3.11 hereto, all such registrations, filings and submissions were in compliance in all material respects with applicable law when filed or as amended or supplemented, and no material deficiencies have been asserted by any such governmental or regulatory body with respect to such registrations, filings or submissions that have not been satisfied. Section 3.12. BROKERS. Schedule 3.12(A) hereto lists all Persons who have acted as brokers (including broker-dealers) with respect to Insurance Contracts which are in force and who were paid commissions by Seller within the past 12 months. Schedule 3.12(B) hereto lists all of the brokers who were paid at least $100,000 in commissions by Seller with respect to the Business during 1994 or at least $75,000 in commissions by Seller with respect to the Business during the first three calendar quarters of 1995 ("Significant Brokers") and identifies any Significant Broker who has indicated in writing to Seller that such broker will not sell or market on behalf of Purchaser group annuity contracts of the type which constitute the Business after the consummation of the transactions contemplated by this Agreement. Schedule 3.12(B) hereto sets forth (i) the standard forms of agreements between Seller and brokers which relate to the Business, (ii) a list of those Significant Brokers as to which such agreements are in effect and (iii) a list of those Significant Brokers who have received commission payments from Seller which do not relate to the Business and, except as set forth on Schedule 3.12(B) hereto, (iv) there are no other written agreements between Seller and any Significant Brokers providing for the compensation or indemnification of such brokers in connection with the Business or the provision of financing (whether in the form of contract loans or otherwise) to such brokers. -42- Each of such contracts and other agreements relating to the Business between Seller and the Significant Brokers is valid, binding and in full force and effect in accordance with its terms. Neither Seller nor, to Seller's knowledge, any Significant Broker is in default in any material respect with respect to any such contract or such other agreement. Section 3.13. REINSURANCE. There are no agreements, written or oral, pursuant to which Seller cedes or retrocedes risks assumed under the Insurance Contracts. There are no Insurance Contracts which are agreements of assumed reinsurance. Section 3.14. BANKING ARRANGEMENTS. Schedule 3.14 hereto contains a complete and accurate list and description of (a) all bank accounts used in whole or part in connection with the Business and (b) all lock box arrangements used in whole or in part in connection with the Business. Section 3.15. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as previously disclosed to Purchaser or except as expressly contemplated or required by this Agreement, since December 31, 1994, Seller has generally conducted the Business only in the ordinary course and there has not been (a) any material change in the underwriting, pricing, actuarial, reserving or investment practices or policies of the Business or any material adverse change in mortality or lapse experience, or (b) any transaction, commitment, dispute, damage, destruction, loss or other event or condition of any character (whether or not in the ordinary course of business), individually or in the aggregate having, or which, insofar as reasonably can be foreseen, is likely to have, a Material Adverse Effect on the Business, other than events or conditions relating to the life insurance industry generally. Schedule 3.15 sets forth the aggregate dollar amount of all surrenders and withdrawals under Insurance Contracts (or contracts that would constitute -43- Insurance Contracts if they were in effect on the Effective Date) from and after June 30, 1995 to December 31, 1995. On or prior to the Closing Date, Seller shall deliver to Purchaser an updated Schedule 3.15, which shall set forth the aggregate dollar amount of all surrenders and withdrawals under Insurance Contracts (or contracts that would constitute Insurance Contracts if they were in effect of the Effective Date) from and after December 31, 1995 to the date which is the last day of the second month preceding the month in which the Closing Date falls. Section 3.16. OTHER SALE ARRANGEMENT. Seller is not obligated or liable, contingently or otherwise, for or with respect to negotiations, letters of intent or commitments for the sale of all or any part of the Business to any Persons other than Purchaser and Newco. Section 3.17. SELLER SEPARATE ACCOUNT. The Seller Separate Account is duly and validly established and maintained under the laws of the State of Maine and the assets of the Seller Separate Account are not chargeable with liabilities arising out of any other business that Seller may conduct; the Seller Separate Account is duly registered as an investment company under the 1940 Act; the Seller Separate Account is and has been operated in compliance with the 1940 Act in all material respects, and Seller has filed all material reports and amendments of its registration statement required to be filed, and has been granted all exemptive relief necessary for the operations of the Seller Separate Account. The Insurance Contracts under which the Seller Separate Account assets are held are duly and validly issued and were sold pursuant to an effective registration statement under the Securities Act and any applicable state securities laws and each such registration statement is currently in effect to the extent necessary to allow Seller to receive contributions under such contracts. Seller has filed each prospectus and statement of additional information, as amended or supplemented, under which the Seller -44- Separate Account assets are held that are required to be filed, and each such prospectus and statement of additional information, as of its respective mailing date or date of use, contained no untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. Section 3.18. ASSIGNED AND ASSUMED CONTRACTS. Each of the Assigned and Assumed Contracts is valid, binding and in full force and effect according to its terms and is freely assignable to Purchaser or Newco, as applicable, pursuant to this Agreement and the General Assignment Agreements without notice to or consent of any Person, other than as specified on Schedule 3.05 hereto. Neither Seller nor, to Seller's knowledge, any other party to any such contract is in default in any material respect with respect to any such contract or such other agreement. Section 3.19. EMPLOYEES. (a) Schedule 3.19(A) hereto lists each Person employed by Seller immediately prior to the execution of this Agreement who customarily devotes more than 20 hours per week to the Business, and further identifies any such Person who has notified Seller in writing as of the date of this Agreement that such Person will not continue working in the Business after the consummation of the transactions contemplated by this Agreement. On the Closing Date, Seller shall deliver to Purchaser an addendum to Schedule 3.19(A), which will identify any Person listed on Schedule 3.19(A) who, as of the Closing Date, is (i) receiving benefits under Seller's long-term disability plan, (ii) receiving benefits under Seller's short-term disability plan or (iii) on an approved leave of absence. The employees listed on Schedule 3.19(A) currently meet the standards set by Seller for continuing the employment of its employees in their respective current positions. -45- (b) Schedule 3.19(B) hereto lists and describes any "pay to stay" or similar arrangement applicable to any employee listed on Schedule 3.19(A) hereto as of the date of this Agreement. Section 3.20. EMPLOYEE BENEFIT PLANS; ERISA. (a) Schedule 3.20(A) hereto contains a list and brief description of (i) all "employee pension benefit plans," as defined in section 3(2) of ERISA, established, maintained, or contributed to by Seller or any of its Affiliates for the benefit of any employees listed on Schedule 3.19(A) (sometimes referred to herein as the "Pension Plans"); (ii) all "employee welfare benefit plans," as defined in section 3(1) of ERISA, established, maintained, or contributed to by Seller or any of its Affiliates for the benefit of any employees listed on Schedule 3.19(A) (sometimes referred to herein as the "Welfare Plans"); and (iii) all other benefit plans, programs, and arrangements established, maintained, or contributed to by Seller or any of its Affiliates for the benefit of any employees listed on Schedule 3.19(A), without regard to the coverage of any such plan, program, or arrangement by ERISA or any provision of the Code. The plans listed on Schedule 3.20(A) are collectively referred to herein as the "Benefit Plans." (b) (i) No Pension Plan established or maintained by Seller or any of its Affiliates, and no Pension Plan to which Seller or any of its Affiliates is obligated to make contributions, had, as of January 1, 1995, an "unfunded benefit liability," as defined in section 4001(a)(18) of ERISA; (ii) No Pension Plan established or maintained by Seller or any of its Affiliates, and no Pension Plan to which Seller or any of its Affiliates is obligated to make -46- contributions, has an "accumulated funding deficiency," as defined in section 302 of ERISA and section 412 of the Code, whether or not waived; (iii) To the best of Seller's knowledge, none of Seller, any of its Affiliates, any officer of Seller or of any of its Affiliates, any Benefit Plan (including the Pension Plans) that is subject to ERISA, any trust created under any such Benefit Plan, or any trustee or administrator of any such Benefit Plan has engaged in a "prohibited transaction," as defined in section 406 of ERISA or section 4975 of the Code, or in any other breach of fiduciary responsibility with respect to a Benefit Plan that could subject Seller, any of its Affiliates, or any officer of Seller or of any of its Affiliates to any tax or penalty pursuant to section 4975 of the Code or to any liability under section 502(i) or 502(l) of ERISA; (iv) No Pension Plan established or maintained by Seller or any of its Affiliates or to which Seller or any of its Affiliates is obligated to make contributions, and no trust created under any such Pension Plan, has been terminated or experienced a "reportable event," as defined in section 4043 of ERISA, during the five-year period ending on the date of execution of this Agreement; and (v) No Pension Plan to which Seller or any of its Affiliates is obligated to make contributions is a "multiemployer plan," as defined in section 4001(a)(3) of ERISA, or a single-employer plan under multiple controlled groups, within the meaning of sections 4063-64 of ERISA. (c) To the best of Seller's knowledge and except to the extent set forth in Schedule 3.20(C) hereto, each Welfare Plan that is a "group health plan," as defined in section 5000(b)(1) -47- of the Code, complies in all material respects with the applicable requirements of section 4980B of the Code ("COBRA"). (d) To the best of Seller's knowledge, and with the exception of claims for benefits, including associated appeals and disputes of denied claims, arising in the ordinary course of administration of the Benefit Plans, no material claims, assessments, investigations, or proceedings in arbitration or litigation relating to or arising under any Benefit Plan are pending or threatened against Seller, any of its Affiliates, any Benefit Plan, or any trust or other funding arrangement created under or established as part of any Benefit Plan, or against any trustee, fiduciary, custodian, administrator, or any other Person holding or controlling assets of any Benefit Plan, and Seller has no basis to anticipate that any such claim or claims exist. Section 3.21. LABOR RELATIONS AND EMPLOYMENT. Except to the extent set forth in Schedule 3.21 hereto, (i) there is no labor strike, dispute, slowdown, stoppage or lockout actually pending or, to Seller's knowledge, threatened against or affecting Seller in connection with the Business, and, since January 1, 1990, there has not been any such action; (ii) to Seller's knowledge, no union claims to represent the employees of Seller in connection with the Business and there are no current union organizing activities among such employees; (iii) Seller is not a party to or bound by any collective bargaining or similar agreement with any labor organization applicable to Seller's employees in connection with the Business; and (iv) there are no material written personnel policies, rules or procedures applicable to Seller's employees in connection with the Business, other than those set forth in Schedule 3.21, true and correct copies of which have heretofore been delivered to Purchaser. -48- Section 3.22. TRANSFERRED ASSETS. Seller has good and marketable title to all assets included within the Transferred Assets (other than cash, the Assignable Licensed Principally Used Software and the Assigned and Assumed Contracts), free of any lien, encumbrance, restriction, claim, charge, or defect of title, and each of the Cash Equivalents that constitute Transferred Assets is realizable in accordance with its terms. Section 3.23. CONTRACTS. (a) Schedule 3.23(A) lists and briefly describes (including the parties to and the date and subject matter of) each and every written contract, agreement, lease, license, commitment or arrangement and, to the knowledge of Seller, each and every oral contract, agreement, commitment or arrangement, to which Seller is a party or which is binding upon Seller that relate to the Business, except only for (i) those specifically disclosed in any other Schedule to this Agreement, including but not limited to the Insurance Contracts, (ii) those which do not relate in any significant manner to the Business or (iii) having a value to or imposing an obligation upon Seller not in excess of $10,000 in respect of any individual item or not in excess of $200,000 in the aggregate for all items not listed and not otherwise properly excluded. (b) Each of the contracts listed on Schedule 3.23(A) is in full force and effect and constitutes a legal, valid and binding obligation of Seller, and to Seller's knowledge, of each other Person that is a party thereto. Except as set forth on Schedule 3.23(A), neither Seller nor, to Seller's knowledge, any other party to such contract is in material violation, breach or default of any such contract or, with or without notice or lapse of time or both, would be in material violation, breach or default of any such contract. Except as set forth on Schedule 3.23(A), no such contract contains any provision providing that any party thereto other than Seller may -49- terminate such contract by reason of the execution of this Agreement or the Ancillary Agreements or the transactions contemplated thereby. (c) Schedule 3.23(C) hereto lists and briefly describes each and every written contract, agreement, commitment or arrangement, and each and every oral contract, agreement, commitment or arrangement, to which Seller is a party or which is binding upon Seller that relate to the Business, pursuant to which Seller is or may become obligated to indemnify any Person in connection with the Business. Except as set forth on Schedule 3.23(C), no indemnification obligations are currently payable by Seller under any such agreement or have become payable by Seller under any such agreement since December 31, 1992. (d) Notwithstanding the generality of the foregoing, Schedule 3.23(D) hereto lists and briefly describes each and every written contract, agreement, commitment or arrangement, and each and every oral contract, agreement, commitment or arrangement, to which Seller is a party or which is binding upon Seller that restrict the right of Seller to change the crediting rates under the Insurance Contracts, other than pursuant to the terms of the Insurance Contracts. Section 3.24. STATUTORY STATEMENTS. Seller has previously disclosed to Purchaser true, complete and correct copies of the Annual Statements of Seller as filed with the Maine Insurance Department for the years ended December 31, 1994, 1993 and 1992, together with all exhibits and schedules thereto applicable to the Business and the actuarial opinions applicable to the Business for such years and supporting actuarial memoranda for the year ended December 31, 1994 only. Seller has previously disclosed to Purchaser a true, complete and correct copy of the Quarterly Statements of Seller as filed with the Maine Insurance Department for the -50- quarters ended September 30, 1995, June 30, 1995 and March 31, 1995, together with all exhibits and schedules thereto. Section 3.25. TAX MATTERS. (a) Each Insurance Contract, other than those identified on Schedule 3.25 (which contracts were not intended at any time to meet the requirements of Section 8.18(a) of the Code), is a "pension plan contract" as defined in section 818(a) of the Code. (b) The transfer of the Insurance Contracts from Seller to Purchaser or Newco, as applicable, under this Agreement and the Ancillary Agreements will not result in the imposition of any Taxes on the holders of the Insurance Contracts or in the loss of any Tax benefits to which the holders are entitled under the Insurance Contracts. (c) To the extent required by law, the assets of the Seller Separate Account are adequately diversified within the meaning of section 817(h) of the Code. (d) Except as previously disclosed to Purchaser, to the extent required, each Insurance Contract complies with section 72 of the Code. (e) The amount of the reserves maintained by Seller for federal income tax purposes and properly computed as specified by the Code with respect to the Insurance Liabilities is equal to the sum of the General Account Reserves and the Separate Account Liabilities. Section 3.26. FINANCIAL STATEMENT DATA. Schedule 3.26 contains certain GAAP and statutory financial statement data for the Business for the years 1993 and 1994 and for the interim periods ended March 31, 1995, June 30, 1995, and September 30, 1995. Such data was obtained from the books and records of Seller and is the same data that was included with -51- respect to the Business in the internal and external GAAP and statutory financial statements of Seller. Such data was computed in accordance with, as applicable, GAAP and Maine SAP. From time to time prior to the Closing Date, Seller shall deliver to Purchaser similar financial statement data for the one- year period ending December 31, 1995 and for the three-month period most recently ended, as such data is compiled in the normal course of Seller's business. Such additional financial data shall be based on the books and records of Seller and will be computed in accordance with GAAP and Maine SAP, as applicable. Section 3.27. TRANSITION SERVICES AGREEMENT. Except as set forth in Schedule 1 to the Transition Services Agreement, the amounts to be paid by Purchaser to Seller pursuant to the terms of the Transition Services Agreement are, or have been computed at, rates that are substantially consistent with Seller's internal charge-back rates as of the date hereof. Section 3.28. CREDITING RATE. The weighted aggregate general account crediting rate in effect as of the date hereof with respect to the Core Insurance Contracts does not exceed 6.06%. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby represents and warrants to Seller as follows: Section 4.01. ORGANIZATION AND STANDING. Purchaser is a corporation duly organized and validly existing under the laws of the State of Indiana and has all requisite power and authority to own, lease and operate its assets, properties and business and to carry on the operations of its business as they are now being conducted. On the Closing Date, Newco will be a corporation duly organized, validly existing and in good standing under the laws of the -52- State of New York and will have all requisite power and authority to own, lease and operate its assets, properties and business and to carry on the operations of its business as it is then being conducted. Section 4.02. AUTHORIZATION. Purchaser has and, on the Closing Date Newco will have, all requisite power and authority to execute, deliver and perform its obligations under this Agreement and under each of the Ancillary Agreements to be executed by it. The execution and delivery by Purchaser of this Agreement and the execution and delivery of the Ancillary Agreements to be executed by Purchaser and Newco, and the performance by each of them of their obligations under such agreements, have been or will be duly authorized. This Agreement has been, and on the Closing Date the Ancillary Agreements executed by Purchaser and Newco, respectively, will be duly executed and delivered by Purchaser and Newco; and, subject to the due execution and delivery by the other parties to such agreements, this Agreement is, and the Ancillary Agreements executed by Purchaser and Newco will, upon due execution and delivery, be valid and binding obligations of Purchaser and Newco, respectively, enforceable against Purchaser and Newco in accordance with their respective terms. Notwithstanding the foregoing, the obligation of Purchaser and Newco to execute any Ancillary Agreement shall be subject to the terms and conditions of this Agreement. Section 4.03. ACTIONS AND PROCEEDINGS. Except as disclosed on Schedule 4.03 hereto, there are no outstanding orders, decrees or judgments by or with any court, governmental agency, regulatory body or arbitration tribunal before which Purchaser or any of its material Affiliates was a party and, on the Closing Date, there will be no such orders, decrees or judgments as to Newco, that, individually or in the aggregate, have a Material -53- Adverse Effect on Purchaser, Newco and/or any of their material Affiliates or (after giving effect to the Closing) have a Material Adverse Effect on the Business. Except as disclosed on Schedule 4.03 hereto, there are no actions, suits, arbitrations or legal, administrative or other proceedings pending or, to Purchaser's knowledge, threatened against Purchaser or any of its material Affiliates, at law or in equity, or before or by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or before any arbitrator of any kind which, if adversely determined, would, individually or in the aggregate, have a Material Adverse Effect on Purchaser and/or any of its material Affiliates or (after giving effect to the Closing) have a Material Adverse Effect on the Business and, on the Closing Date, there will be no such actions, suits, arbitrations or other proceedings as to Newco. Section 4.04. NO CONFLICT OR VIOLATION. Except as disclosed on Schedule 4.04 hereto, the execution, delivery and performance by Purchaser of this Agreement and the execution, delivery and performance by each of Purchaser and Newco of the Ancillary Agreements to which it is a party and the consummation of the transactions contemplated hereby and thereby in accordance with the respective terms and conditions hereof and thereof will not (a) violate any provision of the charter, bylaws or other organizational document of Purchaser or Newco, (b) violate, conflict with or result in the breach of any of the terms of, result in any modification of the effect of, otherwise give any other contracting party the right to terminate, or constitute (or with notice or lapse of time or both, constitute) a default under, any contract or other agreement to which Purchaser or Newco is a party or by or to which either of them or any of their respective assets or properties may be bound or subject, (c) violate any order, judgment, injunction, award or decree of any court, arbitrator or governmental or regulatory -54- body against, or binding upon, or any agreement with, or condition imposed by, any governmental or regulatory body, foreign or domestic, binding upon Purchaser or Newco, (d) violate any statute, law or regulation of any jurisdiction which violation would have a Material Adverse Effect on Purchaser, Newco and/or any of their material Affiliates or (after giving effect to the Closing) have a Material Adverse Effect on the Business, or (e) result in the breach of any of the terms or conditions of, constitute a default under, or otherwise cause an impairment of, any Permit related to Purchaser's or Newco's business or necessary to conduct the Business. Section 4.05. CONSENTS AND APPROVALS. Except as required under the HSR Act or as set forth on Schedule 4.05 hereto and except for required Permits of applicable insurance and securities regulatory authorities, the execution, delivery and performance by Purchaser of this Agreement, and the execution, delivery and performance by each of Purchaser and Newco of the Ancillary Agreements to which it is a party, and the consummation of the transactions contemplated hereby and thereby in accordance with the respective terms hereof and thereof, do not require Purchaser or Newco to obtain any consent, approval or action of, make any filing with or give any notice to, any Person. Section 4.06. BROKERAGE AND FINANCIAL ADVISERS. No broker, finder or financial adviser has acted directly or indirectly as such for, or is entitled to any compensation from, Purchaser or Newco in connection with this Agreement or the transactions contemplated hereby. Section 4.07. COMPLIANCE WITH LAWS. Except as listed on Schedule 4.07 hereto, Purchaser is not in violation of any federal, state, local or foreign law, ordinance or regulation or any other requirement of any governmental or regulatory body, court or arbitrator nor has -55- Purchaser received any written notice that any such violation is being alleged, in each case except those that will be cured by Purchaser prior to, or by the act of, Closing or (after giving effect to the Closing) which individually or in the aggregate would not have a Material Adverse Effect on the Business. On the Closing Date, Newco will not be in violation of any federal, state, local or foreign law, ordinance or regulation or any other requirement of any governmental or regulatory body, court or arbitrator or have received any written notice that any such violation is being alleged, in each case except those that will be cured by the act of Closing or (after giving effect to the Closing) which individually or in the aggregate would not have a Material Adverse Effect on the Business. Section 4.08. PERMITS, LICENSES AND FRANCHISES. Purchaser has been duly authorized by the relevant state insurance regulatory authorities to transact each of the lines of insurance business in each of the jurisdictions as set forth on Schedule 4.08 hereto. Except as listed on Schedule 4.08 hereto, Purchaser has all Permits necessary to conduct the Business in the manner and in the areas in which the Business is presently being conducted, and all such Permits are valid and in full force and effect. Except as listed on Schedule 4.08 hereto, Purchaser has not engaged in any activity which would cause revocation or suspension of any such Permit and no action or proceeding looking to or contemplating the revocation or suspension of any such Permit is pending or threatened. On the Closing Date, Newco will be so authorized in New York, will have all such Permits and will not be engaged in any such activities. Section 4.09. GAAP FINANCIAL STATEMENTS. On or prior to the date hereof, Purchaser has delivered to Seller true, correct and complete copies of (a) the audited -56- consolidated balance sheet of Purchaser and its Subsidiaries as of December 31, 1994, prepared in accordance with GAAP, together with the notes thereon and the related report of Ernst & Young, LLP, the independent certified public accountant of Purchaser, and (b) the audited consolidated statements of income, stockholders' equity and cash flows of Purchaser and its Subsidiaries for the year ended December 31, 1994, prepared in accordance with GAAP, together with the notes thereon and the related report of Ernst & Young, LLP (collectively, the "Purchaser Financial Statements"). Purchaser has delivered to Seller a true, correct and complete copy of the consolidated balance sheet, and the related consolidated statements of income, stockholders' equity and cash flows of Purchaser and its Subsidiaries for the quarters ended September 30, 1995, June 30, 1995 and March 31, 1995, prepared in accordance with GAAP (the "Interim Purchaser Financial Statements"). The Purchaser Financial Statements and the Interim Purchaser Financial Statements are based on the books and records of Purchaser and its Subsidiaries, and the Purchaser Financial Statements have been prepared in accordance with GAAP consistently applied, audited by Ernst & Young, LLP and fairly present in all material respects the consolidated financial position and results of operations of Purchaser and its Subsidiaries as of the date and for the period indicated therein. Section 4.10. STATUTORY STATEMENTS. Purchaser has furnished to Seller true, complete and correct copies of the Annual Statements of Purchaser as filed with the Indiana Insurance Department for the years ended December 31, 1994, 1993 and 1992, together with all exhibits and schedules thereto and applicable actuarial opinions. Purchaser has furnished to Seller a true, complete and correct copy of the Quarterly Statements of Purchaser as filed with -57- the Indiana Insurance Department for the quarters ended September 30, 1995, June 30, 1995 and March 31, 1995, together with all exhibits and schedules thereto. Section 4.11. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as listed on Schedule 4.11 hereto or except as expressly contemplated or required by this Agreement, since December 31, 1994, there has not been (i) any change in the business, operations, condition (financial or otherwise), results of operations, properties, prospects or assets of Purchaser or (ii) in the ability of Purchaser to consummate the transactions contemplated hereby or in any Ancillary Agreement, in either case that has had or is likely to have a Material Adverse Effect on Purchaser and/or any of its material Affiliates or (after giving effect to the Closing) have a Material Adverse Effect on the Business, in either case other than events or conditions relating to the life insurance industry generally. Section 4.12. RELATIONS WITH INVESTMENT COMPANIES. Purchaser does not have, and has not previously had, any adverse relationship with any investment company in which any Seller Separate Account assets are invested, or with any investment adviser thereof, or any Affiliate of either of the foregoing, which would reduce in any significant respect the likelihood of Purchaser entering into a new participation agreement with such Person on substantially the same terms as the currently existing agreement between such Person and Seller. Without limiting the generality of the foregoing, Purchaser has a good relationship with FMR Corp. and its Subsidiaries. -58- ARTICLE V COVENANTS Section 5.01. CONDUCT OF BUSINESS. (a) Prior to the Closing, Seller shall, unless it shall receive the prior written consent of Purchaser: (i) operate the Business as presently operated and only in the ordinary course and consistent with past practice (including but not limited to past underwriting standards) and use commercially reasonable efforts to preserve its relationship with and the goodwill of its brokers, customers, suppliers, employees and other Persons having business dealings with Seller in connection with the Business; and (ii) give notice to Purchaser as promptly as practicable of any Material Adverse Effect with respect to the Business. (b) Prior to Closing, Seller shall notify Purchaser upon entering into any group contract which, if in effect on the Effective Date, would constitute an Insurance Contract. (c) Prior to the Closing, Purchaser and Seller shall cooperate to preserve the goodwill of the brokers, customers, employees and suppliers and other Persons having business dealings with Seller in connection with the Business. (d) Prior to the Closing, Seller shall operate the Business in accordance with industry standards in effect during such time. Section 5.02. CERTAIN TRANSACTIONS. From the date of this Agreement through the Closing, neither Seller nor any of its officers, employees, representatives or agents will, directly or indirectly, solicit, encourage or initiate any negotiations or discussions with, or provide any information to, or otherwise cooperate in any other manner with, any Person or group (other -59- than Purchaser, Newco and their respective Affiliates) concerning any direct or indirect sale or other disposition of the Business. Section 5.03. INVESTIGATIONS. (a) Prior to the Closing Date, Purchaser shall be entitled, through its employees and representatives, to make such investigation of the assets, liabilities, business and operations of the Business, and such examination of the Books and Records, as Purchaser may reasonably request, including, without limitation, for the purpose of investigating the financial condition, service quality and operations of Seller. Any investigation, examination or interview by Purchaser of Seller's employees shall be conducted at reasonable times upon reasonable prior notice; and each of the parties hereto and its employees and representatives, including, without limitation, counsel, investment bankers, and independent public accountants, shall cooperate with the other's employees and representatives, as the case may be, in connection with such review and examination. (b) Prior to the Closing Date, Seller shall be entitled, through its employees and representatives, to make such investigation of the assets, liabilities, business and operations of Purchaser and Newco as Seller may reasonably request. Any such investigation or examination shall be conducted at reasonable times upon reasonable prior notice; and each of the parties hereto and its employees and representatives, including, without limitation, counsel, investment bankers, and independent public accountants, shall cooperate with the other's employees and representatives, as the case may be, in connection with such review and examination. Section 5.04. CONTINUED ACCESS. (a) Following the Closing Date, Seller shall (i) allow Purchaser and/or Newco, upon reasonable prior notice and during regular business hours, through their employees and representatives, the right, at Purchaser's or Newco's -60- expense, to examine and make copies of any books and records retained by Seller, to the extent they relate to the Business, for any reasonable business purpose, including, without limitation, the preparation or examination of Tax returns, regulatory filings and financial statements and the conduct of any litigation or regulatory dispute resolution, whether pending or threatened, concerning the conduct of the Business prior to the Closing Date and (ii) maintain such books and records for Purchaser's and/or Newco's examination and copying. Access to such books and records shall be at Purchaser's or Newco's expense and may not unreasonably interfere with Seller's or any successor company's business operations. (b) Following the Closing Date, Purchaser shall, and shall cause Newco to, (i) allow Seller, upon reasonable prior notice and during regular business hours, through its employees and representatives, the right, at Seller's expense, to examine and make copies of the Books and Records transferred to Purchaser and Newco, respectively, at the Closing for any reasonable business purpose, including, without limitation, the preparation or examination of Tax returns, regulatory filings and financial statements and the conduct of any litigation or the conduct of any regulatory, contractholder, participant or other dispute resolution whether pending or threatened, and (ii) maintain such Books and Records for Seller's examination and copying. Access to such Books and Records shall be at Seller's expense and may not unreasonably interfere with Purchaser's or Newco's or any successor company's business operations. Section 5.05. HSR ACT FILINGS. Seller and Purchaser shall, as promptly as practicable, file, or cause to be filed, Notification and Report Forms to be filed under the HSR Act with the Federal Trade Commission (the "FTC") and the Antitrust Division of the United -61- States Department of Justice (the "Antitrust Division") in connection with the transactions contemplated by this Agreement, the Ancillary Agreements and the other agreements contemplated hereby and thereby, and will use their respective reasonable efforts to respond as promptly as practicable to all inquiries received from the FTC or the Antitrust Division for additional information or documentation and to cause the waiting periods under the HSR Act to terminate or expire at the earliest possible date. Seller and Purchaser will each furnish to the other such necessary information and reasonable assistance as the other may request in connection with its preparation of necessary filings or submissions to any governmental or regulatory agency, including, without limitation, any filings necessary under the provisions of the HSR Act. Section 5.06. CONSENTS AND REASONABLE EFFORTS. Seller and Purchaser shall, and Purchaser shall cause Newco to, cooperate and use their best efforts to obtain all consents, approvals and agreements of, and to give and make all notices and filings with, any governmental authorities and regulatory agencies, necessary to authorize, approve or permit the consummation of the transactions contemplated by this Agreement, the Ancillary Agreements and the other agreements contemplated hereby and thereby, including, without limitation, the Permits described in Section 6.03(a); PROVIDED, HOWEVER, that with respect to the covenants of Purchaser contained in Section 5.22 hereof, Purchaser shall be required to use only commercially reasonable efforts. Seller shall use its best efforts to obtain all approvals and consents to the transactions contemplated by this Agreement and the Ancillary Agreements as set forth on Schedule 3.05 hereto. Purchaser will use its best efforts to obtain all approvals and -62- consents to the transactions contemplated by this Agreement and the Ancillary Agreements as set forth on Schedule 4.05 hereto. Section 5.07. REPRESENTATIONS AND WARRANTIES. From the date hereof through the Closing Date, (a) Seller shall use its best efforts to conduct its affairs in such a manner so that, except as otherwise contemplated or permitted by this Agreement, the representations and warranties contained in Article III shall continue to be true, complete and correct in all material respects on and as of the Closing Date as if made on and as of the Closing Date, (b) Purchaser shall use its best efforts to conduct its affairs in such a manner so that, except as otherwise contemplated or permitted by this Agreement, the representations and warranties as to Purchaser contained in Article IV shall continue to be true and correct in all material respects on and as of the Closing Date as if made on and as of the Closing Date, (c) Seller shall use commercially reasonable efforts to cause the representations and warranties contained in Section 3.10(c) to be true and correct in all material respects on and as of the Closing Date without regard to matters previously disclosed to Purchaser; PROVIDED, HOWEVER, that Seller shall not be required to take any action to cause the representations and warranties contained in Section 3.10(c) to be true and correct (without regard to matters previously disclosed to Purchaser) as of any particular date or period prior to the Closing Date, (d) Seller shall notify Purchaser promptly of any event, condition or circumstance known to Seller occurring from the date hereof through the Closing Date that would constitute a violation or breach of this Agreement by Seller and (e) Purchaser shall notify Seller promptly of any event, condition or circumstance known to Purchaser occurring from the date hereof through the Closing Date that would constitute a violation or breach of this Agreement by Purchaser. -63- Section 5.08. FURTHER ASSURANCES. (a) Upon the terms and subject to the conditions herein provided, each of Seller and Purchaser shall, and Purchaser shall cause Newco to, use all commercially reasonable efforts to take, or cause to be taken, all action or do, or cause to be done, all things or execute any documents necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, the Ancillary Agreements and the other agreements contemplated hereby and thereby. (b) On and after the Closing Date, Seller and Purchaser shall take, and Purchaser shall cause Newco to take, all reasonably appropriate action and execute any additional documents, instruments or conveyances of any kind (not containing additional representations and warranties) which may be reasonably necessary to carry out any of the provisions hereof, including, without limitation, putting each of Purchaser and Newco in full possession and operating control of the Transferred Assets and the Business which each is assuming pursuant to this Agreement and the Ancillary Agreements. Section 5.09. EXPENSES. Except as otherwise specifically provided in this Agreement, the parties to this Agreement shall bear their respective expenses incurred in connection with the preparation, execution and performance of this Agreement and the transactions contemplated hereby, including, without limitation, all fees and expenses of agents, representatives, counsel, investment bankers, actuaries and accountants; PROVIDED, HOWEVER, that (a) Seller and Purchaser shall share equally the cost of the filing fees in connection with the filings with the FTC and the Antitrust Division under the HSR Act with respect to the transactions contemplated hereby and (b) Purchaser shall bear the cost of obtaining required -64- insurance regulatory approvals and Commission approvals (other than any approvals that relate solely to Seller), consents and orders for the implementation of the Indemnity Reinsurance Agreements and the Assumption Reinsurance Agreements from regulatory authorities (other than approvals from the Insurance Departments of the States of Maine, New York and California, as to which each party shall bear its own expenses) and the actual out-of-pocket costs of providing policyholder notices and otherwise implementing the Assumption Reinsurance Agreements in accordance with their respective terms. Section 5.10. ASSUMPTION REINSURANCE AGREEMENTS. At the Closing, Seller and Purchaser shall execute and deliver to each other the Purchaser Assumption Reinsurance Agreement in substantially the form of Exhibit A-1 hereto, and Seller and Newco shall execute and deliver to each other the Newco Assumption Reinsurance Agreement in substantially the form of Exhibit A-2 hereto, each of which shall be effective as of the Effective Date. Section 5.11. INDEMNITY REINSURANCE AGREEMENTS. At the Closing, Seller and Purchaser shall execute and deliver to each other the Purchaser Indemnity Reinsurance Agreement in substantially the form of Exhibit B-1 hereto, and Seller and Newco shall execute and deliver to each other the Newco Indemnity Reinsurance Agreement in substantially the form of Exhibit B-2 hereto, each of which shall be effective as of the Effective Date. Section 5.12. ADMINISTRATIVE SERVICES AGREEMENT. At the Closing, Seller and Purchaser shall execute and deliver to each other the Administrative Services Agreement, which shall be effective as of the Closing Date, in substantially the form of Exhibit C hereto. -65- Section 5.13. TRANSITION SERVICES AGREEMENT. At the Closing, Seller and Purchaser shall execute and deliver to each other the Transition Services Agreement, which shall be effective as of the Closing Date, in substantially the form of Exhibit D hereto. Section 5.14. BILL OF SALE. At the Closing, Seller shall execute and deliver to Purchaser and Newco the Bill of Sale, which shall be effective as of the Closing Date, in substantially the form of Exhibit E hereto. Section 5.15. TRUST AGREEMENTS. At the Closing, Seller, Purchaser and the Trustee shall execute and deliver to each other the Purchaser Trust Agreement in substantially the form of Exhibit F-1 hereto, and Seller, Newco and the Trustee shall execute and deliver to each other the Newco Trust Agreement in substantially the form of Exhibit F-2 hereto, each of which shall be effective as of the Closing Date. Section 5.16(a). GENERAL ASSIGNMENT AGREEMENTS. At the Closing, Seller and Purchaser shall execute and deliver to each other a General Assignment Agreement and Seller and Newco shall execute and deliver to each other a General Assignment Agreement, each of which shall be effective as of the Closing Date, each in substantially the form of Exhibit G hereto. Section 5.16(b). CUSTODIAN AGREEMENT. At the Closing, Purchaser shall cause Newco to execute and deliver and Seller and the Custodian shall execute and deliver to each other a Custodian Agreement substantially in the form of Exhibit K hereto. Section 5.17. COINSURANCE AND ASSUMPTION AGREEMENT. Seller agrees that for a period of 18 months commencing with the Closing Date it will issue, at the written request of Purchaser, group annuity contracts of the type that would be included in the Business if in effect -66- on the Closing Date; PROVIDED, HOWEVER, that Seller shall be obligated to issue such contracts in a particular state only until such time as Purchaser has received form approval for a similar group annuity contract from the insurance regulatory authorities of such state and, if required, has a registration statement with respect to such contract that has been declared effective by the Commission. Upon the receipt of such approval and the receipt of any other required regulatory approvals and such declaration of effectiveness, Purchaser shall assume all contracts issued by Seller hereunder in such state. Pending such assumption, Purchaser shall 100% coinsure the general account liabilities under such contracts and shall administer such contracts pursuant to the Administrative Services Agreement. At the Closing, Seller and Purchaser shall execute and deliver to each other the Coinsurance and Assumption Agreement, which shall be effective as of the Closing Date, in substantially the form of Exhibit H hereto, to implement the reinsurance arrangements described in this Section 5.17. Promptly following the Closing, Purchaser will make all required filings with governmental and regulatory bodies in order to apply for the approvals and declarations referred to above and will diligently pursue the issuance of such approvals and such declarations. Section 5.18. PRODUCTS. Purchaser agrees that, for a period of 18 months from the Closing Date, it will and will cause Newco to make available to the brokers listed on Schedule 3.12(A) hereto group annuity products that are the same as the products available to such brokers as of the date hereof from Seller, either (i) with respect to Purchaser, through the Coinsurance and Assumption Agreement or (ii) with respect to Purchaser or Newco, through group annuity contracts to be issued by Purchaser or Newco, respectively, except as such products may be modified (a) as required by applicable law or in accordance with industry -67- standards, (b) to provide enhanced benefits to prospective holders of the Insurance Contracts or (c) pursuant to a request from a prospective holder of an Insurance Contract. Section 5.19. EMPLOYEES; SEVERANCE PAYMENTS. (a) Purchaser shall provide to Seller, within 60 days of the date hereof, a list of those individuals listed on Schedule 3.19(A) hereto who will not be offered employment by Purchaser (such individuals, along with any replacement employees for any such individuals whose employment terminates prior to the Closing Date and any other individuals listed on Schedule 3.19(A) hereto who are identified prior to the Closing Date in writing to Seller by Purchaser as lacking the work authorization and identification required by the Immigration Reform and Control Act of 1986, being referred to herein as the "Band 1 Employees"). The identity of the Band 1 Employees shall be determined by Purchaser in its sole discretion consistent with any applicable law; PROVIDED, HOWEVER, that no retirement consultant or account representative employees of Seller shall be selected by Purchaser to be a Band 1 Employee. Purchaser shall indicate in writing, at the time it delivers such list to Seller, which of the Band 1 Employees Purchaser believes should be retained by Seller until the Closing Date, and Seller shall use all commercially reasonable efforts to retain such individuals, through the Closing Date, in the positions which such individuals hold as of the date hereof. Seller shall bear full responsibility for either continuing the employment of or providing severance payments to all Band 1 Employees in accordance with its standard practices, and Purchaser shall have no obligations with respect thereto. (b) Schedule 5.19(B) hereto sets forth the names of those individuals with respect to whom Purchaser has offered employment contracts, such contracts to be effective as of the Closing Date. Each such individual who accepts such offer and enters into such an employment -68- contract shall hereinafter be referred to as a "Contract Employee." From and after the commencement of the employment of a Contract Employee by Purchaser, Purchaser shall bear full responsibility for any severance payments payable in connection with the termination of the employment of any Contract Employee in accordance with the terms of such Contract Employee's contract, and Seller shall have no obligations with respect thereto. Purchaser agrees to not, prior to the Closing, offer employment contracts to any additional persons listed on Schedule 3.19(A), other than stay bonuses or similar arrangements. (c) (i) Purchaser shall offer employment as of the Closing Date to all individuals listed on Schedule 3.19(A) hereto who are neither Band 1 Employees nor Contract Employees (such individuals, along with individuals hired by Seller in accordance with Section 5.19(h) as replacement employees for any such individuals whose employment terminates prior to the Closing Date, being referred to herein as the "Band 2 Employees") at their respective geographic locations of employment as of the date hereof in positions substantially similar to the respective positions held by such Band 2 Employees as of the date hereof (or, as to replacement employees, the positions held by the respective Band 2 Employees whom they have replaced), with salaries at least at the level set forth on Schedule 3.19(A) (which shall be modified as soon as possible to provide data related to compensation payable for 1996, which compensation shall be determined consistent with Seller's salary policies with respect to its businesses other than the Business); PROVIDED, HOWEVER, that with respect to individuals listed on Schedule 3.19(A) hereto who are neither Band 1 Employees nor Contract Employees but who are, as of the Closing Date, either (x) receiving benefits under Seller's short-term disability plan or (y) absent from work in connection with an approved leave of absence, Purchaser's offer of employment to such -69- individuals shall be for employment commencing on the first Business Day following the last day for which such short-term disability benefits are payable or such approved leave of absence, as the case may be. Notwithstanding the foregoing or any other provision of this Section 5.19, and except as provided in subsection (c)(ii)(A) and in the following sentence, nothing in this Agreement shall be deemed to require Purchaser to retain any particular Band 2 Employee for any period of time following the Closing Date or to entitle any such Band 2 Employee to any status other than that of an at will employee of Purchaser. Purchaser shall employ the majority of such Band 2 Employees who are located in the greater Portland home office for at least 12 months after the Closing Date and all the employees who are located in field offices for at least six months after the Closing Date. (ii) (A) TERMINATION UPON JOB ELIMINATION. In the event the employment of any Band 2 Employee is terminated by Purchaser because of the elimination of the employee's employment position prior to the date which is 20 months after the Closing Date, the provisions of this subsection (c)(ii)(A) shall apply: Purchaser shall promptly notify Seller of such termination and Seller shall provide such Band 2 Employee with the opportunity to have Seller place such Band 2 Employee in Seller's then-current re-employment program for a maximum period of eight weeks with the same priority consideration for available openings such Band 2 Employee would enjoy were he or she still an employee of Seller. As used in this subsection (c)(ii)(A), job elimination shall include a termination of employment due to an employee's refusal to accept a reassignment to a new job site in excess of fifty (50) miles from the employee's job site immediately preceding the termination. In the event that the job of a Band 2 Employee who is absent from work on -70- account of extended temporary disability (greater than two weeks but less than 12 months) is eliminated and such Band 2 Employee thereafter returns to work within 12 months of the commencement of such period of extended temporary disability and within 18 months of the Closing Date, such Band 2 Employee will be provided with a similar employment position to the one that was eliminated or, in the absence of such position, treated as having been subjected to a job elimination in accordance with the provisions of this subsection (c)(ii)(A); provided that the employee's performance met job expectations immediately preceding such absence. To the extent that such Band 2 Employee who is terminated in the circumstances described in this subsection (c)(ii)(A) is not re-employed by Seller and such Band 2 Employee's employment is terminated under circumstances in which such Band 2 Employee becomes eligible for severance payments under the severance payment plan of Purchaser, Purchaser shall pay severance and provide for continuation of benefit plan coverage to such Band 2 Employee determined as follows: Purchaser shall pay severance to such Band 2 Employee in an amount equal to the salary-based severance payments to which such Band 2 Employee would have been entitled were he or she an employee of Seller on the date of termination of employment (taking into account all of such Band 2 Employee's service with both Seller and Purchaser through such date of termination of employment with Purchaser) under Seller's severance payment plans as in effect on the Closing Date had his or her employment terminated for job elimination (applying Seller's plan's standard) as of such date of termination of employment with Purchaser; PROVIDED, HOWEVER, that such payments shall be payable only in the form of bi-weekly payments for up to 12 or 24 weeks, whichever is applicable to such Band 2 Employee, and any payments due thereafter paid in the form of a single lump sum. On the Closing Date, Seller shall provide -71- Purchaser with a schedule which sets forth each Band 2 Employee's service with Seller, as the same is calculated by Seller for the purposes of determining severance payments. Purchaser shall provide for continuation of benefit plan coverage to such Band 2 Employees following their termination of employment for the period during which they receive bi-weekly severance payments for up to a maximum period of, except as otherwise specified, 12 or 24 weeks, as applicable, with respect to the following benefit plans: (1) Purchaser's Defined Benefit Plan (for recognition of up to 501 hours of service) and Purchaser's SERPs; (2) the Lincoln National Corporation Employees' Group Life Insurance, Accidental Death, Disability, Loss of Sight Insurance and Family Life Insurance Plan; (3) the Lincoln National Corporation Group health, dental, vision and/or hearing Plan for Employees in which such employees would have been entitled to participate had they not been terminated; (4) the Lincoln National Corporation Employees' Health Care Expense Account Plan (pursuant to the Lincoln National Corporation Customized Security Plan) (except that if a re-enrollment occurs during the period that severance is being paid, such terminated Band 2 Employee may not re-enroll for coverage under Purchaser's Health Care Expense Account Plan); and (5) the Lincoln National Corporation Employees' Dependent Care Expense Account Plan (pursuant to the Lincoln National Corporation Customized Security Plan). In the case of a termination of employment of a Band 2 Employee because of the elimination of the employment position of such Band 2 Employee, Purchaser shall not effect such termination of employment prior to providing eight weeks' advance notice to such Band 2 Employee and Seller of such termination of employment. (B) TERMINATION OTHER THAN FOR CAUSE AND OTHER THAN FOR JOB ELIMINATION. In the event the employment of any Band 2 Employee is terminated by Purchaser, -72- other than for cause and other than because of the elimination of such Band 2 Employee's employment position, for example, because of unsatisfactory performance of employment duties, prior to the date which is 18 months after the Closing Date, Purchaser shall have no obligation to provide advance notice to Seller of such termination and Seller shall have no obligation to place such Band 2 Employee in any re-employment program of Seller. In the event that the job of a Band 2 Employee who is absent from work on account of extended temporary disability (greater than two weeks but less than 12 months) is eliminated and such Band 2 Employee's job performance immediately preceding such absence was unsatisfactory and such Band 2 Employee thereafter returns to work within 12 months of the commencement of such period of extended temporary disability and within 18 months of the Closing Date, such Band 2 Employee will be provided with a similar employment position to the one that was eliminated or, in the discretion of Purchaser, treated as having been terminated in accordance with the provisions of this subsection (c)(ii)(B). To the extent such Band 2 Employee is not otherwise employed by Seller and such Band 2 Employee's employment was terminated under circumstances in which such Band 2 Employee becomes eligible for severance payments under the severance payment plan of Purchaser, Purchaser shall pay severance to such Band 2 Employee determined as follows: Purchaser shall pay severance to such Band 2 Employee who is terminated under the circumstances described in this subsection (c)(ii)(B) a lump sum payment in an amount equal to the severance payments to which such Band 2 Employee would have been entitled were he or she an employee of Seller on the date of termination of employment (taking into account all of such Band 2 Employee's service with both Seller and Purchaser through such date of termination of employment with Purchaser) under Seller's salary-based severance payment plan as in effect -73- on the Closing Date had his or her employment terminated for performance reasons (applying Seller's plan's standard) as of such date. (C) TERMINATION FOR CAUSE. In the event the employment of any Band 2 Employee is terminated by Purchaser for cause at any time, Purchaser shall not be obligated to provide any severance or benefit plan coverage continuation to such Band 2 Employee and Purchaser shall have no obligation to notify Seller of such termination and Seller shall have no obligation to place such Band 2 Employee in any re-employment program of Seller. (D) REIMBURSEMENT OF PURCHASER. Not later than 24 months after the Closing Date, Seller shall reimburse Purchaser in an amount equal to one-half of the total severance payments paid or payable by Purchaser in accordance with subsections (c)(ii)(A) and (B) above with respect to Band 2 Employees who were given notice of termination prior to the date which is 18 months after the Closing Date and whose termination date occurs (x) within 20 months of the Closing if in accordance with subsection (c)(ii)(A) and (y) within 18 months of Closing if in accordance with subsection (c)(ii)(B), in each case only to the extent that such severance payments are attributable to years of service with Seller and/or one of its Affiliates; PROVIDED, HOWEVER, that, to the extent the sum of (1) the aggregate amount of the severance payment obligations made by Purchaser to Band 2 Employees pursuant to this subsection (c)(ii) that are attributable to years of service with Seller and/or one of its Affiliates and (2) the aggregate amount of the severance payment obligations made by Purchaser or Newco to Band 2 Employees (as defined in the First UNUM Agreement) pursuant to the corresponding provision of the First UNUM Agreement that are attributable to years of service with Seller and/or one of its Affiliates exceeds $1 million, Seller shall reimburse Purchaser or Newco, as appropriate, -74- in an amount equal to 100% of the amount of all severance payments due in excess thereof to the Band 2 Employees. (iii) Prior to the date which is 18 months from the Closing Date, Seller shall not rehire any Band 2 Employees, except for Band 2 Employees whose employment is first terminated, or who have been given notice of such termination, by Purchaser. (iv) Purchaser shall pay a Retention Bonus on the date which is 12 months from the Closing Date to each Band 2 Employee who is an employee of Purchaser on such date and, with respect to each Band 2 Employee whose employment is terminated as a result of job elimination prior to such date, Purchaser shall pay a Retention Bonus on the date of termination of employment of each such employee. No Retention Bonus shall be paid to any Band 2 Employee whose employment with Purchaser terminates as a result of a resignation or performance failure or for cause. Seller shall reimburse Purchaser for any Retention Bonus payments and any additional Tax liabilities of Purchaser relating to such payments. (d) Purchaser acknowledges that, up to and including the Closing Date, all employees of Seller have an exclusive duty of loyalty to Seller and, both prior to and subsequent to the Closing Date, a continuing non-disclosure obligation as to information regarding Seller that does not relate specifically to the Business. (e) As of the Closing Date, Purchaser shall provide to the retirement consultant and retirement account representative employees of Seller who become Band 2 Employees employment at offices provided by Purchaser other than the facilities of Seller, and shall pay all costs associated with the relocation of such Band 2 Employees. -75- (f) Not later than the date which is 70 days after the date hereof, Purchaser shall notify Seller as to the amount of space to be included in the lease referred to in Section 1 of Schedule 1 to the Transition Services Agreement, which amount of space shall not exceed 40,000 square feet of office space, and the nature and extent of the related services to be provided under the Transition Services Agreement. (g) Not later than 30 days prior to the Closing Date, Seller shall have moved, at Seller's expense, the operations of the Business to a physical plant in a location and having a design consistent with Section 3 of the Transition Services Agreement. (h) In the event that any Band 2 Employee's employment terminates prior to the Closing Date, Seller shall use commercially reasonable efforts, acting in consultation with Purchaser, to replace such Band 2 Employee in order to maintain current staffing levels with respect to the Business. Unless otherwise agreed to by Seller and Purchaser, any individual hired by Seller in accordance with this Section 5.19(h) shall be deemed a Band 2 Employee for the purpose of this Agreement. (i) Prior to the Closing, Seller will continue to monitor and evaluate the work performance of the Band 2 Employees in the ordinary course of its business operations. (j) As soon as reasonably practicable after the date of this Agreement, Seller and Purchaser shall finalize the design of a joint incentive program related to the 1996 performance of the Business, and shall communicate such program to employees of the Business. The cost of such program shall be borne equally by Seller and Purchaser. Section 5.20. EMPLOYEE BENEFITS. (a) Subject to the further provisions of this Section 5.20, and except as provided in Section 5.19, Purchaser agrees to provide benefits under -76- the employee benefit plans, programs, and arrangements of Purchaser and its Affiliates, without regard to the coverage of any such plan, program, or arrangement by ERISA or any provision of the Code, to each Band 2 Employee who accepts employment with Purchaser ("Benefits Affected Employee") on the same terms and conditions as such benefits are provided to similarly situated employees of Purchaser. Purchaser shall credit the service of each Benefits Affected Employee with Seller and its Affiliates for purposes of eligibility, participation, vesting, and accrual of or entitlement to benefits under all plans, programs, and arrangements listed on Schedule 5.20 ("Purchaser's Plans") to the same extent as if such service had been performed for Purchaser, in the amount of such service stated in a schedule to be delivered by Seller to Purchaser as soon as practicable after the Closing Date pursuant to subsection (d)(ii)(B) (the "Benefits Information Schedule"), except to the extent that the crediting of any such service might, in the opinion of counsel to Purchaser, jeopardize the tax qualification of Purchaser's Plans or the tax-favored status of Purchaser's Plans; and PROVIDED FURTHER that Purchaser and its Affiliates shall waive or cause to be waived, except to the extent that such waiver is precluded by applicable law, any waiting period, probationary period, pre- existing condition exclusion, evidence of insurability requirement, or similar condition with respect to initial participation under any plan, program, or arrangement established, maintained, or contributed to by Purchaser or any of its Affiliates to provide health, life insurance, or disability benefits with respect to each Benefits Affected Employee. (b) Subject to the other provisions of this Section 5.20, and except as provided in Section 5.19, Seller, and not Purchaser, shall be responsible and shall assume any and all liability for (i) all compensation, benefits, and perquisites of any kind due any Benefits Affected -77- Employee on account of employment by Seller before the Closing Date, or the termination of employment by Seller, including, but not limited to, continuation of health care coverage pursuant to COBRA; and (ii) all notices, payments, fines, taxes or assessments due to any governmental authority pursuant to any applicable foreign, federal, state or local law, common law, statute, rule or regulation with respect to the employment, discharge or layoff of employees of the Business by Seller, including, but not limited to, the WARN Act and the Maine Severance Pay Law and any rules or regulations that have been issued in connection with any of the foregoing. Subject to the other provisions of this Section 5.20, and except as provided in Section 5.19, Purchaser, and not Seller, shall be responsible and shall assume any and all liability for (i) all compensation, benefits, and perquisites of any kind due any Benefits Affected Employee on account of employment by Purchaser on and after the Closing Date, or the termination of employment by Purchaser, including, but not limited to, continuation of health care coverage pursuant to COBRA; (ii) any decision by Purchaser or its Affiliates to employ or not to employ any employee listed on Schedule 3.19(A); and (iii) all notices, payments, fines, taxes or assessments due to any governmental authority pursuant to any applicable foreign, federal, state or local law, common law, statute, rule or regulation with respect to the employment, discharge or layoff of Benefits Affected Employees by Purchaser, including, but not limited to, the WARN Act and the Maine Severance Pay Law and any rules or regulations that have been issued in connection with any of the foregoing. (c) Notwithstanding subsection (a) to the contrary: -78- (i) Each Benefits Affected Employee shall be eligible to participate in and receive coverage under medical and dental plans established by Purchaser from and after the Closing Date until December 31, 1996, which shall provide continuation of substantially the same medical and dental coverages and level of benefits (including dependent and domestic partner coverages and benefits) as such Benefits Affected Employee received under the UNUM Employees Life, Dental and Medical Plan ("Seller's Employee Welfare Plan") immediately prior to the Closing Date (including continuation of copayments, deductibles, lifetime maximums and pre-existing condition exclusions as then in effect); PROVIDED that a Benefits Affected Employee's participation and coverage under such plans shall terminate in accordance with the terms thereof if such Benefits Affected Employee terminates employment with Purchaser and all of its Affiliates before December 31, 1996. The rate of pre-tax salary reduction contributions for such coverage during 1996 with respect to each Benefits Affected Employee shall not exceed the rate of pre-tax salary reduction contributions for coverage with respect to the Benefits Affected Employee under Seller's Employee Welfare Plan immediately prior to the Closing Date, and the balance of the costs of such coverage shall be paid entirely by Purchaser. Each Benefits Affected Employee who immediately prior to the Closing Date was receiving a credit from Seller for having elected not to participate in the medical or dental portion of Seller's Employee Welfare Plan shall continue to receive such credit from Purchaser on and after the Closing Date through the end of 1996, or the date of such Benefits Affected Employee's termination of employment with Purchaser and all of its Affiliates, if earlier. As of January 1, 1997, each Benefits Affected Employee who is employed by Purchaser or any of its Affiliates on such date shall be eligible to commence participation in and receive coverage under the Lincoln National -79- Corporation Group Health, Dental, Vision and Hearing Plan for Employees, in accordance with Section 5.20(a), except that on and after the Closing Date Purchaser and its Affiliates shall not be required to waive or cause to be waived the exclusion of any pre-existing condition that may be excluded from coverage under Seller's Employee Welfare Plan on such date, for so long as such condition would be excluded from coverage under Seller's Employee Welfare Plan if the Benefits Affected Employee continued to participate in and receive coverage thereunder. (ii) Each Benefits Affected Employee shall be eligible to commence participation in and receive coverage under the Lincoln National Corporation Employees' Group Life Insurance, Accidental Death, Disability, Loss of Sight Insurance and Family Life Insurance Plan as of the Closing Date; PROVIDED that no such Benefits Affected Employee shall be eligible to receive coverage under such plans with respect to any dependent prior to January 1, 1997. (iii) Each Benefits Affected Employee shall be permitted to elect to receive benefits under the Lincoln National Corporation Employees' Health Care Expense Account Plan (pursuant to the Lincoln National Corporation Customized Security Plan) as of the Closing Date; PROVIDED, HOWEVER, that each such Benefits Affected Employee may only make an election with respect to benefits under such plan that has the effect of continuing the election in effect for such Benefits Affected Employee under the medical reimbursement account portion of Seller's Employee Welfare Plan immediately prior to the Closing Date. Seller shall permit each Benefits Affected Employee who is a "qualified beneficiary," as defined in section 4980B of the Code, to elect continuation of coverage under the medical reimbursement account portion of Seller's Employee Welfare Plan, without regard to any election made by such Benefits Affected -80- Employee to receive benefits under Lincoln National Corporation Employees' Health Care Expense Account Plan. (iv) Each Benefits Affected Employee shall be permitted to elect to receive benefits under the Lincoln National Corporation Employees' Dependent Care Expense Account Plan (pursuant to the Lincoln National Corporation Customized Security Plan) as of the Closing Date; PROVIDED, HOWEVER, that each such Benefits Affected Employee may only make an election with respect to benefits under such plan that has the effect of continuing the election in effect for such Benefits Affected Employee under the dependent care account portion of Seller's Employee Welfare Plan immediately prior to the Closing Date. Seller shall provide dependent care assistance benefits to each Benefits Affected Employee who is participating in the dependent care account portion of Seller's Employee Welfare Plan immediately before the Closing Date with respect to qualifying expenses incurred on or before December 31, 1996. (v) (A) Each Benefits Affected Employee shall be eligible to participate in the Lincoln National Corporation Group Health and Dental Plan for Retirees (Retiree Employee Coverage) and Group Life Plans ("Purchaser's Retiree Welfare Plans") on the same terms and conditions as such benefits are provided to similarly situated employees of Purchaser; PROVIDED, HOWEVER, that any such Benefits Affected Employee who either (i) is customarily employed on a part-time basis immediately before the Closing Date or (ii) has attained age 45 before the Closing Date shall be required to have completed only 5 years of service in addition to the otherwise applicable requirement that the employee shall have attained the age of 55; and PROVIDED, FURTHER, that any such Benefits Affected Employee who has both attained age 55 and completed 5 years of service as of the Closing Date and who elects, as of the Closing Date, to -81- participate in the retiree medical, dental and life insurance benefits portion of Seller's Employee Welfare Plan shall not be eligible to participate in Purchaser's Retiree Welfare Plans. Seller shall bear the cost of the adjustments required under this subsection (c)(v)(A), as such cost is determined under Section 5.20(f). (B) Seller shall take into account service with Purchaser and its Affiliates for the purposes of determining eligibility for retiree medical, dental, and life insurance benefits and the rate of retiree contributions under Seller's Employee Welfare Plan of any Benefits Affected Employee who is re-employed by Seller within 20 months after the Closing Date. Purchaser shall bear the cost of the adjustments required under this subsection (c)(v)(B), as such cost is determined under Section 5.20(f). (d) (i) Each Benefits Affected Employee who is eligible to participate in the UNUM Employees Retirement Savings Plan and Trust ("Seller's 401(k) Plan") immediately before the Closing Date shall be eligible to participate in the Lincoln National Corporation Employees' Savings and Profit Sharing Plan ("Purchaser's 401(k) Plan") as of the Closing Date. As set forth in Section 5.20(a), the service of each such Benefits Affected Employee with Seller and its Affiliates prior to the Closing Date shall be credited for all purposes under Purchaser's 401(k) Plan to the same extent as if such service had been performed for Purchaser or any of its Affiliates, in the amount of such service stated in the Benefits Information Schedule; PROVIDED that all such service performed at and after age 18 shall be so credited, and no such Benefits Affected Employee shall be required to attain any age greater than 18 for purposes of eligibility. Any Benefits Affected Employee shall be permitted to roll over outstanding plan loans that are not in default under Seller's 401(k) Plan, and to maintain an account balance of $3,500 or less -82- under Seller's 401(k) Plan until the earlier of (1) the date on which such Benefits Affected Employee terminates employment with Purchaser and all of its Affiliates and is not thereupon re-employed by Seller or any of its affiliates and (2) the date that is 20 months after the Closing Date, except to the extent that the maintenance of such account balances might, in the opinion of counsel to Seller, jeopardize the tax qualification of Seller's 401(k) Plan. (ii) (A) Each Benefits Affected Employee who remains employed by Purchaser or its Affiliates on January 1, 1997 (or whose employment with Purchaser and all its Affiliates was involuntarily terminated by Purchaser or any of its Affiliates before such date), and is a participant in the UNUM Employees Pension Plan and Trust ("Seller's Defined Benefit Plan") and, where applicable, the UNUM Supplemental Retirement Benefit Plan ("Seller's SERP") immediately before the Closing Date shall continue to accrue benefits under such plans (as the same may be amended from time to time) until the earlier of (1) the date on which such Benefits Affected Employee terminates employment with the Purchaser and all of its Affiliates and (2) the date that is 20 months after the Closing Date. The service of each Benefits Affected Employee by the Purchaser and its Affiliates during such period shall be credited under Seller's Defined Benefit Plan and Seller's SERP to the same extent as if such service had been performed for Seller or any of its Affiliates, and the compensation paid to each such Benefits Affected Employee by Purchaser and its Affiliates during such period shall be taken into account to the same extent as if such compensation had been paid by Seller or any of its Affiliates; PROVIDED, HOWEVER, that such service and compensation shall not be required to be taken into account to the extent that such action might, in the opinion of counsel to Seller, jeopardize the tax qualification of Seller's Defined Benefit Plan. As soon as practicable after the earlier of (1) the -83- date on which a Benefits Affected Employee terminates employment with the Purchaser and all of its Affiliates and (2) the date that is 20 months after the Closing Date, Purchaser shall provide to Seller a record of such employee's actual service and compensation with respect to the 20-month period. Purchaser shall bear the cost of the adjustments required under this subsection (d)(ii)(A), as such cost is determined under Section 5.20(f). (B) Each Benefits Affected Employee shall be eligible to participate in the Lincoln National Corporation Employees' Retirement Plan ("Purchaser's Defined Benefit Plan") and, if applicable, the Lincoln National Corporation Employees' Supplemental Pension Benefit Plan and the Lincoln National Corporation Employees' Excess Compensation Pension Benefit Plan ("Purchaser's SERPs") in accordance with the applicable provisions of such plans as amended from time to time. Each Benefits Affected Employee described in the preceding subsection (d)(ii)(A) whose employment with Purchaser and all of its Affiliates has not been terminated on the date that is 20 months after the Closing Date shall be credited for all purposes under Purchaser's Defined Benefit Plan and, if eligible, Purchaser's SERPs, with the service of such Benefits Affected Employee (1) with Seller and its Affiliates up to the Closing Date to the same extent as if such service had been performed for Purchaser and (2) with Purchaser during such 20-month period to the extent that such service was not credited to such Benefits Affected Employee for periods prior to commencement of participation in Purchaser's plans; PROVIDED that all such service performed at and after age 18 shall be so credited, and no such Benefits Affected Employee shall be required to attain any age greater than 18 for purposes of eligibility to participate in Purchaser's Defined Benefit Plan and Purchaser's SERPs. -84- As soon as practicable after the Closing Date, Seller shall provide to Purchaser the Benefits Information Schedule which shall set forth, with respect to each Benefits Affected Employee, the employee's name; date of birth; date of hire; vesting service as of the Closing Date; credited service as of the Closing Date; sex; basic compensation for calendar years 1986 through 1995, determined as the sum of base pay and field compensation; basic plus incentive compensation for calendar years 1986 through 1995; estimated basic compensation for 1996, determined as the sum of the annualized rate of base pay as of the Closing Date and 1996 field incentives (determined as the average of actual 1994 and 1995 field incentives); estimated basic plus incentive compensation for 1996 (determined as the sum of estimated basic compensation for 1996 plus the actual year to date incentive payments as of said date); projected 1997 basic compensation (the projection for 1997 shall be based on the Benefits Affected Employee's estimated basic compensation for 1996, increased by one year on the basis of the Seller's graded rates); projected 1997 basic plus incentive compensation (the projection for 1997 shall be based on the Benefits Affected Employee's projected 1997 basic compensation plus the Benefits Affected Employee's target incentive compensation for 1996); number of hours worked by the Benefits Affected Employee for Seller during 1996; and shall specify the amount of each such employee's normal retirement benefit (age 65 accrued benefit) under Seller's Defined Benefit Plan and Seller's SERP commencing at age 65 and payable in the form of a single life annuity, and such employee's credited service under Seller's plans, all determined as of the date that is 20 months after the Closing Date. For purposes of determining such normal retirement benefit under Seller's Defined Benefit Plan and Seller's SERP, Seller shall assume that the Social -85- Security Taxable Wage Base shall increase by 4.25% for 1997 and by 3.5% per annum from 1998 until the calendar year in which an employee attains age 65. Purchaser shall be permitted to reduce (but not below zero) the aggregate of the accrued benefits under Purchaser's Defined Benefit Plan and Purchaser's SERPs of each Benefits Affected Employee who commences participation thereunder by the amount of such Benefits Affected Employee's benefits specified on the schedule described below in this subsection (d)(ii)(B). Seller shall bear the cost (net of the offset described in the preceding sentence whether or not imposed by Purchaser's Defined Benefit Plan and Purchaser's SERPs) of the adjustments required under this subsection (d)(ii)(B), as such cost is determined under Section 5.20(f). No later than the date that is 24 months after the Closing Date, and for purposes only of calculating pension benefits under Purchaser's Defined Benefit Plan and Purchaser's SERPs, Seller shall provide to Purchaser a schedule containing the actual data in place of the estimated data set forth on the Benefits Information Schedule. (e) On and after the Closing Date, each of Seller and Purchaser shall timely amend their respective employee benefit plans, programs, and arrangements, and shall undertake all actions necessary or desirable to implement such amendments, to the extent that such amendments and other actions are reasonably necessary to carry out any of the terms and provisions of this Section 5.20. (f) (i) Seller and Purchaser agree to adjust the Final Purchase Price as of the date that is 20 months after the Closing Date, for the purpose of settling the obligations of Purchaser to Seller and of Seller to Purchaser under subsections (c)(v) and (d)(ii) above. These -86- obligations shall be determined as set forth in the following Tables 5.20(F)(1) and 5.20(F)(2) and the notes thereto; PROVIDED, HOWEVER, that, to the extent any service of a Benefits Affected Employee with Seller is not credited under one or more of Purchaser's Plans because (pursuant to Section 5.20(a)), in the opinion of counsel to Purchaser, such service credit might jeopardize the tax-qualified or tax-favored status of such plan, such service shall not be taken into account for purposes of the Final Purchase Price adjustment hereunder; and PROVIDED, FURTHER, that, to the extent any service of a Benefits Affected Employee with Purchaser is not credited under Seller's Defined Benefit Plan or Seller's Employee Welfare Plan because (pursuant to Section 5.20(d)(ii)), in the opinion of counsel to Seller, such service credit might jeopardize the tax-qualified status of such plan, such service shall not be taken into account for purposes of the Final Purchase Price adjustment hereunder. -87-
TABLE 5.20(F)(1) PENSION BENEFIT OBLIGATIONS BENEFITS AFFECTED EMPLOYEE WHO TERMINATES EMPLOYMENT WITH PURCHASER PRIOR TO THE DATE THAT IS 20 MONTHS AFTER THE CLOSING DATE AND: SELLER PAYS TO PURCHASER: PURCHASER PAYS TO SELLER: - ------------------------------ -------------------------- ------------------------- Re-employed by Seller Nothing Amount determined under Note 1 Vested but not re-employed by Seller Nothing Amount determined under Note 1 Not vested and not re-employed by Nothing Nothing Seller BENEFITS AFFECTED EMPLOYEE WHO REMAINS EMPLOYED BY PURCHASER ON THE DATE THAT IS 20 MONTHS AFTER THE CLOSING DATE AND: SELLER PAYS TO PURCHASER: PURCHASER PAYS TO SELLER: - ------------------------------ ------------------------- ------------------------- For costs for 20 months' service Nothing Amount determined under Note 2 with Purchaser For past service credit costs Amount determined under Note 3 Nothing through the date that is 20 months after the Closing Date
NOTE 1: Purchaser shall be obligated to make a payment to Seller in an amount to be determined as follows: Purchaser shall calculate for each Benefits Affected Employee the pro rata service cost, as described herein, for accrued pension benefits under Seller's Defined Benefit Plan and Seller's SERP for each Benefits Affected Employee (A) who was employed by Purchaser or any of its Affiliates as of January 1, 1997, and whose employment with Purchaser and all its Affiliates was terminated before the date that is 20 months after the Closing Date or (B) whose employment with Purchaser and all its Affiliates was involuntarily terminated by Purchaser or any of its Affiliates on or before December 31, 1996, for the period from the -88- Closing Date to the date of the termination of the employee's employment with the Purchaser and all its Affiliates. In making this calculation, Purchaser shall use the following assumptions: (1) Demographic assumptions used by Purchaser (as published in the January 1, 1995, actuarial valuation report for Purchaser's Defined Benefit Plan); (2) Interest rate (discount rate): 7.5%; (3) Salary Scale: 5%; (4) Social Security Wage Base Increase: 4.5%; (5) Census data as set forth on the Benefits Information Schedule; (6) Provisions of Purchaser's Defined Benefit Plan and Purchaser's SERPs as in effect on the Closing Date; (7) Benefit starting date for vested terminated employees: Age 64 1/2. Purchaser shall calculate the difference between the projected benefit obligations (using the methodology established by Financial Accounting Standard No. 87 issued by the Financial Accounting Standards Board ("FAS 87")) as of January 1, 1998, and January 1, 1997 (adjusted for interest to January 1, 1998), respectively, for each such employee, to determine the 12-month service costs. Purchaser shall then determine the final service costs for each such employee by prorating the 12-month service costs to reflect the number of years and months (determined on the basis that 15 or more days equals one month) of employment for each such employee from the Closing Date to the date of termination of the employee's employment with the Purchaser and all its Affiliates. (Example: In the case of an employee employed by Purchaser from a closing date of July 1, 1996, through September 30, 1997, the 12-month service cost would be multiplied by 1.25 to reflect one year and three months of employment.) NOTE 2: Purchaser shall be obligated to make a payment to Seller in an amount to be determined as follows: Seller shall calculate for each Benefits Affected Employee the pro rata service cost, as described herein, for accrued pension benefits under Seller's Defined Benefit -89- Plan and Seller's SERP as in effect on January 1, 1997, for each Benefits Affected Employee who is employed by Purchaser on the date that is 20 months after the Closing Date. In making this calculation, Seller shall use the following assumptions: (1) Demographic assumptions used by Seller (as published in the January 1, 1995, actuarial valuation report for Seller's Defined Benefit Plan); (2) Interest rate (discount rate): 7.5%; (3) Average Salary Scale (Seller's graded rates): 4.7%; (4) Social Security Wage Base Increase: 4.25%; (5) Census data as set forth on the Benefits Information Schedule; (6) Provisions of Seller's Defined Benefit Plan and Seller's SERP as in effect on January 1, 1997; (7) Benefit starting date for vested terminated employees: Age 55. Seller shall calculate the difference between the projected benefit obligations (using the methodology established by FAS 87) as of January 1, 1998, and January 1, 1997 (adjusted for interest to January 1, 1998), respectively, for each such employee, to determine the 12-month service cost. Purchaser shall then determine the final service costs by multiplying the 12-month service cost by 1.67. NOTE 3: Seller shall be obligated to make a payment to Purchaser in an amount to be determined as follows: Purchaser shall calculate for each Benefits Affected Employee "projected benefit obligations" (using methodology established by FAS 87) for Purchaser's Defined Benefit Plan and Purchaser's SERPs less the scheduled pension benefits under Seller's Defined Benefit Plan and Seller's SERP, as set forth in the Benefits Information Schedule, as of the date that is 20 months after the Closing Date, for each Benefits Affected Employee who remains employed by Purchaser on the date that is 20 months after the Closing Date. In making this calculation, Purchaser shall use the following assumptions: (1) Demographic assumptions -90- used by Purchaser (as published in the January 1, 1995, actuarial valuation report for Purchaser's Defined Benefit Plan); (2) Interest rate (discount rate): 7.5%; (3) Salary Scale: 5%; (4) Social Security Wage Base Increase: 4.5%; (5) Census data as set forth on the Benefits Information Schedule; (6) Provisions of Purchaser's Defined Benefit Plan and Purchaser's SERPs as in effect on the date that is 20 months after the Closing Date; (7) Benefit starting date for vested terminated employees: Age 64 1/2. -91-
TABLE 5.20(F)(2) RETIREE WELFARE BENEFIT OBLIGATIONS BENEFITS AFFECTED EMPLOYEE WHO TERMINATES EMPLOYMENT WITH PURCHASER PRIOR TO THE DATE THAT IS 20 MONTHS AFTER THE CLOSING DATE AND: SELLER PAYS TO PURCHASER: PURCHASER PAYS TO SELLER: - ----------------------------------------- ------------------------- ------------------------- Re-employed by Seller Nothing Amount determined under Note 4 Terminated prior to attaining age Nothing Nothing 55 and completing 5 years of service, and not re-employed by Seller Terminated after attaining age 55 Amount determined under Note 5 Nothing and completing 5 years of service, and not re-employed by Seller Terminated after (1) attaining age 55 and Nothing Nothing completing 5 years of service prior to Closing Date and (2) having elected to be covered under Seller's plan, not re- employed by Seller BENEFITS AFFECTED EMPLOYEE WHO REMAINS EMPLOYED BY PURCHASER ON THE DATE THAT IS 20 MONTHS AFTER THE CLOSING DATE AND: SELLER PAYS TO PURCHASER: PURCHASER PAYS TO SELLER: - ----------------------------------------- ------------------------- ------------------------- For past service costs prior to Amount determined under Note 6 Nothing Closing Date For costs of coverage Nothing Nothing for employees who had attained age 55 and completed 5 years of service prior to Closing Date and who elected to be covered under Seller's plan
NOTE 4: Purchaser shall be obligated to make a payment to Seller in an amount to be determined as follows: Seller shall calculate for each Benefits Affected Employee the pro rata service cost, as described herein, for accrued retiree welfare benefits under Seller's -92- Employee Welfare Plan, for each Benefits Affected Employee who accepts employment with Purchaser or any of its Affiliates as of the Closing Date and who terminates employment with Purchaser and all its Affiliates before the date that is 20 months after the Closing Date, for the period from the Closing Date to the date of termination of the employee's employment with Purchaser and all its Affiliates. In making this calculation, Seller shall use the following assumptions: (1) Demographic and health care trend assumptions used by Seller (as published in the January 1, 1995, actuarial valuation report of retiree welfare benefits under Seller's Employee Welfare Plan), except that the retirement rate assumption established by the January 1, 1995, actuarial valuation report of Purchaser's Retiree Welfare Plans shall be used; (2) Interest rate (discount rate): 7.5%; (3) Average Salary Scale (Seller's graded rates): 4.7%; (4) Retiree welfare benefit provisions under Seller's Employee Welfare Plan as in effect on the Closing Date; (5) Census data as set forth on the Benefits Information Schedule; (6) Attribution of the expected post-retirement benefit obligation will be between the date of hire and the expected retirement age as determined using the applicable assumptions under Purchaser's Defined Benefit Plan. Seller shall calculate the difference between the accumulated post- retirement benefit obligations (using the methodology established by Financial Accounting Standard No. 106 ("FAS 106"), except as provided in item (6) of the preceding paragraph concerning use of attribution of the expected post- retirement benefit obligation) as of January 1, 1998, and January 1, 1997 (adjusted for interest to January 1, 1998), respectively, for each such employee, to determine the 12-month service costs. Seller shall then determine the final service costs for each such employee by prorating the 12-month service costs to reflect the number of years and months -93- (determined on the basis that 15 or more days equals one month) of employment for each such employee from the Closing Date to the date of termination of the employee's employment with the Purchaser and all its Affiliates. (Example: In the case of an employee employed by Purchaser from a closing date of July 1, 1996, through September 30, 1997, the 12-month service cost would be multiplied by 1.25 to reflect one year and three months of employment.) NOTE 5: Seller shall be obligated to make a payment to Purchaser in an amount to be determined as follows: Purchaser shall calculate for each Benefits Affected Employee the accumulated post-retirement benefit obligation (using the methodology established by FAS 106) for Purchaser's Retiree Welfare Plan, as of the Closing Date, for each Benefits Affected Employee who (A) either (1) after becoming employed by Purchaser, attains age 55 and completes 5 or more years of service during the 20-month period following the Closing Date or (2) had attained age 55 and completed 5 years of service before the Closing Date, (B) terminates employment with Purchaser and all its Affiliates before the date that is 20 months after the Closing Date, and (C) does not irrevocably decline coverage under Purchaser's Retiree Welfare Plans, for the period from the Closing Date to the date of the termination of the employee's employment with Purchaser and all its Affiliates. If an individual irrevocably declines one coverage, then the foregoing calculation shall apply to any other coverage not irrevocably declined (E.G., an irrevocable declination of medical coverage would nevertheless require a calculation for life and dental coverage). Such amount shall be projected for interest to the date that is 20 months after the Closing Date. In making this calculation, Purchaser shall make the following assumptions: (1) Demographic and health care trend assumptions used by Purchaser (as published in the January 1, 1995, actuarial valuation report for Purchaser's Retiree Welfare -94- Plans); (2) Interest rate (discount rate): 7.5%; (3) Salary Scale: 5%; (4) Provisions of Purchaser's Retiree Welfare Plans as in effect on the Closing Date; (5) Census data as set forth on the Benefits Information Schedule; (6) Attribution of the expected benefit obligation will be between the date of hire and the eligibility date for full benefits under Purchaser's Retiree Welfare Plans. NOTE 6: Seller shall be obligated to make a payment to Purchaser in an amount to be determined as follows: Purchaser shall calculate for each Benefits Affected Employee the accumulated post-retirement benefit obligation (using the methodology described herein) for retiree welfare benefits accrued under Purchaser's Retiree Welfare Plans as in effect as of the Closing Date, for each Benefits Affected Employee who remains employed by Purchaser or its Affiliates on the date that is 20 months after the Closing Date. Such amount shall be projected for interest to the date that is 20 months after the Closing Date. In making this calculation, Purchaser shall use the following assumptions: (1) Demographic and health care trend assumptions used by Purchaser (as published in the January 1, 1995, actuarial valuation report of Purchaser's Retiree Welfare Plans); (2) Interest rate (discount rate): 7.5%; (3) Salary Scale: 5%; (4) Provisions of Purchaser's Retiree Welfare Plans as in effect on the Closing Date; (5) Census data as set forth on the Benefits Information Schedule; (6) Use of the methodology established by FAS 106 for employees who either (A) after being employed by the Purchaser attain the age of 55 and complete 5 or more years of service during the period beginning on the Closing Date and ending on the date that is 20 months after the Closing Date or (B) had attained the age of 55 and completed 5 years of service before the Closing Date and for all other employees attribution of the expected post- retirement benefit obligation between the date of hire - 95- and the expected retirement age as determined using the applicable assumptions under Purchaser's Defined Benefit Plan. (ii) Seller and Purchaser shall jointly prepare, as soon as practicable after the Closing Date, a schedule which shall set forth, with respect to each Benefits Affected Employee, the employee's name; Social Security Number; 12-month service cost in accordance with Note 1 to Table 5.20(F)(1) and Note 4 to Table 5.20(F)(2); 167% of the 12-month service cost in accordance with Note 2 to Table 5.20(F)(1); projected benefit obligation in accordance with Note 3 to Table 5.20(F)(1); and accumulated post-retirement benefit obligation in accordance with Notes 5 and 6 to Table 5.20(F)(2). Such schedule shall be used to determine the net adjustment to the Final Purchase Price with respect to the items set forth therein. The net adjustment to the Final Purchase Price calculated under such schedule is assumed to be paid 20 months after the Closing Date. This net adjustment to the Final Purchase Price shall be projected for interest at 7.5% per year from 20 months after the Closing Date to the actual settlement date. (g) Seller shall retain responsibility for and shall indemnify and hold harmless Purchaser from and against any and all claims, losses, damages and expenses (including, without limitation, reasonable attorneys' fees) and other liabilities and obligations relating to or arising out of all workers' compensation claims of Affected Employees for injuries, as defined under the applicable Workers' Compensation Act, sustained on or before the Closing Date, regardless of when the claim is actually made. Purchaser shall have responsibility for and shall indemnify and hold harmless Seller from and against any and all claims, losses, damages and expenses (including, without limitation, reasonable attorneys' fees) and other liabilities and obligations relating to or arising out of all workers' compensation claims of Affected Employees (or -96- replacement employees of Seller who become employed by Purchaser) for injuries, as defined under the applicable Workers' Compensation Act, sustained after the Closing Date. Section 5.21. ALLOCATION OF FINAL PURCHASE PRICE. Seller and Purchaser agree for all Tax purposes to report the purchase of the Business as an assumption reinsurance transaction. Within 120 days after Closing, Purchaser and Seller shall agree upon the valuation of the assets purchased and shall complete a Form 8594 for submission to the IRS with their 1996 federal income tax returns. The methodology for the allocation of the final purchase price to the intangibles for federal tax purposes is the following: Tax reserves assumed in the transaction $ Other non-insurance liabilities assumed Cash paid by reinsurer ------------ Total consideration incurred by reinsurer (a) ------------ ------------ Cash received by the reinsurer Fair market value of investment assets Accounts receivable and other assets ------------ Total value of non-intangible assets (b) ------------ ------------ Amount allocable to the ceding commission (a-b) ------------ ------------ -97- Section 5.22. NEWCO. Purchaser shall use commercially reasonable efforts to acquire or organize Newco (commercially reasonable for these purposes to be interpreted in light of the regulatory requirements customarily imposed by the New York Insurance Department) and to cause each warranty and representation contained in this Agreement with respect to Newco to be true and correct no later than September 30, 1996. Purchaser shall also use commercially reasonable efforts to cause Newco, no later than September 30, 1996, to become an accredited reinsurer in the State of Maine and in other states where becoming an accredited reinsurer is required in order for Seller to receive statutory statement credit for the reinsurance under the Newco Indemnity Reinsurance Agreement. Purchaser shall similarly use commercially reasonable efforts to obtain for Newco ratings from Standard & Poor's, Moody's Investor Services, Inc. and A.M. Best & Co., which shall be no lower than those assigned to Purchaser. Seller shall use commercially reasonable efforts to assist Purchaser in obtaining accredited reinsurer status as provided in this Section 5.22. Section 5.23. BROKER/DEALER TRANSITION. Purchaser agrees to use commercially reasonable efforts prior to the Closing Date to: (a) enter into new agreements with the registered representatives (including dually registered representatives) and selling agreement partners listed on Schedule 5.23 hereto that provide for payment of commissions on substantially the same terms as their current arrangements with UNUM Sales Corporation with respect to the Insurance Contracts and any contracts sold pursuant to the Coinsurance and Assumption Agreement; and (b) obtain the necessary approvals and make the necessary filings and appointments so that the registered representatives and selling agreement partners listed on Schedule 5.23 hereto can lawfully receive from Purchaser commissions on the Insurance -98- Contracts and any contracts sold pursuant to the Coinsurance and Assumption Agreement. Purchaser agrees to assume the costs incurred as a result of the negotiation of the agreements and regulatory filings, registrations and appointments referred to above. Seller agrees to provide reasonable assistance to Purchaser in effectuating an orderly transition from UNUM Sales Corporation to Purchaser, and each of the parties will use commercially reasonable efforts to effectuate such transition by the Closing Date. Section 5.24. OTHER AGREEMENTS. Seller and Purchaser shall, following the date hereof, work in good faith to complete the First UNUM Agreement and the schedules and exhibits thereto as soon as practicable. Following such completion, Seller shall cause First UNUM to execute the First UNUM Agreement, which will include as a condition of closing a guaranty by UNUM Corporation, a Delaware corporation, of the obligations of First UNUM thereunder. In addition, prior to the Closing, Seller and Purchaser shall work in good faith, and in accordance with the financial terms set forth herein and in the Transition Services Agreement, to complete the exhibits provided for in the Transition Services Agreement. In addition, prior to the Closing, Seller and Purchaser shall work in good faith to prepare the License Agreements in accordance with the terms and conditions specified in the definition of the License Agreements. Section 5.25. BANK ACCOUNTS AND LOCKBOXES. Prior to the Closing, Seller and Purchaser shall agree upon the treatment after Closing of Seller's bank accounts and lock-box arrangements which are used primarily in the Business. Such agreements shall be in accordance with applicable laws, regulations and industry standards for financial controls and banking -99- arrangements. Such agreements shall be reflected in the Administrative Services Agreement and the Transition Services Agreement. Section 5.26. COMPUTER SYSTEMS. Seller shall, prior to the Closing, take, at the expense of Seller, actions to ensure that Seller's computer systems are capable of inputing, processing and outputing information relating to (i) the Insurance Contracts to enable the Insurance Contracts to be administered in the name of Seller, Newco or Purchaser (as applicable depending upon whether such Insurance Contracts have been novated to Purchaser pursuant to the Purchaser Assumption Reinsurance Agreement or Newco pursuant to the Newco Assumption Reinsurance Agreement), as contemplated by the Administrative Services Agreement, and to permit Purchaser to prepare the reports contemplated to be prepared by Purchaser under Sections 4.04 and 4.05 of the Administrative Services Agreement and (ii) the Insurance Contracts (as defined in the First UNUM Agreement) to enable the Insurance Contracts (as defined in the First UNUM Agreement) to be administered in the name of First UNUM or Newco (as applicable depending upon whether such Insurance Contracts have been novated to Newco pursuant to the Assumption Reinsurance Agreement (as defined in the First UNUM Agreement)), as contemplated by the Administrative Services Agreement (as defined in the First UNUM Agreement), and to permit Purchaser to prepare the reports contemplated to be prepared by Purchaser under Sections 4.04 and 4.05 of the Administrative Services Agreement (as defined in the First UNUM Agreement). Section 5.27. COMPUTER SOFTWARE. With respect to Licensed Generally Used Software and the Licensed Principally Used Software, Seller and Purchaser shall work together cooperatively to determine the most economical method of obtaining from the licensors of the -100- Licensed Generally Used Software and the licensors of the Licensed Principally Used Software the right for Purchaser to operate the Licensed Generally Used Software and the Licensed Principally Used Software, which license, in the case of the Licensed Generally Used Software, will grant Purchaser the right to use such software solely in connection with the conduct of the Combined Business. Seller shall be responsible for all costs and expenses associated with obtaining such right from the licensors of the Licensed Generally Used Software and the Licensed Principally Used Software. Purchaser shall be entitled to participate fully in any negotiation with any such licensors, but shall bear its own costs in connection with such participation. With respect to the Licensed Generally Used Software and the Licensed Principally Used Software, Purchaser shall assume responsibility for complying with the terms and conditions of the licenses governing such software, including responsibility for the payment of the costs and expenses, or its pro rata share of the costs and expenses, as applicable, of all ongoing contractual responsibilities, including without limitation licensing, upgrade and maintenance fees; PROVIDED, HOWEVER, that Purchaser shall not be responsible for the payment of any annual licensing fees payable with respect to the Shared Cost Period. Seller shall pay all licensing fees payable with respect to the Shared Cost Period in connection with the Licensed Generally Used Software and the Licensed Principally Used Software. Section 5.28. CONTRACT ADMINISTRATION. As of the Closing Date, Seller will have in place and be operating a process for: (a) notifying Participants (and, where appropriate, their employers) when contributions or payments to a Transferred Contract on behalf of any individual under a salary -101- deferral agreement exceed or appear to exceed the applicable maximum annual dollar limit under section 402(g) of the Code in any calendar year; (b) notifying each Participant (and, where appropriate, their employers or former employers) of the minimum required distribution rules under applicable provisions of sections 401(a)(9) and 403(b)(10) of the Code in the year such Participant reaches age 70 and each year thereafter, and for calculating such minimum required distributions; (c) promptly and properly allocating forfeitures to Participant accounts where forfeitures are not applied to reduce future employer contributions; (d) verifying (prior to any distribution or contract loan) signatures authorizing distributions or contract loans from any Transferred Contract exceeding $50,000; and (e) verifying Participant changes of address by correspondence directed to the old as well as the new address. Section 5.29. CREDIT FOR REINSURANCE. In the event that Newco is not successful, on or prior to December 1, 1997, in obtaining accredited reinsurance status in all states where such status is required for Seller to obtain statutory statement credit for the reinsurance under the Newco Indemnity Reinsurance Agreement, as contemplated by Section 5.22 hereof, Seller and Purchaser shall endeavor in good faith to revise the applicable Ancillary Agreements and/or to enter into new agreements in order to provide Seller with such statutory statement credit. Such arrangements may include, without limitation, (a) the issuance of a letter of credit for the benefit of Seller which complies with applicable law for credit for reinsurance or (b) a cession to Purchaser instead of Newco of the reinsurance contemplated under the Newco Indemnity Reinsurance Agreement, with a retrocession of such business by Purchaser to Newco. The -102- parties contemplate that Seller would bear the costs of establishing any letters of credit as referenced above, provided that Purchaser would bear the incremental costs of establishing a letter of credit to the extent that the amount of such letter of credit should exceed $100 million. Section 5.30. CUSTODIAN ACCOUNT. In the event that the New York Insurance Department rejects a proposal submitted to the New York Insurance Department by the parties calling for the establishment by Newco of a custodian arrangement for the benefit of holders of Insurance Contracts issued in New York and for the release of assets held pursuant to the Seller Custodian Agreement with a fair market value equal to the portion of the General Account Reserves that pertains to those Insurance Contracts that are subject to the provisions of the Seller Custodian Agreement, the parties shall negotiate in good faith to formulate a revised proposal for submission to the New York Insurance Department with the objective of securing the release of such assets. Notwithstanding this Section 5.30, in no event shall Purchaser or Newco be required to (i) fund any custodian account in an amount exceeding 100% of the General Account Reserves pertaining to the relevant Insurance Contracts minus the aggregate amount of contract loans under such Insurance Contracts or (ii) bear any costs that are significantly in excess of those that Purchaser or Newco would have borne had the relevant assets been maintained under the Newco Trust Agreement. -103- ARTICLE VI CONDITIONS PRECEDENT TO THE OBLIGATION OF PURCHASER TO CLOSE The obligations of Purchaser under this Agreement are subject to the satisfaction on or prior to the Closing of the following conditions, any one or more of which may be waived by it to the extent permitted by law: Section 6.01. REPRESENTATIONS AND COVENANTS. (a) The representations and warranties of Seller contained in this Agreement and in the Ancillary Agreements shall be true and correct in all respects on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date, except to the extent that the failure of any such representations and warranties to be true and correct (excluding, for these purposes, any materiality limitations contained therein) would not, individually or in the aggregate, have a Material Adverse Effect on the Business; PROVIDED, HOWEVER, that any such representations and warranties that are given as of a particular date and relate solely to a particular date or period shall be true and correct in all respects as of such date or period, except to the extent that the failure of any such representations and warranties to be true and correct (excluding, for these purposes, any materiality limitations contained therein) would not, individually or in the aggregate, have a Material Adverse Effect on the Business. (b) Seller shall have performed and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied with by Seller on or prior to the Closing. (c) Seller shall periodically until the Closing update the information contained in the Schedules hereto that have been prepared by or on behalf of Seller and any matters -104- previously disclosed by Seller to Purchaser with respect to the representation and warranties of Seller set forth herein, so that such Schedules and other disclosures shall be true and correct in all respects on and as of the Closing Date, and such updated information shall not affect the obligations of the parties to proceed with the Closing (provided all other conditions to the Closing are satisfied or waived) to the extent that such information as updated, individually or in the aggregate, and considered collectively with any breaches of any representations and warranties contained herein or in the Ancillary Agreements (excluding, for these purposes, any materiality limitations contained therein), would not have a Material Adverse Effect on the Business. (d) On the Closing Date, Seller shall have delivered to Purchaser a certificate of Seller, dated as of the Closing Date and signed by an executive officer of Seller, as to the matters set forth in this Section 6.01. (e) In the event that (i) the representations and warranties of Seller contained in this Agreement fail to be true and correct on and as of the Closing Date (ignoring, for these purposes, any updated information provided by Seller pursuant to Section 6.01(c)) and (ii) such failure would not, individually or in the aggregate, have a Material Adverse Effect on the Business, neither Purchaser nor Newco shall be precluded from seeking indemnification pursuant to Article X of this Agreement with respect to any breaches of the representations and warranties of Seller contained in this Agreement that were breaches as of the date of this Agreement. Section 6.02. OTHER AGREEMENTS. The Ancillary Agreements and each of the other agreements and instruments contemplated hereby and thereby to which Seller is a party shall have been duly executed and delivered by Seller on the Closing Date and each of such -105- agreements, documents and instruments shall be in full force and effect with respect to Seller on the Closing Date. Section 6.03. GOVERNMENTAL AND REGULATORY CONSENTS AND APPROVALS. (a) All Permits and authorizations required by either party or Newco from governmental and regulatory bodies listed on Schedule 6.03 hereto, and all Permits and authorizations from any other governmental or regulatory bodies that are legally required by either party or Newco to close this Agreement and to implement the Indemnity Reinsurance Agreements shall have been obtained and shall be in full force and effect and without conditions or limitations which are unacceptable to Purchaser in the exercise of its reasonable business judgment, and Purchaser shall have been furnished with appropriate evidence, reasonably satisfactory to it and its counsel, of the granting of such Permits. (b) The waiting period prescribed by the HSR Act shall have expired. Section 6.04. THIRD PARTY CONSENTS. All consents from Persons set forth on Schedule 4.05 hereto shall have been obtained without conditions or limitations which are unacceptable to Purchaser in the exercise of its reasonable business judgment, and shall be in full force and effect. Section 6.05. PARTICIPATION AGREEMENTS. Purchaser and Newco shall have entered into a new participation agreement with each of the investment companies listed on Schedule 6.05 hereto and the investment adviser for and the principal underwriter of such company, as applicable, on substantially the same terms as such agreement with Seller. Section 6.06. POSSESSION OF ASSETS; INSTRUMENTS OF CONVEYANCE. On the Closing Date, Seller shall have delivered (and caused the Seller Custodian to have delivered) to -106- Purchaser, Newco or the Trustee, as applicable, possession of the Transferred Assets to be transferred on the Closing Date and shall have transferred (and caused the Seller Custodian to have transferred) to Purchaser, Newco or the Trustee, as applicable, all of the right, title and interest of Seller in and to such assets as provided in this Agreement and the Ancillary Agreements. Section 6.07. OPINION OF COUNSEL TO SELLER. Purchaser shall have received the opinion of the General Counsel of Seller dated as of the Closing Date, addressed to Purchaser and substantially in the form of Exhibit I hereto. Section 6.08. INJUNCTION. There shall be no effective injunction, writ, preliminary restraining order or any order of any nature issued by a court of competent jurisdiction, directing that the transactions provided for herein not be consummated as herein provided. Section 6.09. CUSTOMER ASSET VALUE. The sum of (a) the Customer Asset Value, as adjusted as set forth below, as of the date of the Closing Balance Sheet, and (b) the Customer Asset Value as defined in the First UNUM Agreement, as adjusted as set forth below, as of the date of the Closing Balance Sheet, shall not be less than $2,059,050,000; PROVIDED, HOWEVER, that, for the purposes of this Section 6.09, in determining Customer Asset Value (as defined herein and in the First UNUM Agreement), there shall be excluded from the calculation an amount equal to the aggregate GAAP reserves relating to all Insurance Contracts (as defined herein and in the First UNUM Agreement) that are not Core Insurance Contracts. Section 6.10. CREDITING RATES. The weighted aggregate general account crediting rate in effect from the date hereof to the Closing Date with respect to the Core Insurance Contracts, averaged over such period of time, shall not be greater than 6.06%. -107- Section 6.11. NEW YORK SUBSIDIARY. Newco shall be a New York life insurance company subsidiary of Purchaser that is licensed by the New York Insurance Department to conduct life and annuity businesses in the State of New York and that is recognized as an accredited reinsurer in the State of Maine. Section 6.12. EMPLOYMENT CONTRACTS. Purchaser shall have entered into employment contracts with the employee(s) listed on Schedule 6.12 hereof and such employee(s) shall not be in material breach thereof. In addition, such employee(s) shall be employed by Seller as of the Closing Date, unless the employment of such employee(s) shall have terminated prior to such date due to death or permanent disability. Section 6.13. FIRST UNUM CLOSING. Simultaneous with the Closing under this Agreement, the closing under the First UNUM Agreement shall have occurred. ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATION OF SELLER TO CLOSE The obligations of Seller under this Agreement are subject to the satisfaction on or prior to the Closing of the following conditions, any one or more of which may be waived by it to the extent permitted by law: Section 7.01. REPRESENTATIONS AND COVENANTS. (a) The representations and warranties of Purchaser contained in this Agreement and in the Ancillary Agreements shall be true and correct in all respects on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date, except to the extent that the failure of any such representations and warranties to be true and correct (excluding, for these purposes, any -108- materiality limitations contained therein) would not, individually or in the aggregate, materially and adversely affect the ability of Purchaser and Newco (giving effect to the Closing) to conduct the Business; PROVIDED, HOWEVER, that any such representations and warranties that are given as of a particular date and relate solely to a particular date or period shall be true and correct in all respects as of such date or period, except to the extent that the failure of any such representations and warranties to be true and correct (excluding, for these purposes, any materiality limitations contained therein) would not, individually or in the aggregate, materially and adversely affect the ability of Purchaser and Newco (giving effect to the Closing) to conduct the Business. (b) Purchaser and Newco shall have performed and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied with by Purchaser and Newco, respectively, on or prior to the Closing Date. (c) Purchaser shall periodically until the Closing update the information contained in the Schedules hereto that have been prepared by or on behalf of Purchaser so that such Schedules shall be true and correct in all respects on and as of the Closing Date, and such updated information contained in the Schedules hereto shall not affect the obligations of the parties to proceed with the Closing (provided all other conditions to the Closing are satisfied or waived) to the extent that such information contained in the Schedules hereto as updated, individually or in the aggregate, and considered collectively with any breaches of any representations and warranties contained herein or in the Ancillary Agreements (excluding, for these purposes, any materiality limitations contained therein), would not have a Material Adverse -109- Effect on Purchaser or Newco or (after giving effect to the Closing) have a Material Adverse Effect on the Business. (d) On the Closing Date, Purchaser shall have delivered to Seller a certificate of Purchaser, dated as of the Closing Date and signed by an executive officer of Purchaser, as to the matters set forth in this Section 7.01. (e) In the event that (i) the representations and warranties of Purchaser contained in this Agreement fail to be true and correct on and as of the Closing Date (ignoring, for these purposes, any updated information provided by Purchaser pursuant to Section 7.01(c)) and (ii) such failure would not, individually or in the aggregate, materially and adversely affect the ability of Purchaser and Newco (giving effect to the Closing) to conduct the Business, Seller shall not be precluded from seeking indemnification pursuant to Article X of this Agreement with respect to any breach of the representations and warranties of Purchaser contained in this Agreement that were breaches as of the date of this Agreement. Section 7.02. OTHER AGREEMENTS. The Ancillary Agreements and each of the other agreements and instruments contemplated hereby and thereby to which Purchaser or Newco is a party shall have been duly executed and delivered by Purchaser or Newco, as applicable, on the Closing Date and each of such agreements and instruments shall be in full force and effect with respect to Purchaser or Newco on the Closing Date, as applicable. Section 7.03. GOVERNMENTAL AND REGULATORY CONSENTS AND APPROVALS. (a) All Permits required by either party or Newco from governmental and regulatory bodies listed on Schedule 6.03 and all Permits and authorizations from any other governmental or regulatory bodies that are legally required by either party or Newco to close this Agreement and to -110- implement the Indemnity Reinsurance Agreements shall have been obtained and shall be in full force and effect and without conditions or limitations which are unacceptable to Seller in the exercise of its reasonable business judgment, and Seller shall have been furnished with appropriate evidence, reasonably satisfactory to it and its counsel, of the granting of such Permits. (b) The waiting period prescribed by the HSR Act shall have expired. (c) The New York Insurance Department shall have approved a transfer at Closing to the Trustee of cash and Cash Equivalents held in the Seller Custodian Account, with a fair market value equal to the portion of the General Account Reserves that pertain to those Insurance Contracts that are subject to the provisions of the Custodial Agreement. Section 7.04. THIRD PARTY CONSENTS. All consents from Persons set forth on Schedule 3.05 hereto shall have been obtained without conditions or limitations which are unacceptable to Seller in the exercise of its reasonable business judgment, and shall be in full force and effect. Section 7.05. PURCHASE PRICE. Purchaser and Newco shall have paid to Seller an aggregate amount equal to the Preliminary Purchase Price as provided in this Agreement. Section 7.06. OPINION OF COUNSEL TO PURCHASER. Seller shall have received the opinion of Michael J. Wilkins, an Associate General Counsel of Lincoln National Corporation, dated as of the Closing Date, addressed to Seller and substantially in the form of Exhibit J hereto. -111- Section 7.07. INJUNCTION. There shall be no effective injunction, writ, preliminary restraining order or any order of any nature issued by a court of competent jurisdiction, directing that the transactions provided for herein not be consummated as herein provided. Section 7.08. RATINGS. Seller shall have received confirmation in form and substance reasonably satisfactory to Seller that, as of the Closing Date, the Standard & Poor's Corporation Claims-Paying Ability rating of Purchaser is A+ or higher and the Moody's Investors Service, Inc. Financial Strength rating of Purchaser is A1 or higher. Seller shall have received confirmation in form and substance reasonably satisfactory to Seller that, as of the Closing Date, (i) the Standard & Poor's Corporation Claims-Paying Ability rating of Newco and the Moody's Investors Service, Inc. Financial Strength rating of Newco shall be not lower than those assigned by such rating agencies to Purchaser and (ii) either (A) a rating shall be assigned to Newco by A.M. Best & Co. which shall be no lower than that assigned to Purchaser or (B) Purchaser shall guaranty the obligations of Newco to the holders of the Insurance Contracts. Section 7.09. NEW YORK SUBSIDIARY. Seller shall have received from Purchaser evidence reasonably satisfactory to Seller that Newco is a New York life insurance company subsidiary of Purchaser that is licensed by the New York Insurance Department to conduct life and annuity businesses in the State of New York. Section 7.10. PRINCIPAL UNDERWRITER. Purchaser or an affiliated broker-dealer will have entered into any agreements with Seller that are required for Purchaser or such affiliated broker-dealer to perform, commencing on the Closing Date, the functions of a principal underwriter, as defined in the 1940 Act, of the Insurance Contracts and any contracts sold pursuant to the Coinsurance and Assumption Agreement until such time as such contracts are -112- novated. In addition, if an affiliate of Purchaser serves as principal underwriter, Purchaser and its affiliate will have entered into any agreements between those two entities necessary to allow the registered representatives and selling agreement partners listed on Schedule 5.23 to lawfully receive commissions on the Insurance Contracts and any contracts sold pursuant to the Coinsurance and Assumption Agreement. Any such agreements shall contain customary representations, warranties and indemnities and shall terminate in the event of the termination of the Administrative Service Agreement. Section 7.11. FIRST UNUM AGREEMENT CLOSING. Simultaneously with the Closing under this Agreement, the closing under the First UNUM Agreement shall have occurred. ARTICLE VIII FURTHER AGREEMENTS Section 8.01. SELLER'S NON-COMPETE. (a) Seller agrees that, except as set forth in Section 8.01(d) hereof, following the Closing Date until the second anniversary of the Closing Date (the "Non-Compete Period") Seller shall not, and Seller agrees that none of its Affiliates shall, in the United States, without the consent of Purchaser: (i) solicit any holder of an Insurance Contract for the purpose of (A) obtaining applications for new group annuity contracts which constitute the Business or (B) inducing or attempting to induce any such Person to cancel, replace, surrender, withdraw assets or fail to make contributions to an Insurance Contract, or provide any incentive for any insurance agent of Seller or any broker to, directly or indirectly, do any of the foregoing; -113- (ii) establish a sales force for the purpose of soliciting applications for new contracts to be issued by Seller or by any such Affiliate which would be included in the Business if issued by Purchaser or Newco or an Affiliate of Purchaser or Newco; or (iii) disclose or reveal to any Person other than Purchaser or Newco any trade secret or other confidential information relating solely to the Business, unless Seller is legally required (whether by binding court or regulatory order, statute or otherwise) to disclose or reveal such information, provided that Seller shall only disclose such information to the extent required to satisfy such legal requirement. (b) Purchaser and Seller acknowledge that any damage caused to Purchaser and Newco by reason of the breach by Seller or by any of Seller's Affiliates or any of their respective successors in interest of this Section 8.01 could not be adequately compensated for in monetary damages alone; therefore, each party agrees that, in addition to any other remedies, at law or otherwise, Purchaser and Newco shall be entitled to specific performance of this Section 8.01 or an injunction to be issued by a court of competent jurisdiction restraining and enjoining any violation of this Section 8.01. (c) It is the intent and desire of the parties to this Agreement that the provisions of this Section 8.01 shall be enforced to the fullest extent permissible under applicable law. Accordingly, if any particular portion of this Section 8.01 shall be adjudicated to be invalid or unenforceable, this Section 8.01 shall be amended to delete therefrom the portion thus adjudicated to be invalid and unenforceable under such law. (d) The provisions of Sections 8.01(a)(i) and (ii) hereof shall apply to Colonial Life & Accident Insurance Company only with respect to the solicitation of group contractholders of -114- the Insurance Contracts for issuance of new group annuity contracts. Purchaser agrees that the provisions of this Section 8.01 shall not prevent Colonial Life & Accident Insurance Company from soliciting any insurance contracts or policies on its behalf or on behalf of any other insurer from Persons other than such group contractholders. ARTICLE IX SURVIVAL OF REPRESENTATIONS AND WARRANTIES Section 9.01. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties of Seller and Purchaser contained in this Agreement shall survive the execution and delivery hereof; PROVIDED, HOWEVER, that the representations and warranties of Seller and Purchaser herein shall terminate and expire on the second anniversary of the Closing Date, except for (a) representations and warranties of Seller pursuant to Section 3.10(c), which representations and warranties shall terminate and expire as follows: (i) representations and warranties relating to a federal tax matter, including, without limitation, matters relating to the qualification of any Insurance Contract under the Code, shall continue until the earlier of (A) December 31 of the fourth year following the calendar year in which the Closing Date falls or (B) the lapse of the applicable statute of limitations under the Code for the assessment of any relevant Tax and (ii) representations and warranties relating to a claim for a breach of a fiduciary obligation under ERISA shall continue until the earlier of (A) December 31 of the sixth year following the calendar year in which the Closing Date falls or (B) the lapse of the statute of limitations under ERISA for the assertion of such claim and (b) representations and warranties as to which a written notice pursuant to Article X, action, suit, proceeding or arbitration shall -115- have been made or commenced prior to the applicable expiration date, which representations shall continue until such matters have been finally decided, settled or adjudicated. ARTICLE X INDEMNIFICATION Section 10.01. OBLIGATION TO INDEMNIFY. (a) Subject to the limitations set forth in this Article X, Seller agrees to indemnify, defend and hold harmless Purchaser and Newco (and their respective directors, officers, employees, Affiliates, successors and permitted assigns) from and against all Losses (as hereinafter defined), based upon: (i)(A) any breach of or inaccuracy in the representations and warranties of Seller contained in Article III hereof (other than those contained in Sections 3.10(c) and 3.25(d) hereof) or in any Ancillary Agreement; or (B) any breach, nonfulfillment or default in the performance of any of the covenants and agreements of Seller contained in this Agreement (other than those contained in Sections 5.28(a), (b) and (c)), any Ancillary Agreement or in any certificate or document delivered by Seller pursuant to any of the provisions of, or in connection with, this Agreement or any Ancillary Agreement, to the extent that the sum of Losses in connection with clauses (a)(i)(A) and (a)(i)(B) of this Section 10.01 and Losses (as defined in the First UNUM Agreement) in connection with the corresponding provisions of the First UNUM Agreement exceeds $1 million in the aggregate, and then only in the amount of such excess; (ii) any Asserted Liability arising out of any breach of or inaccuracy in the representations and warranties of Seller contained in Section 3.10(c) hereof or any breach, nonfulfillment or default in the performance of any of the covenants and agreements of Seller contained in Section 5.28(a), (b) or (c) hereof, if the sum of Losses in connection therewith and Losses (as defined in the First UNUM Agreement) in connection with -116- any Asserted Liability arising out of any breach of or inaccuracy in the representations and warranties of First UNUM, or any breach, nonfulfillment or default by First UNUM contained in the corresponding provisions of the First UNUM Agreement exceeds $500,000 in the aggregate, in which case all such Losses shall be indemnified (there being no indemnification hereunder for Losses based on any breach of or inaccuracy in the representations and warranties of Seller contained in Section 3.10(c) hereof or any breach, nonfulfillment or default in the performance of any of the covenants and agreements of Seller contained in Section 5.28(a), (b) or (c) hereof except for Losses resulting from an Asserted Liability); (iii) any Extra Contractual Obligations; (iv) all liabilities or obligations arising out of or related to the Assigned and Assumed Contracts based on acts of Seller occurring prior to the Closing Date other than those liabilities or obligations reflected on the Final Balance Sheet and (v) any breach of or inaccuracy in the representations and warranties contained in Section 3.25(d) hereof. Solely for the purposes of this Section 10.01(a), the question whether any representation or warranty contained in Section 3.10(c) or 3.25(d) hereof has been breached shall be made without regard to matters previously disclosed to Purchaser, so that no such disclosure made prior to the date hereof, and no update to any such disclosure made on or prior to the Closing Date, shall be taken into account in determining whether any such breach has occurred. As used in this Article X, Loss and/or Losses shall mean claims, losses, liabilities, damages, deficiencies, costs, expenses (including attorneys' fees), interest, taxes and penalties. (b) Subject to the limitations set forth in this Article X, Purchaser agrees to indemnify, defend and hold harmless Seller (and its directors, officers, employees, Affiliates, successors and permitted assigns) from and against all Losses, based upon: (i)(A) any breach -117- of or inaccuracy in the representations and warranties of Purchaser contained in Article IV hereof or in any Ancillary Agreement; or (B) any breach, nonfulfillment or default in the performance of any of the covenants and agreements of Purchaser contained in this Agreement or any of the covenants or agreements of Purchaser or Newco contained in any Ancillary Agreement or in any certificate or document delivered by Purchaser or Newco pursuant to any of the provisions of, or in connection with, this Agreement or any Ancillary Agreement, to the extent that the sum of Losses in connection with clauses (b)(i)(A) and (b)(i)(B) of this Section 10.01 and Losses (as defined in the First UNUM Agreement) in connection with the corresponding provisions of the First UNUM Agreement exceeds $1 million in the aggregate, and then only in the amount of such excess; and (ii) the Insurance Liabilities and any claim (other than an Extra Contractual Obligation) of any Person other than Seller or its Affiliates with respect to or arising out of any Insurance Liability. (c) The aggregate amount for which Purchaser shall be liable under Section 10.01(b) shall be $35 million less any amounts paid under the corresponding provision of the First UNUM Agreement. The aggregate amount for which Seller shall be liable under Sections 10.01(a)(i), (iii) and (iv) shall be $35 million less any amounts paid under the corresponding provisions of the First UNUM Agreement. The aggregate amount for which Seller shall be liable under Section 10.01(a)(ii) shall be (i) $210 million with respect to Claims Notices received by Seller from Purchaser during the period commencing on the Closing Date and ending on December 31, 1997, (ii) $140 million with respect to Claims Notices received by Seller from Purchaser during the period commencing on January 1, 1998 and ending on December 31, 1998, and (iii) $70 million with respect to Claims Notices received by Seller from -118- Purchaser during the period commencing on January 1, 1999 and ending on December 31 of the sixth year following the calendar year in which the Closing Date falls less, in each case, any amount paid under the corresponding provision of the First UNUM Agreement; PROVIDED, HOWEVER, that the aggregate amount for which Seller shall be liable under Section 10.01(a)(ii) during any period described in this Section 10.01(c) shall be reduced by any amounts paid or payable by Seller with respect to Claims Notices received by Seller during any prior period pursuant to Section 10.01(a)(ii) and amounts paid or payable under the corresponding provision of the First UNUM Agreement; and, PROVIDED FURTHER, that in no event shall the liability of Seller with respect to Section 10.01(a)(ii) exceed $210 million less any amount paid under the corresponding provision of the First UNUM Agreement. Section 10.02. CLAIMS NOTICE. Any claim for indemnification that Newco wishes to assert hereunder shall be asserted by Purchaser on behalf of Newco. In the event that either Purchaser, Newco or Seller wishes to assert a claim for indemnification hereunder, such party seeking indemnification (the "Indemnified Party") shall deliver written notice (a "Claims Notice") to the other party (the "Indemnifying Party") no later than ten (10) Business Days after such claim becomes known to the Indemnified Party, specifying the facts constituting the basis for, and the amount (if known) of, the claim asserted. Failure to deliver a Claims Notice with respect to a claim in a timely manner as specified in the preceding sentence shall not be deemed a waiver of the Indemnified Party's right to indemnification hereunder for Losses in connection with such claim, but the amount of reimbursement to which the Indemnified Party is entitled shall be reduced by the amount, if any, by which the Indemnified Party's Losses would have been less had such Claims Notice been timely delivered; PROVIDED, HOWEVER, that, -119- notwithstanding the foregoing, the failure to deliver a Claims Notice with respect to a claim within twenty (20) Business Days of the Indemnified Party's receipt of written notice of such claim shall be deemed a waiver of the Indemnified Party's right to indemnification hereunder for Losses in connection with such claim. Section 10.03. RIGHT TO CONTEST CLAIMS OF THIRD PARTIES. (a) Subject to Section 10.04 hereof, if an Indemnified Party asserts a claim for indemnification hereunder because of a claim or demand made, or an action, proceeding or investigation instituted, by any Person not a party to this Agreement (a "Third Party Claimant") that may result in a Loss with respect to which the Indemnified Party would be entitled to indemnification pursuant to Section 10.01 hereof without regard to the dollar limitations set forth in Section 10.01 (an "Asserted Liability"), the Indemnified Party shall deliver to the Indemnifying Party a Claims Notice with respect thereto, which Claims Notice shall, in accordance with the provisions of Section 10.02 hereof, be delivered no later than ten (10) Business Days after such Asserted Liability is actually known to the Indemnified Party. Failure to deliver a Claims Notice with respect to an Asserted Liability in a timely manner as specified in the preceding sentence shall not be deemed a waiver of the Indemnified Party's right to indemnification for Losses in connection with such Asserted Liability, but the amount of reimbursement to which the Indemnified Party is entitled shall be reduced by the amount, if any, by which the Indemnified Party's Losses would have been less had such Claims Notice been timely delivered; PROVIDED, HOWEVER, that, notwithstanding the foregoing, the failure to deliver a Claims Notice with respect to an Asserted Liability within twenty (20) Business Days of the Indemnified Party's receipt of written notice of such Asserted -120- Liability shall be deemed to be a waiver of the Indemnified Party's right to indemnification hereunder for Losses in connection with such Asserted Liability. (b) Subject to Section 10.04 hereof, the Indemnifying Party shall have the right, upon written notice to the Indemnified Party, to investigate, contest, defend or settle any Asserted Liability that may result in a Loss with respect to which the Indemnified Party is entitled to indemnification pursuant to Section 10.01 hereof; provided, that the Indemnified Party may, at its option and at its own expense, participate in the investigation, contesting, defense or settlement of any such Asserted Liability through representatives and counsel of its own choosing; and, provided further, that the Indemnifying Party shall not settle any Asserted Liability unless (i) such settlement is on exclusively monetary terms or (ii) the Indemnified Party shall have consented to the terms of such settlement, which consent shall not unreasonably be withheld. The failure of the Indemnifying Party to provide the above-mentioned written notice to the Indemnified Party within thirty (30) days after receipt of a Claims Notice with respect to an Asserted Liability shall be deemed an election not to defend the same. Unless and until the Indemnifying Party elects to defend the Asserted Liability, the Indemnified Party shall have the right, at its option and at the Indemnifying Party's expense, to do so in such manner as it deems appropriate; PROVIDED, HOWEVER, that the Indemnified Party shall not settle or compromise any Asserted Liability for which it seeks indemnification hereunder without the prior written consent of the Indemnifying Party (which shall not be unreasonably withheld) during the thirty (30) day period referred to above. (c) The Indemnifying Party shall be entitled to participate in (but not to control) the defense of any Asserted Liability which it has elected, or is deemed to have elected, not to -121- defend, or as to which it does not have the right to defend under Section 10.03(b) or 10.04(a), with its own counsel and at its own expense. If the Indemnifying Party seeks to question (i) the manner in which the Indemnified Party defended an Asserted Liability with respect to which the Indemnifying Party elected, or is deemed to have elected, not to defend or (ii) the amount or nature of any settlement entered into by the Indemnified Party in connection with such Asserted Liability, the Indemnifying Party shall have the burden to prove by a preponderance of the evidence that the Indemnified Party did not defend or settle such Asserted Liability in a reasonably prudent manner. (d) Except as provided in the first sentence of Section 10.03(b), and subject to the provisions of Section 10.04 hereof, the Indemnifying Party shall bear all costs of defending any Asserted Liability and shall indemnify and hold the Indemnified Party harmless against and from all costs, fees and expenses incurred in connection with defending such Asserted Liability. (e) Purchaser and Seller shall, and Purchaser shall cause Newco to, make mutually available to each other all non-privileged relevant information in their possession relating to any Asserted Liability and shall cooperate with each other in the defense thereof. Section 10.04. SECTION 10.01(a)(ii) INDEMNIFICATION. Notwithstanding any contrary provision in Section 10.03 and except as provided in subsection (a)(iii) of this Section 10.04, the provisions of this Section 10.04 shall govern the procedures by which Purchaser and/or Newco shall seek indemnification under Section 10.01(a)(ii) with respect to Employer Claims and IRS Claims. (a) (i) In the event that any Contractholder asserts a claim against Purchaser and/or Newco or indicates to Purchaser and/or Newco that it believes that the IRS may assert a Tax -122- liability against such Contractholder (or against one or more participants or holders of certificates under the relevant Transferred Contract) (an "Employer Claim"), Purchaser shall deliver to Seller a written notice with respect thereto no later than ten (10) Business Days after such Employer Claim is actually known to (A) Purchaser, in the case of an Employer Claim against Purchaser, (B) Newco, in the case of an Employer Claim against Newco, or (C) the first of Purchaser and Newco to have such actual knowledge, in the case of an Employer Claim against both Purchaser and Newco, specifying the facts constituting the basis for, and the amount, if known, of such Employer Claim. Failure to deliver such written notice with respect to an Employer Claim in a timely manner as specified in the preceding sentence shall not be deemed a waiver of Purchaser's and/or Newco's right to indemnification hereunder for Losses in connection with such Employer Claim, but the amount of reimbursement to which Purchaser and/or Newco is entitled shall be reduced by the amount, if any, by which Purchaser's and/or Newco's Losses would have been less had such written notice been timely delivered; PROVIDED, HOWEVER, that, notwithstanding the foregoing, the failure to deliver such written notice with respect to an Employer Claim within twenty (20) Business Days of (x) Purchaser's receipt, in the case of an Employer Claim against Purchaser, (y) Newco's receipt, in the case of an Employer Claim against Newco, or (z) the first of Purchaser's receipt or Newco's receipt, in the case of an Employer Claim against both Purchaser and Newco, of written notice of such Employer Claim shall be deemed a waiver of Purchaser's or Newco's, as applicable, right to indemnification hereunder for Losses in connection with such Employer Claim. Seller shall be entitled to participate in (but not control) the investigation of any Employer Claim, with its own counsel and at its own expense. Purchaser or Newco, as applicable, shall have the right, but -123- not the obligation, to investigate and to settle on, with respect to Seller, exclusively monetary terms, any such Employer Claim without the consent of Seller, either by making the settlement payment to the relevant Contractholder, participant or holders of certificates or by making such payment directly to the IRS. In the event that Losses incurred by Purchaser and/or Newco in connection with the settlement of any such Employer Claim do not exceed $250,000, Purchaser shall provide written notice (the "Settlement Notice") to Seller within ten (10) Business Days of the making of such payment by Purchaser or Newco, which Settlement Notice shall set forth in reasonable detail the amount of Losses incurred by Purchaser and/or Newco in connection with the settlement of such Employer Claim and the portion thereof for which Purchaser and/or Newco seeks indemnification. Seller shall either pay in full the amount for which Purchaser and/or Newco seeks indemnification or request arbitration in accordance with Section 10.04(a)(ii). If Seller neither pays in full the amount for which Purchaser and/or Newco seeks indemnification nor requests arbitration in accordance with the provisions of Section 10.04(a)(ii) within thirty (30) days of the date on which Seller received such Settlement Notice, Purchaser shall be entitled to request arbitration in accordance with Section 10.04(a)(ii). In the event that Losses in connection with any settlement of an Employer Claim exceed $250,000, or in the event that any such Losses, when added to other Losses as to which Purchaser or Newco has entered into settlements in accordance with this Section 10.04(a)(i) or the corresponding provision of the First UNUM Agreement during the same calendar year, would exceed $2,500,000 in the aggregate, neither Purchaser nor Newco shall be entitled to seek indemnification under, and such Losses shall not count towards the $500,000 threshold set forth in, Section 10.01(a)(ii). -124- (ii) (A) In the event that an arbitration proceeding is commenced in accordance with the provisions of subsection (a)(i) of this Section 10.04, the party requesting the arbitration shall have the right to arbitrate, pursuant to the procedures specified below, with regard to (i) whether the relevant Losses were based upon any breach of or inaccuracy in the representations and warranties of Seller contained in Section 3.10(c) hereof or the covenants and agreements of Seller contained in Section 5.28(a), (b) or (c) hereof, (ii) the reasonableness of the amount of the settlement entered into by Purchaser and/or Newco and (iii) the reasonableness of any proposed allocation of settlement between Purchaser and/or Newco on the one hand and Seller on the other hand. In any such arbitration proceeding, Purchaser shall have the burden to prove by a preponderance of the evidence the matters set forth in clauses (i) and (iii) of the preceding sentence. In the event that the arbitrators rule in favor of Purchaser as to such matters, Seller shall have the burden to prove by a preponderance of the evidence that Purchaser and/or Newco did not settle such Employer Claim in a reasonable manner. In the event that the arbitrators rule in favor of Seller on the issue of the reasonableness of the settlement, they shall be entitled to determine a lesser amount to be indemnified by Seller. (B) In the event that Seller wishes to exercise its right to seek arbitration with respect to an Employer Claim that has been settled, it shall deliver a written notice of exercise to Purchaser within thirty (30) days of the date on which Seller received the Settlement Notice with respect to such settlement. In the event that Seller neither requests arbitration in accordance with the foregoing sentence nor pays in full the amount for which Purchaser and/or Newco seeks indemnification within thirty (30) days of the date on which Seller received the applicable Settlement Notice and Purchaser wishes to exercise its right to seek arbitration, -125- Purchaser shall deliver a written notice of exercise to Seller within ten (10) Business Days of the expiration of such 30-day period. The arbitration panel shall consist of three attorneys widely recognized as having expertise in matters relating to ERISA and section 403(b) of the Code; PROVIDED, HOWEVER, that there shall be excluded from the arbitration panel the following individuals: (x) any attorney who worked on this Agreement, any Ancillary Agreement or any of the transactions contemplated hereby or thereby; (y) any attorney employed by or partner of the firm with which any attorney described in clause (x) is affiliated as of the date hereof or as of the Closing Date; and (z) any attorney employed by or partner of any firm advising either party with respect to any matter at the time of such arbitration. Seller shall appoint one such arbitrator and Purchaser shall appoint the second arbitrator. Such arbitrators shall then select the third arbitrator before arbitration commences. Should either Seller or Purchaser decline to appoint an arbitrator, or should the two arbitrators be unable to agree upon the choice of a third, such arbitrator shall be appointed in accordance with the rules of the American Arbitration Association. The arbitration shall be held in New York, New York, as soon as possible after the arbitrators are appointed. Each party will have the opportunity to present evidence and to cross-examine witnesses. Discovery shall be limited to the production of written documents and the taking of depositions, in each case as found by the arbitrators to be directly relevant to, and reasonably necessary to the resolution of, the issues in the arbitration, and such other discovery as the arbitrators may order. Decisions of the arbitrators shall be by majority vote. Each party shall bear its own costs and those of its counsel in connection with any such arbitration, but the costs of arbitration, including the fees of the arbitrators, shall be shared equally by the parties. Judgment upon any award of the arbitrators may be entered in a Federal court of competent -126- jurisdiction located in the City, County and State of New York. Any out-of- pocket expenses incurred by Purchaser or Newco in connection with the enforcement of any such decision shall be reimbursed by Seller (but shall not be included in determining the limitations on Seller's liability under Section 10.01(c)). (iii) In the event that neither Purchaser nor Newco settles an Employer Claim under Section 10.04(a)(i), Purchaser shall be entitled to deliver a Claims Notice to Seller with respect to such Employer Claim at any time provided that neither Purchaser nor Newco has made any pleading or other filing in any court or other tribunal with respect to such Employer Claim and that Seller receives such Claims Notice at least twenty (20) days prior to the date upon which any such filing is due in response to a complaint or other filing made by the IRS or the relevant Contractholder. In the event that Purchaser delivers a Claims Notice to Seller with respect to such an Employer Claim, the provisions of Section 10.03 shall apply to such Employer Claim; provided, that the requirement that Claims Notices with respect to Asserted Liabilities be delivered within ten (10) Business Days after the Asserted Liability is actually known to the Indemnified Party shall not be applicable. (b) (i) In the event that the IRS asserts a claim against Purchaser and/or Newco or indicates to Purchaser and/or Newco that it may assert a Tax liability against one or more Contractholders (an "IRS Claim"), Purchaser shall deliver to Seller written notice with respect thereto no later than ten (10) Business Days after such IRS Claim is actually known to (A) Purchaser, in the case of an IRS Claim against Purchaser, (B) Newco, in the case of an IRS Claim against Newco, or (C) the first of Purchaser and Newco to have such actual knowledge, in the case of an IRS Claim against both Purchaser and Newco, specifying the basis for and the -127- amount, if known, of such IRS Claim, and Purchaser and/or Newco, on the one hand, and Seller, on the other hand, shall jointly investigate, contest, defend or settle such IRS Claim. In any such joint defense, Purchaser and/or Newco, on the one hand, and Seller, on the other hand, shall cooperate in good faith. In the event that Purchaser and/or Newco, on the one hand, and Seller, on the other hand, agree to a settlement with the IRS and to an allocation of the settlement between Purchaser and/or Newco, on the one hand, and Seller, on the other hand, the amount of (A) Seller's allocable share (as determined by Purchaser and/or Newco, on the one hand, and Seller, on the other hand) of the settlement and of the legal fees and other expenses incurred by Purchaser and/or Newco in connection with the IRS Claim and (B) the legal fees and other expenses incurred by Seller in connection with the IRS Claim shall be paid by Seller. In the event that a settlement offer is made by the IRS and either Purchaser and/or Newco, on the one hand, or Seller, on the other hand, wishes to accept the offer, the other party shall not unreasonably withhold its consent to the settlement. If Seller rejects the offer but Purchaser or Newco, as applicable, nonetheless agrees to the settlement, or if Seller wishes to accept the offer but Purchaser or Newco, as applicable, does not agree to the settlement, the procedures set forth in Section 10.04(b)(ii) shall apply. (ii) (A) In the event that the amount of Losses sought by Purchaser and/or Newco in connection with a settlement offer rejected by Seller in connection with an IRS Claim is $1,000,000 or less, Purchaser shall have the right to arbitrate the reasonableness of Seller's rejection of such offer. The arbitrators shall be selected in accordance with the procedures set forth in Section 10.04(a)(ii)(B) except as specifically provided in this Section 10.04(b)(ii)(A). The arbitrators shall determine (i) whether and the extent to which the IRS Claim was based -128- upon any breach of or inaccuracy in the representations and warranties of Seller contained in Section 3.10(c) hereof or the covenants and agreements of Seller contained in Section 5.28(a), (b) or (c) hereof, (ii) the reasonableness of the amount of the settlement offer in light of their determination as to the question set forth in clause (i) of this sentence and (iii) the reasonableness of any proposed allocation of settlement between Purchaser and/or Newco, on the one hand, and Seller, on the other hand. In any such arbitration proceeding, Purchaser shall have the burden to prove by a preponderance of the evidence the matters set forth in clauses (i) and (iii) of the preceding sentence. In the event that the arbitrators rule in favor of Purchaser as to such matters, Seller shall have the burden to prove by a preponderance of the evidence that its rejection of the settlement offer was reasonable. In the event that the arbitrators rule that Seller's rejection of the settlement was unreasonable, Seller shall indemnify Purchaser and/or Newco for Seller's allocable share of Losses based upon the IRS Claim (allocated based on Seller's liability, on the one hand, and Purchaser's and/or Newco's liability, on the other hand, with respect to such IRS Claim), and for out-of-pocket expenses incurred by Purchaser in connection with the arbitration. In the event that the arbitrators rule that Seller's rejection of the settlement was reasonable, the arbitrators shall be entitled to determine a lesser amount to be indemnified by Seller. Judgment upon any award of the arbitrators may be entered in a Federal court of competent jurisdiction located in the City, County and State of New York. Any out-of- pocket expenses incurred by Purchaser in connection with the enforcement of any such decision shall be reimbursed by Seller (but shall not be included in determining the limitations on Seller's liability under Section 10.01(c)). -129- (B) In the event that the amount of Losses sought by Purchaser and/or Newco in connection with a settlement offer rejected by Seller in connection with an IRS Claim is greater than $1,000,000, Purchaser or Newco, as applicable, shall have the right to bring an action in any court of competent jurisdiction to seek resolution of the matters set forth in clauses (i) and (ii) of Section 10.04(b)(ii)(A). In the event that the court rules that Seller's rejection of the settlement was unreasonable, Seller shall indemnify Purchaser and/or Newco for Seller's allocable share of Losses based upon the IRS Claim (allocated based on Seller's liability, on the one hand, and Purchaser's and/or Newco's liability, on the other hand, with respect to such IRS Claim), and for out-of-pocket expenses incurred by Purchaser or Newco, as applicable, in connection with the litigation (which shall not be included in determining the limitations on Seller's liability under Section 10.01(c)). In the event that the court rules that Seller's rejection of the settlement was reasonable, the court shall be entitled to determine a lesser amount to be indemnified by Seller. (C) In the event that the amount of Losses allocable to Seller in connection with a settlement offer rejected by Purchaser and/or Newco in connection with an IRS Claim is $1,000,000 or less, Seller shall have the right to arbitrate the reasonableness of Purchaser's and/or Newco's rejection of such offer. The arbitrators shall be selected in accordance with the procedures set forth in Section 10.04(a)(ii)(B) except as specifically provided in this Section 10.04(b)(ii)(C). The arbitrators shall determine the reasonableness of the amount of the settlement offer. Purchaser shall have the burden to prove, by a preponderance of the evidence, that its and/or Newco's rejection of the settlement offer was reasonable. In the event that the arbitrators rule that Purchaser's and/or Newco's rejection of the settlement was unreasonable, -130- Purchaser shall indemnify Seller for out-of-pocket expenses incurred by Seller in connection with the arbitration and Seller's aggregate indemnification obligation under Section 10.01(a)(ii), if any, arising from such IRS Claim and from any subsequent IRS Claim or Employer Claim relating to the issue or issues that (x) were the subject of the IRS Claim in question and (y) would have been resolved by the relevant settlement offer (regardless of whether such IRS Claim or Employer Claim arises out of the identical Insurance Contract or Insurance Contracts) shall be limited, in the aggregate, to the portion of such IRS Claim in question that is allocable to Seller (as determined by the arbitrators and specified in written findings of the arbitrators). Judgment upon any award of the arbitrators may be entered in a Federal court of competent jurisdiction located in the City, County and State of New York. Any out-of-pocket expenses incurred by Seller in connection with the enforcement of any such decision shall be reimbursed by Purchaser (but shall not be included in determining the limitations on Purchaser's liability under Section 10.01(c)). (D) In the event that the amount of Losses allocable to Seller in connection with a settlement offer rejected by Purchaser and/or Newco in connection with an IRS Claim is greater than $1,000,000, Seller shall have the right to bring an action in any court of competent jurisdiction to seek resolution of the reasonableness of the amount of the settlement offer. In the event that the court rules that Purchaser's and/or Newco's rejection of the settlement was unreasonable, Seller's aggregate indemnification obligation under Section 10.01(a)(ii), if any, arising from such IRS Claim and from any subsequent IRS Claim or Employer Claim relating to the issue or issues that (x) were the subject of the IRS Claim in question and (y) would have been resolved by the relevant settlement offer (regardless of -131- whether such IRS Claim or Employer Claim arises out of the identical Insurance Contract or Insurance Contracts) shall be limited, in the aggregate, to the portion of such IRS Claim in question that is allocable to Seller (as determined by the court). In addition, Purchaser shall indemnify Seller for out-of-pocket expenses incurred by Seller in connection with the litigation (which shall not be included in determining the limitations on Purchaser's liability under Section 10.01(c)). (c) The parties intend that in determining whether a settlement or a settlement offer pursuant to this Section 10.04 was reasonable, arbitrators or a court, as applicable, shall consider the factors typically considered by insurers in settling claims of policyholders and contractholders including, but not be limited to, (i) whether Purchaser and/or Newco acted in good faith in settling an Employer Claim, or a portion of an IRS Claim allocable to Seller (in the event of a settlement by Purchaser and/or Newco) and (ii) the likely results of litigation had the Employer Claim, or a portion of an IRS Claim allocable to Seller, been litigated to a final judgment before a court of competent jurisdiction (in the event of a settlement by Purchaser and/or Newco or a settlement offer rejected by Seller or Purchaser and/or Newco), (iii) the potential costs of litigation, (iv) the potential for additional claims to develop in the course of litigation or continued settlement negotiations, (v) adverse publicity that would result from litigation and (vi) the potential for the establishment of adverse legal precedent in a court proceeding, in each case, as such may be applicable; PROVIDED, HOWEVER, that in determining any such reasonableness, the arbitrators shall consider the future business interests of Purchaser and/or Newco with respect to the Contractholders only to the extent that such business interests are included within the factors specifically referred to above in clauses (i) through (vi); and, -132- PROVIDED FURTHER, that, with respect to an IRS Claim, the arbitrators shall consider solely the factors specifically referred to above in clauses (i) through (vi) and whether the settlement of Seller's allocable portion of the IRS Claim would have been reasonable had such allocable portion been the sole subject of the IRS Claim. (d) Unless and until Purchaser or Seller shall have commenced an arbitration or judicial proceeding against the other party pursuant to the provisions hereof, Purchaser and Seller shall, and Purchaser shall cause Newco to, make mutually available to each other all non-privileged relevant information in their possession relating to any Employer Claim or IRS Claim and shall cooperate with each other in the investigation or defense thereof. Section 10.05. INDEMNIFICATION PAYMENTS. Subject to a party's right to defend pursuant to Section 10.03 or Section 10.04 hereof, an Indemnifying Party hereunder shall make a required indemnification payment with respect to a Loss promptly after a Claims Notice is received. All such payments shall be made by wire transfer of immediately available funds to such account or accounts as the Indemnified Party shall designate to the Indemnifying Party in writing. ARTICLE XI TERMINATION PRIOR TO CLOSING Section 11.01. TERMINATION OF AGREEMENT. This Agreement may be terminated at any time prior to the Closing: (a) by Seller in writing, if Purchaser shall (i) fail to perform in any material respect its agreements contained herein or in the First UNUM Agreement required to be performed on or prior to the Closing Date or (ii) breach any of its representations, warranties, -133- covenants or agreements contained herein, which breach would, individually or in the aggregate, materially and adversely affect the ability of Purchaser to consummate the transactions contemplated hereby or (after giving effect to the Closing) the ability of Purchaser and Newco to conduct the Business, which failure or breach is not cured within ten (10) days after Seller has notified Purchaser of its intent to terminate this Agreement pursuant to this Section 11.01(a); (b) by Purchaser in writing, if Seller shall (i) fail to perform in any material respect its agreements contained herein or in the First UNUM Agreement required to be performed on or prior to the Closing Date or (ii) breach any of its representations, warranties, covenants or agreements contained herein, which breach would, individually or in the aggregate, have a Material Adverse Effect on the Business or materially and adversely affect the ability of Seller to consummate the transactions contemplated hereby, which failure or breach is not cured within ten (10) days after Purchaser has notified Seller of its intent to terminate this Agreement pursuant to this Section 11.01(b); (c) by Seller or Purchaser in writing, if there shall be any order, writ, injunction or decree of any court or governmental or regulatory agency binding on Purchaser and/or Seller, which prohibits or restrains Purchaser and/or Seller from consummating the transactions contemplated hereby; PROVIDED, that Purchaser and/or Seller, as the case may be, shall have used its best efforts to have any such order, writ, injunction or decree lifted and the same shall not have been lifted by December 15, 1996; (d) by either of Seller or Purchaser in writing, if the Closing has not occurred on or prior to December 15, 1996 unless the absence of such occurrence shall be due to the failure -134- of the party seeking to terminate this Agreement to materially perform each of its obligations under this Agreement required to be performed by it on or prior to the Closing Date; (e) at any time on or prior to the Closing Date, by mutual written consent of Seller and Purchaser; and (f) by Seller in writing if, at any time prior to the Closing Date, (i) the ratings of Purchaser shall become lower than the ratings specified in Section 7.08 hereof or (ii) Purchaser shall be placed on credit watch with an indication of a reduction in rating to a rating lower than the ratings so specified and Purchaser is not removed from credit watch within fourteen (14) days after being so placed on credit watch. Section 11.02. BREAK-UP FEE. (a) In the event that Seller or Purchaser shall terminate this Agreement pursuant to Section 11.01(a) or (b) hereof or otherwise fail to close this Agreement in accordance with the terms hereof, other than a failure to close this Agreement in accordance with Section 11.01(c), (d) or (e), in addition to any other remedy available to the non- breaching party at law or equity, the breaching party shall pay to the non- breaching party, within ten (10) Business Days of such termination, the sum of $2 million, as well as all out-of-pocket fees and expenses incurred by the non- breaching party in connection with the negotiation and preparation of this Agreement and the Ancillary Agreements. (b) In the event that Seller shall terminate this Agreement pursuant to Section 11.01(f) hereof, Purchaser shall pay to Seller, within ten (10) Business Days of such termination, the sum of $2 million, as well as all out-of- pocket fees and expenses incurred by Seller in connection with the negotiation and preparation of this Agreement and the Ancillary Agreements. -135- (c) The parties recognize that this Section 11.02 shall not apply if this Agreement fails to close solely due to the failure of Purchaser to satisfy by December 15, 1996 the condition to close set forth in Section 7.09 hereof, provided that Purchaser shall not have failed to perform its covenants contained in Section 5.22 hereof. (d) The parties recognize that this Section 11.02 shall not apply if this Agreement fails to close solely due to the failure of Seller to satisfy the condition to close set forth in Section 6.12 hereof. Section 11.03. SURVIVAL. If this Agreement is terminated and the transactions contemplated hereby are not consummated as described above, this Agreement shall become null and void and of no further force and effect, except for (a) the provisions of this Agreement relating to the obligations of the parties hereto to keep confidential and not to use certain information and data obtained from the other parties hereto and (b) the provisions of Sections 5.09, 11.02, 12.01 and this Section 11.03. ARTICLE XII MISCELLANEOUS Section 12.01. PUBLICITY. Except as may otherwise be required by law, no release or announcement concerning this Agreement or the transactions contemplated hereby shall be made without advance approval thereof by Seller and Purchaser. The parties hereto shall cooperate with each other in making any release or announcement. Section 12.02. CONFIDENTIALITY. The parties agree that, other than as agreed or as required to implement the transactions contemplated hereby, the parties will keep confidential the terms and conditions of this Agreement and the Ancillary Agreements, including, without -136- limitation, the Schedules hereto and thereto, except as otherwise required by law (including, without limitation, pursuant to any federal or state securities laws or pursuant to any legal, regulatory or legislative proceedings). Section 12.03. NOTICES. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally (by courier or otherwise), telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid and return receipt requested. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission or, if mailed, three days after the date of deposit in the United States mails, as follows: (i) if to Purchaser: The Lincoln National Life Insurance Company 1300 South Clinton Street P.O. Box 1110 Fort Wayne, Indiana 48601-1110 Attention: Carl L. Baker Telecopier No.: (219) 455-5135 With a concurrent copy to: Sutherland, Asbill & Brennan 1275 Pennsylvania Avenue, N.W. Washington, D.C. 20004 Attention: David A. Massey Telecopier No.: (202) 637-3593 (ii) If to Seller: UNUM Life Insurance Company of America 2211 Congress Street Portland, Maine 04122 Attention: Kevin J. Tierney Telecopier No.: (207) 770-4377 -137- With a concurrent copy to: LeBoeuf, Lamb, Greene & MacRae, L.L.P. 125 West 55th Street New York, New York 10019-5389 Attention: Donald B. Henderson, Jr. Telecopier No.: (212) 424-8500 Any party may, by notice given in accordance with this Section 12.02 to the other parties, designate another address or person for receipt of notices hereunder provided that notice of such a change shall be effective upon receipt. Section 12.04. ENTIRE AGREEMENT. This Agreement (including the Ancillary Agreements, the other agreements contemplated hereby and thereby, the Exhibits and the Schedules hereto) contains the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior agreements, written or oral, with respect thereto; PROVIDED, HOWEVER, that the Confidentiality Agreement entered into between Seller and Purchaser dated September 19, 1995 shall remain in full force and effect in accordance with its terms both prior to and subsequent to the Closing (except, following Closing, as to the utilization of Books and Records and the hiring of Seller's employees as provided for in this Agreement). Section 12.05. WAIVERS AND AMENDMENTS; NON-CONTRACTUAL REMEDIES; PRESERVATION OF REMEDIES. This Agreement may be amended, superseded, cancelled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by each of the parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party on exercising any right, power or privilege hereunder shall operate as a waiver thereof. Nor shall any waiver on the part of any party of any right, power or privilege, nor any single or partial exercise of any such right, power or privilege, preclude any further exercise thereof or -138- the exercise of any other such right, power or privilege. The rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies that any party may otherwise have at law or in equity. Section 12.06. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. Section 12.07. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, permitted assigns and legal representatives. Neither this Agreement, nor any right hereunder, may be assigned by any party (in whole or in part) without the prior written consent of the other party hereto; PROVIDED, that Seller and Purchaser agree that Newco shall enter into the Newco Assumption Reinsurance Agreement, the Newco Indemnity Reinsurance Agreement, the Newco Trust Agreement and a Custodian Agreement, as contemplated herein, with respect to Insurance Contracts issued to residents of the State of New York. Section 12.08. INTERPRETATION. (a) Notwithstanding anything in this Agreement to the contrary, no term or condition of this Agreement shall be construed to supersede, restrict or otherwise limit any term or condition set forth in the Indemnity Reinsurance Agreements or in the Assumption Reinsurance Agreements. (b) Except as otherwise provided in Section 10.04 hereto, the parties acknowledge and agree that they may pursue judicial remedies at law or equity in the event of a dispute with respect to the interpretation or construction of this Agreement. In the event that an alternative -139- dispute resolution procedure is provided for in any of the Ancillary Agreements or any other agreement contemplated hereby or thereby, and there is a dispute with respect to the construction or interpretation of such Ancillary Agreement, the dispute resolution procedure provided for in such Ancillary Agreement shall be the procedure that shall apply with respect to the resolution of such dispute. (c) For purposes of this Agreement, the words "hereof," "herein," "hereby" and other words of similar import refer to this Agreement as a whole unless otherwise indicated. Whenever the singular is used herein, the same shall include the plural, and whenever the plural is used herein, the same shall include the singular, where appropriate. Section 12.09. NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement is intended or shall be construed to give any Person (including, but not limited to, the employees of Seller), other than the parties hereto, their successors and permitted assigns, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. Section 12.10. COUNTERPARTS. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all, of the parties hereto. Section 12.11. OTHER AGREEMENTS, EXHIBITS AND SCHEDULES. The Exhibits and the Schedules are a part of this Agreement as if fully set forth herein. All references herein to Articles, Sections, subsections, paragraphs, subparagraphs, clauses, Exhibits and Schedules shall be deemed references to such parts of this Agreement, unless the context shall otherwise require. -140- Section 12.12. HEADINGS. The headings in this Agreement are for reference only, and shall not affect the interpretation of this Agreement. Section 12.13. DOLLAR REFERENCES. All dollar references in this Agreement are to the currency of the United States. Section 12.14. NEWCO SIGNATURE PAGE. Prior to the Closing Date, Purchaser shall cause Newco to execute a signature page to this Agreement in substantially the form of Exhibit L hereto, and Newco shall thereafter be deemed to be a party to this Agreement for all purposes as if it had executed this Agreement concurrently with Seller and Purchaser. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. UNUM LIFE INSURANCE COMPANY OF AMERICA By: /s/ Kevin J. Tierney ------------------------------- Name: Kevin J. Tierney Title: Senior Vice President and General Counsel THE LINCOLN NATIONAL LIFE INSURANCE COMPANY By: /s/ Kelly D. Clevenger ------------------------------- Name: Kelly D. Clevenger Title: Vice President -141- EX-12 10 EXHIBIT 12 EXHIBIT 12 UNUM CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN MILLIONS) Year Ended December 31, -------------------------- 1995 1994 1993 - --------------------------------------------------------------------------- EARNINGS: Income from continuing operations before income taxes $381.9 $198.6 $460.3 Add: Fixed charges 48.0 29.6 24.2 ------ ------ ------ Earnings as adjusted $429.9 $228.2 $484.5 ------ ------ ------ ------ ------ ------ FIXED CHARGES: Interest expense $ 37.2 $ 18.7 $ 12.7 Interest portion of rent expense 10.8 10.9 11.5 ------ ------ ------ Total fixed charges $ 48.0 $ 29.6 $ 24.2 ------ ------ ------ ------ ------ ------ RATIO OF EARNINGS TO FIXED CHARGES 9.0 7.7 20.0 ------ ------ ------ ------ ------ ------ For purposes of computing the ratio of earnings to fixed charges, earnings as adjusted consist of income from continuing operations before income taxes plus fixed charges. Fixed charges consist of interest expense and the estimated interest portion of rent expense. EX-21 11 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF UNUM CORPORATION Listed below are subsidiaries of UNUM Corporation, as of December 31, 1995, with their respective jurisdiction of incorporation. UNUM Holding Company (Delaware) First UNUM Life Insurance Company (New York) UNUM Sales Corporation (Delaware) Claims Service International, Inc. (Delaware) UNUM Life Insurance Company of America (Maine) Colonial Companies, Inc. (Delaware) Colonial Life & Accident Insurance Company (South Carolina) BenefitAmerica, Inc. (South Carolina) Commercial Life Insurance Company (Wisconsin) UNUM European Holding Company Limited (United Kingdom) UNUM Limited (United Kingdom) Duncanson & Holt, Inc. (New York) Duncanson & Holt Services, Inc. (Maine) Group Management Services, Inc. (Washington) Duncanson & Holt Canada Ltd. (Canada) Duncanson & Holt Asia PTE Ltd. (Singapore) Duncanson & Holt Europe Ltd. (United Kingdom) Duncanson & Holt Underwriters Ltd. (United Kingdom) UNUM Japan Accident Insurance Company Limited (Japan) EX-23 12 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the following Registration Statements and related Prospectuses of our report dated February 6, 1996, on our audits of the consolidated financial statements and the financial statement schedules of UNUM Corporation and subsidiaries as of December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994, and 1993, which report is included in the Annual Report on Form 10-K: Form S-8 No. 33-31270 pertaining to the UNUM Employees Retirement Savings Plan and Trust Form S-8 No. 33-19090 pertaining to the 1987 Executive Stock Option Plan Form S-8 No. 33-38225 pertaining to the 1990 Long-Term Stock Incentive Plan Form S-8 No. 33-52741 pertaining to the 1990 Long-Term Stock Incentive Plan Form S-3 No. 33-36873 Form S-3 No. 33-69132 Form S-8 No. 33-60124 pertaining to the Colonial Companies, Inc. Security Saver Plan Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 No. 33-55870 /s/ COOPERS & LYBRAND L.L.P. Portland, Maine March 27, 1996 EX-24 13 EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kevin J. Tierney and John-Paul DeRosa his true and lawful attorney-in-fact and agent, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign the Annual Report on Form 10-K for the year ending December 31, 1995 of UNUM Corporation pursuant to the Securities Exchange Act of 1934 and any or all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all his said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. Witness our signatures on the date set forth below: Signature Title Date --------- ----- ---- /s/ Gayle O. Averyt Director March 22, 1996 Gayle O. Averyt /s/ Robert E. Dillon, Jr. Director March 22, 1996 Robert E. Dillon, Jr. /s/ Gwain H. Gillespie Director March 22, 1996 Gwain H. Gillespie /s/ Ronald E. Goldsberry Director March 22, 1996 Ronald E. Goldsberry /s/ Donald W. Harward Director March 22, 1996 Donald W. Harward Signature Title Date --------- ----- ---- /s/ George J. Mitchell Director March 22, 1996 George J. Mitchell /s/ Cynthia A. Montgomery Director March 22, 1996 Cynthia A. Montgomery /s/ James L. Moody, Jr. Director March 22, 1996 James L. Moody, Jr. /s/ Lawrence R. Pugh Director March 22, 1996 Lawrence R. Pugh /s/ Lois Dickson Rice Director March 22, 1996 Lois Dickson Rice Director March 22, 1996 John W. Rowe EX-27 14 EXHIBIT 27
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL 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-K DATED DECEMBER 31, 1995. 1,000 12-MOS DEC-31-1995 DEC-31-1995 9,135,400 0 0 25,200 1,163,400 222,200 11,692,500 42,500 0 1,142,300 14,787,800 6,575,100 0 0 3,840,300 583,800 0 0 10,000 2,292,900 14,787,800 3,018,200 806,300 225,100 73,300 2,493,000 (114,700) 0 381,900 100,800 281,100 0 0 0 281,100 3.87 0 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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