-----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, JxqeWVBKbNpCIhA7tlzHrADWnaNNDAnneAf2dwj8jWrqVFzOT88zeEvfkg7OpitW bvhoLzzFaSaYKPS+gP8EJw== 0000950146-99-000694.txt : 19990409 0000950146-99-000694.hdr.sgml : 19990409 ACCESSION NUMBER: 0000950146-99-000694 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990408 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNUM CORP CENTRAL INDEX KEY: 0000795581 STANDARD INDUSTRIAL CLASSIFICATION: 6321 IRS NUMBER: 010405657 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09254 FILM NUMBER: 99584119 BUSINESS ADDRESS: STREET 1: 2211 CONGRESS ST P612 CITY: PORTLAND STATE: ME ZIP: 04122 BUSINESS PHONE: 2077702211 MAIL ADDRESS: STREET 1: 2211 CONGRESS STREET CITY: PORTLAND STATE: ME ZIP: 04122 10-K405 1 UNUM CORPORATION FORM 10-K405 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-9254 UNUM Corporation (Exact name of registrant as specified in its charter) ---------------- Delaware 01-0405657 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 2211 Congress Street, Portland, Maine 04122 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (207) 770-2211 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 Exchange Preferred stock purchase rights New York Stock Exchange Pacific Exchange 8.8% Junior Subordinated Deferrable Interest New York Stock Exchange Debentures, Series A, Due 2025 6.75% Notes, due 2028 New York Stock Exchange
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 February 19, 1999, was approximately $6,721,800,000. As of February 19, 1999, 138,905,041 shares of the registrant's common stock were outstanding. Exhibit Index appears on page 80. ================================================================================ TABLE OF CONTENTS PART I Item Page - - ---- ---- 1. Business ................................................................................. 1 A. Description of Business ............................................................... 1 B. Disability Insurance Segment .......................................................... 2 C. Special Risk Insurance Segment ........................................................ 4 D. Colonial Products Segment ............................................................. 5 E. Retirement Products Segment ........................................................... 5 F. Investments ........................................................................... 5 G. Risk Management and Reinsurance ....................................................... 5 H. Reserves .............................................................................. 6 I. Employees ............................................................................. 6 J. Competition ........................................................................... 6 K. Regulation ............................................................................ 6 L. Participation Fund Account ............................................................ 7 2. Properties ............................................................................... 7 3. Legal Proceedings ........................................................................ 7 4. Submission of Matters to a Vote of Security Holders ...................................... 7 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters ................ 8 6. Selected Financial Data .................................................................. 9 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .... 10 7A. Quantitative and Qualitative Information about Market Risk ............................... 26 8. Financial Statements and Supplementary Data .............................................. 27 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..... 62 PART III 10. Directors and Executive Officers of the Registrant ....................................... 62 A. Directors of the Registrant ........................................................... 62 B. Executive Officers of the Registrant .................................................. 63 11. Executive and Director Compensation ...................................................... 64 12. Security Ownership of Certain Beneficial Owners and Management ........................... 69 13. Certain Relationships and Related Transactions ........................................... 71 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .......................... 71 Signatures ............................................................................... 72 Index to Exhibits ........................................................................ 80
UNUM Corporation and Subsidiaries PART I Item 1. BUSINESS A. Description of Business UNUM Corporation is a Delaware insurance holding company organized in 1985. Operations of its subsidiaries, described below, account for substantially all of UNUM Corporation and subsidiaries' ("UNUM") consolidated assets and revenues. UNUM Corporation is based in Portland, Maine, and through its affiliates has operations in North America, the United Kingdom, the Pacific Rim and Latin America. UNUM is: o the leading provider of group long term disability insurance ("group LTD") in the United States and the United Kingdom; o the leading provider of group short term disability insurance ("group STD") in the United States; and o a major provider of group life, individual disability ("ID"), long term care ("LTC") insurance, special risk reinsurance operations and payroll-deducted voluntary employee benefit products. UNUM conducts operations in North America through wholly-owned subsidiaries including: o UNUM Life Insurance Company of America ("UNUM America"), a Maine life insurance company licensed in 49 states, the District of Columbia and Canada; o First UNUM Life Insurance Company ("First UNUM"), a New York life insurance company; o Colonial Companies, Inc. ("Colonial Companies"), a Delaware holding company whose wholly-owned subsidiary, Colonial Life & Accident Insurance Company ("Colonial"), is a South Carolina life insurance company licensed in 49 states and the District of Columbia; o Duncanson & Holt, Inc. ("D&H"), a New York corporation; and o Options and Choices, Inc. ("OCI"), based in Wyoming and acquired in 1997, which delivers integrated information and analysis to help organizations manage their health and disability program costs. UNUM's United Kingdom operations are conducted by: o UNUM Limited, a wholly-owned subsidiary of UNUM European Holding Company, which is wholly-owned by UNUM Corporation; and o Duncanson & Holt Europe Ltd., a wholly-owned subsidiary of D&H. UNUM's Pacific Rim operations are led by: o UNUM Japan Accident Insurance Company Limited ("UNUM Japan") a wholly-owned Japanese non-life insurance company established in 1994. UNUM's Latin America operations are led by: o Boston Compania Argentina de Seguros SA ("Boston Seguros"), a general lines property/casualty, life and workers' compensation insurance company, purchased in 1997 and based in Argentina. On November 22, 1998, UNUM entered into an agreement with Provident Companies Inc. ("Provident"), pursuant to which UNUM and Provident will merge under the name UNUMProvident Corporation ("UNUMProvident"). Under the merger agreement ("the merger"), each outstanding share of Provident common stock will be reclassified and converted into 0.73 of a share of UNUMProvident common stock and each outstanding share of UNUM common stock will be converted into one share of UNUMProvident common stock. The merger will be accounted for as a pooling of interests. The transaction is expected to be completed by midyear 1999, and is subject to clearance or approval by certain federal and state regulators, approval by shareholders of both companies, and customary closing conditions. Shareholders who collectively have beneficial ownership representing approximately 26% of Provident's common stock have agreed to vote in favor of the merger. As a result of the merger, approximately 58% of UNUMProvident will be owned by current UNUM shareholders immediately prior to the merger and 42% of UNUMProvident by current Provident shareholders immediately prior to the merger. 1 In October 1996, UNUM America and First UNUM closed the sale of their group tax-sheltered annuity ("TSA") businesses to two insurance subsidiaries of Lincoln National Corporation. The sale involved approximately 1,700 group contractholders and assets under management of approximately $3.3 billion. The contracts were initially reinsured on an indemnity basis. Upon consent of the TSA contractholders and participants, the contracts are considered reinsured on an assumption basis, legally releasing UNUM America and First UNUM from future contractual obligation. As of December 31, 1998, consents for assumption reinsurance have been received relating to substantially all assets under management. B. Disability Insurance Segment The Disability Insurance segment, which in 1998 accounted for 57% and 59% of UNUM's revenues and income before income taxes, respectively, includes disability products offered in North America, the United Kingdom and Japan. UNUM America and First UNUM market their group insurance and individual insurance products, included in the Disability Insurance and Special Risk Insurance segments, through a network of 40 offices in the United States and Canada utilizing brokers. As of December 31, 1998, these branch offices were organized into five regions and were staffed with approximately 1,140 management, sales, service and administrative personnel.
- - ------------------------------------------------------------------------------------------------------------------------- Product Description Customer Focus Other Information - - ------------------------------------------------------------------------------------------------------------------------- UNUM America and First UNUM - - ------------------------------------------------------------------------------------------------------------------------- Group LTD Coverage for loss of earned Employer groups consisting of Group LTD is UNUM's principal income due to injury or sickness, executive, administrative, product. Since 1976, UNUM effective after a waiting period, to management personnel; America and First UNUM specified maximums as a professionals such as educators, combined have been the leading percentage of income and length consultants, health care providers, provider of group LTD, based on of time. accountants and engineers. inforce cases and premium, according to Employee Benefit Plan Review. Sold primarily on a basis permitting periodic repricing to address the underlying claims experience and the interest rate environment. - - ------------------------------------------------------------------------------------------------------------------------- Group STD Coverage for loss of earned Employer groups consisting of UNUM America and First UNUM income due to injury or sickness, executive, administrative, combined are the leading provider effective immediately for management personnel; of group STD based on premium accidents, and after one week for professionals such as educators, and inforce lives according to sickness, for up to 26 weeks, to consultants, health care providers, Employee Benefit Plan Review specified maximums as a accountants and engineers. for 1997. percentage of income. Sold primarily on a basis permitting periodic repricing to address the underlying claims experience and the interest rate environment. - - ------------------------------------------------------------------------------------------------------------------------- LTC Pays a benefit upon the loss of Group LTC is offered to employer Marketed on a guaranteed two or more Activities of Daily groups of 15 or more participants. renewable basis. All policies cover Living (e.g. bathing, dressing, Groups can offer coverage to costs related to licensed nursing feeding) and the insured's retirees and employees, and their home care; optional coverage is requirement of standby assistance spouses, parents and grandparents. available for professional and/or or cognitive impairment; pays on informal home care and inflation an indemnity basis, regardless of Individual LTC is offered on a protection. expenses incurred, up to a lifetime single customer basis and to maximum. smaller employer groups. - - -------------------------------------------------------------------------------------------------------------------------
2 UNUM Corporation and Subsidiaries
- - ------------------------------------------------------------------------------------------------------------------------- Product Description Customer Focus Other Information - - ------------------------------------------------------------------------------------------------------------------------- UNUM America and First UNUM - - ------------------------------------------------------------------------------------------------------------------------- Lifelong Disability Coverage for loss of earned Professionals, corporate UNUM America and First UNUM Protection income due to injury or sickness. executives, business owners, and combined are a major provider of ("LDP") administrative support personnel. individual disability income policies measured by inforce premium for the United States and Canada, according to the Life Insurance Marketing Research Association's 1997 Individual Health Issues and Inforce Survey. Issued on a guaranteed renewable basis, with the right to reprice inforce policies subject to regulatory approval. Provides benefits and transitional support for moderate disabilities, with richer benefits for severe disabilities. Common options include additional coverage for catastrophic injury or illness and an option to convert to an LTC policy at retirement age. - - ------------------------------------------------------------------------------------------------------------------------- Association Coverage for loss of earned Members of professional UNUM America is a leading disability income due to injury or sickness. associations. provider of disability insurance in the association marketplace. UNUM introduced new conditionally renewable products in 1997. - - ------------------------------------------------------------------------------------------------------------------------- LTD reinsurance Reinsurance of other insurance Insurance companies participating Managed by Duncanson & Holt companies' LTD insurance risks. in reinsurance facilities. Services, Inc., a leading manager of group LTD reinsurance in the United States and a wholly-owned subsidiary of D&H. - - ------------------------------------------------------------------------------------------------------------------------- Non-cancellable No longer actively marketed by UNUM America or First UNUM in the Refer to Item 8 Note 6 ID products United States. "Reinsurance" for a detailed discussion of reinsurance coverage of the active life reserves of UNUM America's existing United States non-cancellable ID block of business by Centre Life Reinsurance Limited. - - ------------------------------------------------------------------------------------------------------------------------- UNUM Limited - - ------------------------------------------------------------------------------------------------------------------------- Group LTD Similar to United States product. The leading provider of group LTD insurance in the United Kingdom, based on premium Executive, administrative and revenue, per ERC Frankona management personnel and other Reassurance Ltd's annual group professionals. risk survey for 1997. - - -------------------------------------------------------- ----------------------------- Individual Similar to United States product, Marketed through a network of disability subject to local welfare independent financial advisors and regulations. selected United Kingdom insurance companies. - - ------------------------------------------------------------------------------------------------------------------------- UNUM Japan - - ------------------------------------------------------------------------------------------------------------------------- Group and Similar to United States products. Executive, administrative and Marketed through contracted individual LTD management personnel and other independent agents and brokers. professionals. - - ------------------------------------------------------------------------------------------------------------------------- Credit LTD Protection for mortgage/home Salaried workers. Marketed through banks and lease payments in the event of credit unions. disability. - - -------------------------------------------------------------------------------------------------------------------------
3
- - ------------------------------------------------------------------------------------------------------------------------- Product Description Customer Focus Other Information - - ------------------------------------------------------------------------------------------------------------------------- LTD reinsurance Assumption of certain insurance Insurance companies participating Primarily quota share coinsurance risk through long term disability in reinsurance facilities. with the direct insurer subject to reinsurance operations for policies compliance with UNUM Japan's in Japan and Hong Kong. risk management standards for pricing, underwriting and claims management.
Refer to Item 7 under the caption "Disability Insurance Segment" and Item 8 Note 16 "Segment Information" for more information. C. Special Risk Insurance Segment The Special Risk Insurance segment in 1998 accounted for 28% and 31% of UNUM's revenues and income before income taxes, respectively. The Special Risk Insurance segment's group insurance products are sold primarily on a basis permitting periodic repricing, enabling UNUM to adjust the pricing of its products to address the underlying claims experience and interest rate environment.
- - ----------------------------------------------------------------------------------------------------------------------------------- Product Description Customer Focus Other Information - - ----------------------------------------------------------------------------------------------------------------------------------- UNUM America and First UNUM - - ----------------------------------------------------------------------------------------------------------------------------------- Group life Term life insurance; universal life Broad range of employees. UNUM America and First UNUM products insurance; accidental death and combined were the fourth largest dismemberment riders. writer of group life insurance in the United States for 1997 based on number of inforce contracts per Employee Benefit Plan Review. Marketed through independent brokers and specialty agents; also offered through the association group channel. - - ----------------------------------------------------------------------------------------------------------------------------------- Group special risk Travel and voluntary accident To employees on an employer or Marketed through a network of insurance. employee-paid basis. independent brokers and specialty agents. - - ----------------------------------------------------------------------------------------------------------------------------------- Duncanson & Holt - - ----------------------------------------------------------------------------------------------------------------------------------- Reinsurance Provides reinsurance facility Insurance companies participating Special risk reinsurance operations business management services which may in reinsurance facilities. include UNUM America's include marketing, underwriting, participation in reinsurance administration, claims payment facilities managed by D&H and and actuarial services. direct reinsurance arrangements primarily for accident and health, long term care and other special risk business. As a member company in special risk reinsurance facilities managed by D&H, UNUM America assumes a share of the insurance risk of those facilities. A leading accident and health reinsurance underwriting manager which has offices throughout the United States and in London, Toronto, Bermuda and Singapore. - - -----------------------------------------------------------------------------------------------------------------------------------
D&H and its subsidiaries, with the exception of Duncanson & Holt Underwriters Ltd. ("DHU"), a wholly-owned subsidiary of Duncanson and Holt Europe Ltd. ("D&H Europe"), do not bear any insurance risk. DHU participates in various Lloyd's of London ("Lloyd's") syndicates as a corporate name bearing insurance risk. D&H Europe owns three Lloyd's Managing Agents which manage syndicates that underwrite primarily personal accident and other classes of business at Lloyd's. Refer to Item 7 under the caption "Special Risk Insurance Segment" and Item 8 Note 16 "Segment Information" for more information. 4 D. Colonial Products Segment The Colonial Products segment, which includes Colonial and its affiliates, in 1998 accounted for 14% and 21% of UNUM's revenues and income before income taxes, respectively. Colonial markets a broad line of payroll-deducted, voluntary employee benefit products.
- - -------------------------------------------------------------------------------------------------------------------------------- Product Description Customer Focus Other Information - - -------------------------------------------------------------------------------------------------------------------------------- Accident and Benefit payments for disability Colonial products are marketed sickness policies income, death, dismemberment or primarily through a 3,500 member major injury. Designed to career sales force and 7,700 supplement Social Security, brokers, and through collaborative workers' compensation and other sales with UNUM America. All insurance plans. products are purchased solely with employee funds. Employees at their worksites. Policies are issued on a guaranteed renewable basis. This right to change premiums is, or may be, subject to various state insurance department rules, regulations and approvals. - - --------------------------------------------------------- Life insurance Universal life; whole life. - - --------------------------------------------------------- Cancer policies Designed to provide payments for hospitalization and scheduled medical benefits. - - --------------------------------------------------------------------------------------------------------------------------------
Colonial markets its accident and health products as qualified fringe benefits that can be purchased with pretax employee dollars as part of a flexible benefits program pursuant to Section 125 of the Internal Revenue Code, accounting for approximately 47% of its total premiums in 1998. Flexible benefits programs assist employers in managing benefit and compensation packages and provide policyholders the ability to choose benefits that best meet their needs. Congress could change the laws to limit or eliminate fringe benefits available on a pretax basis, eliminating Colonial's ability to continue marketing its products this way. However, Colonial believes its products provide value to its policyholders, which will remain even if the tax advantages offered by flexible benefit programs are eliminated. Refer to Item 7 under the caption "Colonial Products Segment" and Item 8 Note 16 "Segment Information" for more information. E. Retirement Products Segment The Retirement Products segment in 1998 accounted for 1% and less than 1% of UNUM's revenues and income before income taxes, respectively. This segment includes products no longer actively marketed by UNUM including: TSAs, guaranteed investment contracts, deposit administration accounts, 401(k) plans, individual life and group medical insurance. On October 1, 1996, UNUM America and First UNUM closed the sale of their respective TSA businesses to Lincoln, as discussed in Item 1 A "Description of Business." Refer to Item 7 under the caption "Retirement Products Segment" and Item 8 Note 16 "Segment Information" for more information. F. Investments UNUM management believes its mortgage loan portfolio is well diversified geographically and by property type at year end 1998, with less than 20% in any one region; 33% was in industrial properties, 28% in office buildings, 22% in retail properties, and 17% in other property types. Mortgage loans that were 60 days or more delinquent on a contract basis, impaired loans and restructured loans were immaterial at December 31, 1998. Refer to Item 7 under the caption "Investments" and Item 8 Note 2 "Investments" for more information. G. Risk Management and Reinsurance Risk management, including product design, pricing, underwriting, reserving and benefits management, involves a determination of the type and amount of risk an insurer is willing to accept, administration and evaluation of business inforce and determination of claim liability. UNUM's underwriters, organized by product and sales region, evaluate policy applications based on information provided by the applicant and other sources. Underwriting 5 UNUM Corporation and Subsidiaries rules and procedures are established to produce mortality and morbidity results consistent with assumptions used in pricing the product, while also providing for competitive risk selection. Consistent with industry practice, UNUM reinsures with other unaffiliated companies portions of the insurance risk it has underwritten. Reinsurance allows UNUM to sell policies with higher benefits than the entire risk UNUM is willing to assume. UNUM remains contingently liable to the insured for payment of policy benefits if the reinsurers cannot meet their obligations under the agreements. UNUM does not generally reinsure risk on a product-specific basis for group LTD, group STD or association group disability. For other insurance products, UNUM reinsures benefits over various amounts, depending on the type of coverage. In addition to product-specific reinsurance arrangements, UNUM's insurance companies are covered by reinsurance for certain catastrophic losses. UNUM periodically monitors the financial condition, and in some cases holds substantial collateral as security in the form of funds, securities and/or letters of credit to mitigate credit risk from its reinsurers. At December 31, 1998, approximately 85% of the reinsurance receivable balance was due from five reinsurers. These reinsurers had a rating of A or better (Strong) from Standard & Poor's--a recognized insurance rating agency. Additionally, UNUM holds collateral in the form of securities comprising 53% of the balance. During 1996, UNUM America entered into an agreement for reinsurance coverage of the active life reserves of its existing United States non-cancellable individual disability block of business. This agreement does not reinsure any claims incurred prior to January 1, 1996. For more information on this reinsurance agreement refer to Item 8 Note 6 "Reinsurance." Total reinsurance premiums assumed and ceded for the year ended December 31, 1998, were $320.8 million and $414.3 million, respectively. Current or planned reinsurance activity is not expected to have a significant impact on UNUM's ability to underwrite additional insurance. H. Reserves The unpaid claims reserves reported in the consolidated financial statements are liabilities for unpaid losses, with respect to insured events which have occurred, including events not yet reported to UNUM, in accordance with generally accepted accounting principles ("GAAP"). These reserve balances generally differ from those in statutory financial statements, which are subject to minimum reserves established by state laws. The differences between GAAP and statutory reserves arise from the use of different morbidity, mortality, interest, expense and lapse assumptions. Future policy benefits reserves are based on UNUM's insurance subsidiaries' experience as adjusted to provide for possible adverse deviations. These estimates are periodically reviewed and compared with actual experience. The assumptions may be revised when it is determined that future expected experience differs from the assumed estimates. I. Employees At December 31, 1998, UNUM had approximately 8,200 full-time employees. Some employees in Argentina, comprising less than 1% of UNUM's total workforce, are members of a union. J. Competition The principal competitive factors affecting all of 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 group and individual insurance products sold by UNUM. At the end of 1998, there were more than 1,600 legal reserve life insurance companies in the United States and Canada, more than 240 life assurance offices in the United Kingdom, approximately 106 life and non-life insurance companies in Japan, and more than 250 insurance companies in Argentina. These companies may offer insurance products similar to those marketed by UNUM. K. Regulation In common with other insurance companies, UNUM's insurance subsidiaries are subject to regulation and supervision in jurisdictions in which they do business, primarily for the protection of policyholders. Although the extent of such regulation varies, insurance laws generally establish supervisory agencies with broad administrative powers including: granting and revocation of licenses to transact business; establishing reserve requirements; setting the form, content and frequency of required financial statements; the licensing of agents; the approval of policy 6 forms; prescribing the type and amount of investments permitted; and, in general, the conduct of all insurance activities. UNUM's insurance operations and subsidiaries must meet the standards and tests for its investments promulgated by insurance laws and regulations of the jurisdictions in which they are domiciled. Insurance subsidiaries operate under insurance laws which require they establish and carry, as liabilities, statutory reserves to meet obligations on their disability, life, accident and health policies and annuities. These reserves are verified periodically by various regulators. UNUM's domestic insurance subsidiaries are examined periodically by examiners from their states of domicile and by other states in which they are licensed to conduct business. Certain states require periodic registration and reporting by insurance companies domiciled in them that control or are controlled by other corporations or persons. UNUM's domestic insurance subsidiaries are registered as members of the UNUM holding company system in the states of Maine, New York, South Carolina and Delaware. 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. The risk-based capital ("RBC") standards for life insurance companies, as prescribed by the National Association of Insurance Commissioners, establish an RBC ratio comparing adjusted surplus to required surplus for United States domiciled insurance companies. If the RBC ratio falls within certain ranges, regulatory action may be taken ranging from increased information requirements to mandatory control by the domiciliary insurance department. The RBC ratios for UNUM's insurance subsidiaries, measured at December 31, 1998, were significantly above the ranges that would require regulatory action. L. Participation Fund Account Participating policies issued by the former Union Mutual Life Insurance Company ("Union Mutual") prior to its demutualization will remain participating as long as they remain in force. A Participation Fund Account ("PFA") was established for the benefit of all Union Mutual's individual participating life and annuity policies and contracts. At December 31, 1998, the PFA had approximately $371 million in assets, held by UNUM America, Union Mutual's successor. PFA assets, investment earnings, and income from operations are not available to UNUM America during the operation or upon the termination of the PFA. In the unlikely event 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 would reduce earnings of UNUM America and UNUM. All operating data of the PFA 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 seven office buildings and three service buildings located throughout the Portland, Maine area. UNUM also owns office buildings in the United Kingdom, South Carolina and Argentina, which serve as the home offices of UNUM Limited, the Colonial Companies and Boston Seguros, respectively. In addition, UNUM leases office space, on periods principally from five to ten years, for use by its home office, affiliates and sales forces. Item 3. LEGAL PROCEEDINGS Refer to Item 8 Note 15 "Litigation" for information on legal proceedings. 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 1998. 7 UNUM Corporation and Subsidiaries PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The principal markets in which UNUM Corporation common stock is traded are the New York Stock Exchange and the Pacific Exchange. UNUM's ticker symbol is "UNM." As of December 31, 1998, there were 21,756 shareholders of record of common stock. Information concerning restrictions on the ability of UNUM's affiliates to transfer funds to UNUM in the form of cash dividends is described in Item 8 Note 11 "Dividend Restrictions." 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:
1998 1997 --------------------------------------------------- --------------------------------------------------- 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ High .................. $ 60.063 $ 59.375 $ 59.625 $ 55.563 $ 54.438 $ 48.250 $ 46.500 $ 39.813 Low ................... $ 42.000 $ 44.000 $ 51.500 $ 48.000 $ 45.125 $ 40.688 $ 33.625 $ 35.313 Close ................. $ 58.375 $ 49.688 $ 55.500 $ 55.188 $ 54.375 $ 45.625 $ 42.250 $ 36.500 Dividend Paid ......... $ 0.1475 $ 0.1475 $ 0.1475 $ 0.1425 $ 0.1425 $ 0.1425 $ 0.1425 $ 0.1375
8 UNUM Corporation and Subsidiaries 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
Year Ended December 31, ------------------------------- 1998 1997 (Dollars in millions, except per common share data) --------------- --------------- Income Statement Data Revenues: Premiums and fees and other income: (b) Disability Insurance Segment ....................... $ 2,167.5 $ 1,882.6 Special Risk Insurance Segment ..................... 1,208.4 947.2 Colonial Products Segment .......................... 556.5 530.8 Retirement Products Segment ........................ 26.6 130.3 Corporate .......................................... -- 0.1 ------------ ---------- Total premiums and fees and other income ............ 3,959.0 3,491.0 ------------ ---------- Net investment income: (a) Disability Insurance Segment ....................... 491.4 468.0 Special Risk Insurance Segment ..................... 80.6 71.5 Colonial Products Segment .......................... 67.7 57.6 Retirement Products Segment ........................ 38.6 54.4 Corporate .......................................... 4.1 5.9 ------------ ---------- Total net investment income ......................... 682.4 657.4 ------------ ---------- Total revenues ...................................... 4,641.4 4,148.4 ------------ ---------- Benefits and expenses: (b) Disability Insurance Segment ....................... 2,352.4 2,037.9 Special Risk Insurance Segment ..................... 1,127.7 917.4 Colonial Products Segment .......................... 517.2 489.6 Retirement Products Segment ........................ 64.6 108.5 Corporate .......................................... 62.1 58.6 ------------ ---------- Total benefits and expenses ......................... 4,124.0 3,612.0 ------------ ---------- Income (loss) before income taxes: (b) Disability Insurance Segment ....................... 306.5 312.7 Special Risk Insurance Segment ..................... 161.3 101.3 Colonial Products Segment .......................... 107.0 98.8 Retirement Products Segment ........................ 0.6 76.2 Corporate .......................................... (58.0) (52.6) ------------ ------------ Total income before income taxes .................... 517.4 536.4 ------------ ------------ Income taxes ........................................ 154.0 166.1 ------------ ------------ Net income .......................................... $ 363.4 $ 370.3 ============ ============ Per common share: Net income--basic .................................. $ 2.63 $ 2.65 Net income--diluted ................................ $ 2.57 $ 2.59 Dividends paid ..................................... $ 0.5850 $ 0.5650 ============= ============= Balance Sheet Data Assets .............................................. $ 15,182.9 $ 13,440.1 Long-term debt ...................................... $ 598.3 $ 509.2 Stockholders' equity ................................ $ 2,737.7 $ 2,434.8 Shares outstanding .................................. 138.7 138.3 Weighted-average shares outstanding during the year: Basic .............................................. 138.3 139.9 Diluted ............................................ 141.4 142.9 Year Ended December 31, ----------------------------------------------- 1996 1995 1994 (Dollars in millions, except per common share data) --------------- --------------- --------------- Income Statement Data Revenues: Premiums and fees and other income: (b) Disability Insurance Segment ....................... $ 1,917.7 $ 1,879.9 $ 1,716.2 Special Risk Insurance Segment ..................... 783.3 702.3 607.1 Colonial Products Segment .......................... 498.2 475.1 441.3 Retirement Products Segment ........................ 65.8 34.1 31.4 Corporate .......................................... -- 0.1 0.8 ------------ ---------- ---------- Total premiums and fees and other income ............ 3,265.0 3,091.5 2,796.8 ------------ ---------- ---------- Net investment income: (a) Disability Insurance Segment ....................... 468.5 592.9 400.3 Special Risk Insurance Segment ..................... 57.6 48.4 40.7 Colonial Products Segment .......................... 47.3 52.2 32.6 Retirement Products Segment ........................ 217.2 323.7 338.0 Corporate .......................................... 16.1 14.2 4.2 ------------ ---------- ---------- Total net investment income ......................... 806.7 1,031.4 815.8 ------------ ---------- ---------- Total revenues ...................................... 4,071.7 4,122.9 3,612.6 ------------ ---------- ---------- Benefits and expenses: (b) Disability Insurance Segment ....................... 2,170.9 2,255.8 2,060.3 Special Risk Insurance Segment ..................... 761.7 690.4 581.9 Colonial Products Segment .......................... 453.1 439.6 411.2 Retirement Products Segment ........................ 281.6 312.3 327.4 Corporate .......................................... 62.8 42.9 33.2 ------------ ---------- ---------- Total benefits and expenses ......................... 3,730.1 3,741.0 3,414.0 ------------ ---------- ---------- Income (loss) before income taxes: (b) Disability Insurance Segment ....................... 215.3 217.0 56.2 Special Risk Insurance Segment ..................... 79.2 60.3 65.9 Colonial Products Segment .......................... 92.4 87.7 62.7 Retirement Products Segment ........................ 1.4 45.5 42.0 Corporate .......................................... (46.7) (28.6) (28.2) ------------ ------------ ------------ Total income before income taxes .................... 341.6 381.9 198.6 ------------ ------------ ------------ Income taxes ........................................ 103.6 100.8 43.9 ------------ ------------ ------------ Net income .......................................... $ 238.0 $ 281.1 $ 154.7 ============ ============ ============ Per common share: Net income--basic .................................. $ 1.63 $ 1.93 $ 1.04 Net income--diluted ................................ $ 1.61 $ 1.92 $ 1.04 Dividends paid ..................................... $ 0.5450 $ 0.5175 $ 0.4600 ============= ============= ============= Balance Sheet Data Assets .............................................. $ 15,580.4 $ 14,787.8 $ 13,127.2 Long-term debt ...................................... $ 409.2 $ 457.3 $ 182.1 Stockholders' equity ................................ $ 2,263.1 $ 2,302.9 $ 1,915.4 Shares outstanding .................................. 143.6 146.0 144.8 Weighted-average shares outstanding during the year: Basic .............................................. 145.9 145.4 148.3 Diluted ............................................ 148.0 146.6 149.5
- - -------- (a) Includes investment income and net realized investment gains (losses). (b) Refer to the discussion of special items in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations," as these items may affect the comparability of the information presented in certain segments. 9 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis reviews the consolidated financial condition of UNUM at December 31, 1998, and 1997, the consolidated results of operations for the past three years and, where appropriate, factors that may affect future financial performance. FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 ("the Act") provides a "safe harbor" for forward-looking statements which are identified as such and are accompanied by the identification of important factors which could cause a material difference from the forward-looking statements. UNUM claims the protection afforded by the safe harbor in the Act. Certain information contained in this discussion, or in any other written or oral statements made by UNUM, is or may be considered as forward-looking; for example, disclosures regarding "Quantitative and Qualitative Information About Market Risk," the "Year 2000 Date Conversion" and reserves discussed in the Disability Insurance segment contain such information. Forward-looking statements are those not based on historical information, but rather, relate to future operations, strategies, financial results or other developments, and contain terms such as "may," "expects," "should," "believes," "anticipates," "intends," "estimates," "projects," "goals," "objectives" or similar expressions. Although UNUM has used appropriate care in developing forward-looking statements, such statements are based upon estimates and assumptions that are subject to significant risks, business, economic and competitive uncertainties, and other factors, many of which are beyond UNUM's control or, with respect to future business decisions, are subject to change. Certain risks and uncertainties are inherent in UNUM's business. Therefore, UNUM cautions the reader that revenues and income could differ materially from those expected to occur depending on factors which may be global or national in scope, related to the insurance industry generally, or applicable to UNUM specifically. Such factors are general economic conditions including changes in interest rates and the performance of financial markets, changes in domestic and foreign laws, regulations and taxes, competition, industry consolidation, competitor demutualization, credit risks and other factors. Insurance reserve liabilities can fluctuate as a result of changes in numerous factors, and such fluctuations can have material positive or negative effects on earnings. These factors include, but are not limited to, interest rates, incidence rates and recovery rates. Incidence and recovery rates may be influenced by many factors, including but not limited to, the emergence of new diseases, new trends and developments in medical treatments, general economic and societal conditions of the markets where UNUM has operations, and the effectiveness of risk management programs. UNUM disclaims any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise. PROPOSED MERGER WITH PROVIDENT On November 22, 1998, UNUM entered into an agreement with Provident Companies Inc. ("Provident"), pursuant to which UNUM and Provident will merge under the name UNUMProvident Corporation ("UNUMProvident"). Under the merger agreement, each outstanding share of Provident common stock will be reclassified and converted into 0.73 of a share of UNUMProvident common stock and each outstanding share of UNUM common stock will be converted into one share of UNUMProvident common stock. The merger will be accounted for as a pooling of interests. Certain information contained in this discussion about the merger, or in any other written or oral statements made by UNUM, regarding the impact of the merger on future operations, is considered as forward-looking, and should be read as such (see previous section on "Forward-Looking Information"). In connection with the proposed merger, UNUM is evaluating its processes and assumptions used to calculate the discount rate for claim reserves of certain disability businesses so that they may be more consistent with those used by Provident. Upon completion of the merger, UNUM will reduce the rates used to discount unpaid claims reserves for group long term disability, individual disability and the disability businesses of UNUM Limited. The preliminary estimates of discount rate reductions will result in an estimated increase to UNUM's unpaid claims reserves upon consummation of the merger of approximately $230 million on a pretax basis. Additionally, it is expected that upon completion of the merger the combined entity, UNUMProvident, will record an expense for merger related costs of approximately $210 million on a pretax basis. These costs include amounts for severance and related costs, early retirement, exit costs for duplicate facilities and asset impairments, and merger related costs such as investment banker, legal and accountant fees. The estimated merger related expenses represent management's best estimates based on available information at this time. Actual charges may differ from these estimated amounts when these items are finalized. 10 UNUM Corporation and Subsidiaries CONSOLIDATED OVERVIEW
(Dollars and shares in millions, except per common share data) 1998 % Change 1997 % Change 1996 - - ------------------------------------------------- ------------- ----------- ------------- ----------- ------------- Income Data Revenues Premiums ....................................... $ 3,841.7 17.7% $ 3,263.7 3.6% $3,151.5 Investment income .............................. 661.4 nm 661.0 (17.7) 803.3 Net realized investment gains (losses) ......... 21.0 nm (3.6) nm 3.4 Fees and other income .......................... 117.3 (48.4) 227.3 nm 113.5 --------- ----- ---------- ----- --------- Total revenues ................................ 4,641.4 11.9 4,148.4 1.9 4,071.7 Benefits and expenses ........................... 4,124.0 14.2 3,612.0 (3.2) 3,730.1 --------- ----- ---------- ----- --------- Income before income taxes ...................... 517.4 (3.5) 536.4 57.0 341.6 Income taxes .................................... 154.0 (7.3) 166.1 60.3 103.6 --------- ----- ---------- ----- --------- Net income .................................... $ 363.4 (1.9)% $ 370.3 55.6% $ 238.0 ========= ===== ========== ===== ========= Net income per common share: Diluted ........................................ $ 2.57 (0.8)% $ 2.59 60.9% $ 1.61 Basic .......................................... $ 2.63 (0.8)% $ 2.65 62.6% $ 1.63 ========== ===== ========== ===== ========== Summary of income (loss) before income taxes Disability Insurance Segment ................... $ 306.5 (2.0)% $ 312.7 45.2% $ 215.3 Special Risk Insurance Segment ................. 161.3 59.2 101.3 27.9 79.2 Colonial Products Segment ...................... 107.0 8.3 98.8 6.9 92.4 Retirement Products Segment .................... 0.6 (99.2) 76.2 nm 1.4 Corporate ...................................... (58.0) 10.3 (52.6) 12.6 (46.7) ---------- ----- ---------- ----- ---------- Total income before income taxes .............. $ 517.4 (3.5)% $ 536.4 57.0% $ 341.6 ========== ===== ========== ===== ==========
- - -------- nm = not meaningful or in excess of 100%
(Dollars and shares in millions) 1998 1997 1996 - - ------------------------------------------------------ -------------- -------------- -------------- Balance Sheet Data Assets ............................................... $ 15,182.9 $ 13,440.1 $ 15,580.4 Notes Payable ........................................ $ 881.8 $ 635.8 $ 526.9 Stockholders' equity ................................. $ 2,737.7 $ 2,434.8 $ 2,263.1 Shares outstanding ................................... 138.7 138.3 143.6 Weighted-average shares outstanding--diluted ......... 141.4 142.9 148.0 Weighted-average shares outstanding--basic ........... 138.3 139.9 145.9
During 1998, to better reflect the business of Duncanson & Holt Underwriters Ltd., as reported in the Special Risk Insurance segment, the results have been reflected on separate lines in UNUM's consolidated statements of income and balance sheets. Previously, the operating results and financial position were reported as a net amount in fees and other income and other assets, respectively. The 1997 and 1996 amounts have been reclassified for comparative purposes. Effective tax rates, which reflect income tax expense as a percentage of income before income taxes, were 29.8%, 31.0% and 30.3% for 1998, 1997 and 1996, respectively. Reported income tax expense was below the federal statutory tax rate of 35% primarily due to tax savings from investments in tax-exempt bonds and mortgages. The change in the effective tax rate over the three year period was primarily due to changes in tax-exempt income as a percentage of income before income taxes. 11 A comparison of net income is impacted by the inclusion of realized investment gains (losses), and special items, that occurred in 1998, 1997 and 1996. Operating income in 1998, 1997 and 1996, which is presented on an after tax basis and excludes realized investment gains (losses) and the special items discussed below, was as follows:
(Dollars in millions, except per common share amounts) 1998 % Change 1997 % Change 1996 - - ---------------------------------- ----------- ---------- ----------- ---------- ----------- Operating income ................. $ 388.2 13.6% $ 341.7 13.3% $ 301.7 Operating income per common share: Diluted ......................... $ 2.75 15.1% $ 2.39 17.2% $ 2.04 Basic ........................... $ 2.81 15.2% $ 2.44 17.9% $ 2.07
This management's discussion and analysis focuses on results on a pretax operating income basis, which is defined as income (loss) before income taxes exclusive of realized investment gains (losses) and special items. Realized investment gains (losses) are excluded from this discussion as management believes the volatility in gains and losses associated with the selling of invested assets in the financial markets is not representative of ongoing operations. Special items are excluded from this discussion as management considers them as being not representative of our ongoing operations and believes a discussion of the results on a pretax operating income basis provides a better understanding of the results of ongoing operations. While management believes that pretax operating income provides relevant and useful information, it does not replace income before income taxes and net income calculated in accordance with generally accepted accounting principles as a measure of UNUM's profitability. Therefore, this discussion should be read in conjunction with the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Selected Consolidated Financial Data included elsewhere in the Form 10-K. The following table summarizes pretax operating income (loss) for the four business segments and Corporate for the years ended December 31, 1998, 1997 and 1996, and is followed by a discussion of the special items for those periods and a reconciliation of income (loss) before income taxes to pretax operating income (loss).
(Dollars in millions) 1998 % Change 1997 % Change 1996 - - ----------------------------------------- ----------- ---------- ----------- ---------- ----------- Summary of pretax operating income (loss) Disability Insurance Segment ........... $ 348.3 10.3% $ 315.8 13.4% $ 278.4 Special Risk Insurance Segment ......... 159.4 27.7 124.8 38.4 90.2 Colonial Products Segment .............. 105.1 6.4 98.8 6.6 92.7 Retirement Products Segment ............ 1.0 (78.7) 4.7 (65.4) 13.6 Corporate .............................. (58.0) 12.0 (51.8) 38.1 (37.5) -------- ----- -------- ----- -------- Total pretax operating income ......... $ 555.8 12.9% $ 492.3 12.6% $ 437.4 ======== ===== ======== ===== ========
UNUM reported increased pretax operating income for the year ended December 31, 1998, as compared with the same period in 1997. The increase was primarily attributable to improvements in pretax operating income for the Special Risk Insurance and Disability Insurance segments, primarily resulting from solid premium growth in each segment. See the segment discussions that follow for a more detailed analysis of operating results. For the year ended December 31, 1997, as compared with the same period in 1996, UNUM reported increased pretax operating income, driven by improved results in the Disability Insurance and Special Risk Insurance segments, resulting primarily from strong premium growth in both segments during 1997. Special Item in 1998 Disability Claims Reserve Increase In connection with entering into the merger agreement with Provident in fourth quarter 1998, UNUM anticipates that as a result of integrating its claim operations with Provident, there will be a temporary increase in claim costs. UNUM expects that fewer claims will be resolved or closed during the period when the two companies are planning and implementing the integration of their claims organizations. The average length of duration for claims will increase, resulting in more benefit payments being paid for a relatively short time until the consolidation of operations is complete. During the fourth quarter of 1998, UNUM increased its unpaid claims reserve by $59.4 million related to the expected increase in disability claim duration on existing claims. This reserve increase was reflected as a $49.0 million increase in benefits to policyholders and a $10.4 million reduction in fee income in the Disability Insurance segment. The reduction 12 UNUM Corporation and Subsidiaries in fee income represents increased reserves for the United States non-cancellable individual disability business that is reinsured with Centre Life Reinsurance Limited ("Centre Re"). See Item 8 Note 6 under the caption "Reinsurance" for further information on the reinsurance transaction. Management will continue to evaluate the impacts of the merger on disability claims experience and the assumptions around expected disability claims duration that were used in the determination of the claims reserve increase. Special Items in 1997 TSA Deferred Gain Recognition UNUM Life Insurance Company of America ("UNUM America") and First UNUM Life Insurance Company ("First UNUM") closed the sale of their respective tax-sheltered annuity ("TSA") businesses to The Lincoln National Life Insurance Company and Lincoln Life & Annuity Company of New York, both subsidiaries of Lincoln National Corporation, on October 1, 1996. The sale resulted in a deferred pretax gain, of which $72.6 million was recognized in income during 1997, as fees and other income in the Retirement Products segment. Reorganization Costs During fourth quarter 1997, UNUM recognized $6.5 million of operating expenses related to a management and field office reorganization within its North American reinsurance operations, reducing income before income taxes in the Special Risk Insurance segment. Included in the $6.5 million of costs was a $6.0 million restructuring charge and $0.5 million of direct costs, primarily relocation expenses. The restructuring charge of $6.0 million was comprised of $4.0 million of lease exit costs, $1.4 million of severance related costs and $0.6 million of abandoned assets. Reinsurance Pool Results During fourth quarter 1997, certain reinsurance pools managed by UNUM's wholly-owned subsidiary, Duncanson & Holt Inc. ("D&H"), received new claim information from ceding insurance enterprises about certain older pool years and completed an analysis of recent claims experience deterioration. As a result of these factors, certain pools have strengthened claim reserves. The impact to UNUM in fourth quarter 1997 from these pool claim reserve increases was an $11.7 million reduction in fee income and a $6.7 million increase in benefits to policyholders in the Special Risk Insurance segment, reducing income before income taxes by $18.4 million. The $11.7 million reduction in fee income reflects lower profit commission levels in certain older pool years after the pool claim reserve strengthening. The $6.7 million increase in benefits to policyholders represents the amount of additional claim reserves UNUM recognized as a result of its participation in the pools that strengthened claim reserves. Special Items in 1996 Individual Disability Reinsurance Fees During the fourth quarter of 1996, UNUM executed a definitive reinsurance agreement between UNUM America and Centre Re, a Bermuda-based reinsurance specialist, for reinsurance coverage of the active life reserves of UNUM America's existing United States non-cancellable individual disability block of business. As a result, UNUM recognized a pretax charge of $49.7 million, reflected as operating expenses in the Disability Insurance segment, which represents the present value of the anticipated minimum amount of fees to be paid to Centre Re under the agreement. For additional information regarding the reinsurance agreement see Item 8 Note 6 under the caption "Reinsurance." Intangible Asset Write-offs and Future Loss Reserves In connection with the merger of Commercial Life Insurance Company ("Commercial Life") into UNUM America, the sale of UNUM America's TSA business, as well as UNUM's continued efforts to strengthen its focus on its core products, the company initiated a review of certain products, which resulted in the recognition of pretax charges totaling $39.4 million during third quarter 1996. The charges included the write-off of certain intangible assets and the establishment of a reserve for the present value of expected future losses on certain discontinued products. 13 For the year ended December 31, 1996, these charges reduced income before income taxes by $13.1 million in the Disability Insurance segment, reflected as $0.5 million of benefits to policyholders, $0.9 million of operating expenses, and $11.7 million as a change in deferred policy acquisition costs; $11.3 million in the Special Risk Insurance segment, reflected as $6.9 million of benefits to policyholders and $4.4 million of operating expenses; and $15.0 million in the Retirement Products segment, reflected as benefits to policyholders. Commercial Life Merger and Integration Costs During the third quarter of 1996, actions related to the merger of Commercial Life into UNUM America resulted in a $10.1 million increase in operating expenses for Corporate. The $10.1 million charge consisted of $2.9 million of direct costs incurred and the recording of a $7.2 million restructuring charge to recognize $2.8 million of severance costs and $4.4 million of lease exit costs, primarily related to the merger. Reconciliation of Income (Loss) Before Income Taxes to Pretax Operating Income (Loss) The following table reconciles income (loss) before income taxes to pretax operating income (loss) for the four business segments and Corporate for the years ended December 31, 1998, 1997 and 1996:
Disability Special Risk Colonial Retirement Consolidated (Dollars in millions) Insurance Insurance Products Products Corporate UNUM - - ------------------------------------------ ------------ -------------- ---------- ------------ ----------- ------------- Year Ended December 31, 1998: Income (loss) before income taxes ........ $ 306.5 $ 161.3 $ 107.0 $ 0.6 $ (58.0) $ 517.4 Exclude realized investment (gains) losses .................................. (17.6) (1.9) (1.9) 0.4 -- (21.0) -------- -------- -------- ------- ------- -------- 288.9 159.4 105.1 1.0 (58.0) 496.4 Special item: Disability claims reserve increase ...... 59.4 -- -- -- -- 59.4 -------- -------- -------- ------- ------- -------- Pretax operating income (loss) ........... $ 348.3 $ 159.4 $ 105.1 $ 1.0 $ (58.0) $ 555.8 ======== ======== ======== ======= ======= ======== Year Ended December 31, 1997: Income (loss) before income taxes ........ $ 312.7 $ 101.3 $ 98.8 $ 76.2 $ (52.6) $ 536.4 Exclude realized investment (gains) losses .................................. 3.1 (1.4) -- 1.1 0.8 3.6 -------- -------- -------- ------- ------- -------- 315.8 99.9 98.8 77.3 (51.8) 540.0 Special items: TSA deferred gain recognition ........... -- -- -- (72.6) -- (72.6) Reorganization costs .................... -- 6.5 -- -- -- 6.5 Reinsurance pool results ................ -- 18.4 -- -- -- 18.4 -------- -------- -------- ------- ------- -------- Pretax operating income (loss) ........... $ 315.8 $ 124.8 $ 98.8 $ 4.7 $ (51.8) $ 492.3 ======== ======== ======== ======= ======= ======== Year Ended December 31, 1996: Income (loss) before income taxes ........ $ 215.3 $ 79.2 $ 92.4 $ 1.4 $ (46.7) $ 341.6 Exclude realized investment (gains) losses .................................. 0.3 (0.3) 0.3 (2.8) (0.9) (3.4) -------- -------- -------- ------- ------- -------- 215.6 78.9 92.7 (1.4) (47.6) 338.2 Special items: ID reinsurance fees ..................... 49.7 -- -- -- -- 49.7 Write-offs and future loss reserves ..... 13.1 11.3 -- 15.0 -- 39.4 Merger and integration costs ............ -- -- -- -- 10.1 10.1 -------- -------- -------- ------- ------- -------- Pretax operating income (loss) ........... $ 278.4 $ 90.2 $ 92.7 $ 13.6 $ (37.5) $ 437.4 ======== ======== ======== ======= ======= ========
14 UNUM Corporation and Subsidiaries Pretax Operating Income (Loss) by Segment The following sections discuss the results of the four business segments and Corporate for the years ended December 31, 1998, 1997 and 1996. These discussions are based on pretax operating income (loss), which excludes realized investment gains (losses) and the special items previously described. The summary financial information provided prior to each segment discussion has been adjusted to exclude the impact of special items from all income statement line items, consistent with the discussion of results on a pretax operating income basis. DISABILITY INSURANCE SEGMENT
(Dollars in millions) 1998 % Change 1997 % Change 1996 - - ----------------------------------------- ------------- ---------- ------------- ----------- -------------- Revenues Premiums Group LTD .............................. $ 1,385.1 13.6% $ 1,219.1 11.4% $ 1,094.6 Group STD .............................. 274.4 33.7 205.3 29.9 158.1 UNUM Limited ........................... 166.8 13.5 147.0 10.8 132.7 Individual Products .................... 131.0 34.6 97.3 17.8 82.6 Other Disability Insurance ............. 168.6 14.1 147.8 (65.0) 421.9 --------- ----- --------- ----- ---------- Total premiums ......................... 2,125.9 17.0 1,816.5 (3.9) 1,889.9 Investment income ....................... 473.8 0.6 471.1 0.5 468.8 Fees and other income ................... 52.0 (21.3) 66.1 nm 27.8 --------- ----- --------- ----- ---------- Total operating revenues ............... 2,651.7 12.7 2,353.7 (1.4) 2,386.5 Benefits and expenses Benefits to policyholders ............... 1,745.7 16.1 1,503.9 (0.7) 1,514.4 Operating expenses ...................... 486.7 7.7 452.0 (1.8) 460.4 Commissions ............................. 196.8 17.2 167.9 (8.8) 184.2 Increase in deferred policy acquisition costs .................................. (125.8) 46.4 (85.9) 68.8 (50.9) ---------- ----- ---------- ----- ----------- Total benefits and expenses ............ 2,303.4 13.0 2,037.9 (3.3) 2,108.1 ---------- ----- ---------- ----- ----------- Pretax operating income (a) ............. $ 348.3 10.3% $ 315.8 13.4% $ 278.4 ========== ===== ========== ===== =========== Supplemental information (b): Sales (annualized new premiums) ......... Group LTD .............................. $ 325.2 $ 294.4 $ 218.7 Group STD .............................. $ 130.1 $ 94.8 $ 74.0 UNUM Limited ........................... $ 30.6 $ 20.0 $ 14.3 Long Term Care ......................... $ 43.0 $ 24.5 $ 17.4 Lifelong Disability Protection ......... $ 17.0 $ 10.6 $ 5.5 Persistency (premiums) .................. Group LTD .............................. 89.4% 87.7% 83.6% Group STD .............................. 89.6% 86.7% 84.5% UNUM Limited ........................... 91.2% 91.3% 85.6% Benefit ratio (% of premiums) ........... 82.1% 82.8% 80.1% Operating expense ratio (% of premiums) .............................. 22.9% 24.9% 24.4%
- - -------- nm = not meaningful or in excess of 100% (a) For the definition of pretax operating income see the Consolidated Overview. (b) Information relating to sales and persistency is presented as an indicator of premium growth in the segment. Persistency data also indicates experience in maintaining customers over time. Benefit ratios and operating expense ratios show the relative relationships among data to earned premiums in the segment's income statement. The Disability Insurance segment includes disability products offered through: UNUM America and First UNUM in North America; UNUM Limited in the United Kingdom; and UNUM Japan Accident Insurance Company Limited ("UNUM Japan"). The products included in this segment are group long term disability ("group LTD"), group short term disability ("group STD"), long term care, individual disability and disability reinsurance operations. 15 Overview A new product grouping, Individual Products, shown in the previous table, was reported in the Disability Insurance segment effective June 30, 1998, and prior year amounts have been reclassified for comparative purposes. Those products reported as Individual Products include long term care, guaranteed renewable individual disability (Lifelong Disability Protection) and certain other individual disability products. The traditional, fixed price, non- cancellable individual disability ("non-cancellable ID") business is now reported in the Other Disability Insurance line. Additionally, effective January 1, 1997, the individual components of the operating results for the reinsured non-cancellable ID business are not reflected on separate lines in UNUM's statements of income; instead, components of the operating results are combined and reflected as a net amount in fees and other income. The Disability Insurance segment's pretax operating income increased in 1998, as compared with 1997, primarily as a result of strong premium growth and favorable expense growth for the segment. Unfavorable claims experience in the major product lines and reduced fees and other income for the segment partially offset these favorable factors. The following discussion of 1997 results, as compared with 1996 results, includes the underlying trends of both the reinsured and non-reinsured portions of the non-cancellable ID business in order for the analysis of operating results to be comparable. Refer to Item 8 Note 6 under the caption "Reinsurance" for further information. The increase in the Disability Insurance segment's pretax operating earnings in 1997, as compared with 1996, was primarily attributable to improved premium growth, increased investment income and favorable operating expense ratios across most lines of business. These favorable factors were partially offset by higher benefit ratios in certain disability businesses. After adjusting for the effect of claim block acquisitions, the Disability Insurance segment reported premium growth of 15.5% in 1998 compared with prior year's growth of 9.4%, which was also adjusted for $255.4 million of premium ceded during 1997 under the non-cancellable ID reinsurance agreement. The improvement in premium growth was driven by strong sales results and persistency improvements, primarily in group LTD and group STD. One-time premiums, which are generated by claim block acquisitions, are summarized in the table below. Management intends to pursue additional claim block acquisitions in the future.
Year Ended December 31, ------------------------------------ (Dollars in millions) 1998 1997 1996 - - ------------------------------------------- ---------- ---------- ---------- Group LTD ................................. $ 23.7 $ 18.9 $ 10.0 UNUM Limited .............................. 0.3 2.6 8.4 Long Term Care ............................ -- 0.5 -- Disability Reinsurance Operations ......... 31.0 2.1 -- ------- ------- ------- Total .................................... $ 55.0 $ 24.1 $ 18.4 ======= ======= =======
During 1998, market interest rates fell to historically low levels. Management expects the reserve discount rate for certain disability lines will likewise decline as current cash flows are invested in assets at current yields, which are below the composite yield of existing assets purchased in prior years, resulting in higher claim liabilities. Management expects to price new business and reprice existing business, at contract renewal dates, to mitigate the effect on new claim liabilities from this decline in interest rates. However, given the competitive market conditions for UNUM's disability products in the United States and the United Kingdom, it is uncertain whether pricing actions can mitigate the entire effect of interest rate declines. Additionally, in connection with the proposed merger with Provident, UNUM is evaluating its processes and assumptions used to calculate the discount rate for claim reserves for group LTD, individual disability and the disability businesses of UMUM Limited (see "Proposed Merger with Provident" for further information). Group Long Term Disability During 1998, group LTD experienced increased pretax operating income that was driven primarily by strong premium growth of 13.6% and an improved operating expense ratio. Premium growth in 1998 resulted from the impact of solid sales growth and stronger persistency, which is a reflection of continuing customer service actions. 16 UNUM Corporation and Subsidiaries Group LTD was unfavorably affected by a higher benefit ratio in 1998, largely the result of increased levels of claims incidence, an increase in the average size of claims and a longer duration of claims as compared with 1997. As discussed in the section titled Forward-Looking Information, certain risks and uncertainties are inherent in UNUM's business. Components of claims experience, including but not limited to, incidence levels and claims duration, may continue for some period of time at or above the higher levels experienced in 1998. Therefore, management continues to monitor claims experience in group LTD and responds to changes by periodically adjusting prices, refining underwriting guidelines, changing product features and strengthening risk management policies and procedures. In addition, management will continue to evaluate the impacts of the merger on disability claims experience and the assumptions around expected disability claims duration that were used in the determination of the fourth quarter 1998 claims reserve increase. Group Short Term Disability Pretax operating income for group STD increased in 1998, as compared with 1997. Key drivers of the increase were premium growth from record sales and improved persistency, and a favorable operating expense ratio. The strong sales levels reflect UNUM's continuing efforts to cross-sell group STD products with other UNUM group products, as well as increasing large case sales. An unfavorable change in the benefit ratio, primarily from increased claims incidence levels and larger size cases, partially offset these favorable factors. UNUM Limited UNUM Limited's pretax operating income declined for the year ended December 31, 1998, as compared with 1997. The decline was primarily due to an increased benefit ratio generally resulting from a longer duration of claims and increased levels of claims incidence and average size of claims. Favorable expense growth partially offset this decline. In general, UNUM Limited's earnings expressed in U.S. dollars are affected by fluctuations in the exchange rates used in the translation of earnings from British pounds sterling. The weighted-average exchange rate was approximately $1.66, $1.64 and $1.56 for the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998, the spot rate was approximately $1.66. Individual Products During 1998, the long term care ("LTC") and Lifelong Disability Protection ("LDP") blocks of business, while still relatively small, continued to contribute favorably to pretax operating income. LTC and LDP experienced significant premium growth in 1998, as compared with 1997, reflecting the strong sales momentum for these businesses. Other Disability Insurance The non-cancellable ID business contributed favorably to the segment's pretax operating earnings for 1998, largely driven by a lower benefit ratio, as compared with 1997, during which the non-cancellable ID block incurred higher levels of claims incidence. Partially offsetting these positive results was a decline in the operating results of the reinsured block of non-cancellable ID business reported in fees and other income. This decline was primarily due to unfavorable claims experience generally resulting from an increase in the average size of claims and a higher level of claims incidence in the reinsured block. See Item 8 Note 6 under the caption "Reinsurance" for a discussion of the reinsurance transaction. 17 SPECIAL RISK INSURANCE SEGMENT
(Dollars in millions) 1998 % Change 1997 % Change 1996 - - ------------------------------------------- ------------ ---------- ------------ ---------- ------------ Revenues Premiums Group Life ............................... $ 645.9 22.3% $ 528.1 20.1% $ 439.6 Other Special Risk Products .............. 513.2 32.5 387.4 25.5 308.6 -------- ----- -------- ---- -------- Total premiums .......................... 1,159.1 26.6 915.5 22.4 748.2 Investment income ......................... 78.7 12.3 70.1 22.3 57.3 Fees and other income ..................... 49.3 13.6 43.4 23.6 35.1 -------- ----- -------- ---- -------- Total revenues .......................... 1,287.1 25.1 1,029.0 22.4 840.6 Benefits and expenses Benefits to policyholders ................. 803.3 26.1 637.2 23.2 517.1 Operating expenses ........................ 226.8 17.5 193.1 3.4 186.8 Commissions ............................... 176.1 38.1 127.5 42.1 89.7 Increase in deferred policy acquisition costs .................................... (78.5) 46.5 (53.6) 24.1 (43.2) --------- ----- --------- ---- --------- Total benefits and expenses ............. 1,127.7 24.7 904.2 20.5 750.4 --------- ----- --------- ---- --------- Pretax operating income (a) ............... $ 159.4 27.7% $ 124.8 38.4% $ 90.2 ========= ===== ========= ==== ========= Supplemental information (b): Group life sales (annualized new premiums) ................................ $ 208.7 $ 175.8 $ 150.0 Group life persistency (premiums) ......... 86.4% 86.5% 85.6% Benefit ratio (% of premiums) ............. 69.3% 69.6% 69.1% Operating expense ratio (% of premiums) ................................ 19.6% 21.1% 25.0%
- - -------- (a) For the definition of pretax operating income see the Consolidated Overview. (b) Information relating to sales and persistency is presented as an indicator of premium growth in the segment. Persistency data also indicates experience in maintaining customers over time. Benefit ratios and operating expense ratios show the relative relationships among data to earned premiums in the segment's income statement. The Special Risk Insurance segment includes group life, accidental death and dismemberment, travel and voluntary accident insurance, special risk reinsurance operations, and other special risk insurance products. Pretax operating income for the Special Risk Insurance segment increased for the year ended December 31, 1998, as compared with 1997, primarily driven by strong premium growth and a lower operating expense ratio across the segment. Additionally, increased fees and other income, largely from reinsurance underwriting management operations, and increased investment income positively affected pretax operating income for this period. Higher benefit ratios in certain product lines partially offset these increases. UNUM's participation in Lloyd's of London syndicates experienced a higher benefit ratio, especially in the fourth quarter, as new information was received about the profitability of open syndicate years. The profitability of the Lloyd's of London market and the syndicates in which UNUM participates may continue to deteriorate and impact future pretax operating income. UNUM is conducting a strategic review of its reinsurance businesses, including the Lloyd's of London syndicates, to determine the appropriateness of their fit within the context of the UNUMProvident merged entity. The review could result in the sale of some or all of the reinsurance businesses. Due to the nature of the risks underwritten and the relative size of the blocks of businesses, several of the products in the Special Risk Insurance segment can exhibit claims variability. Solid sales results and stable persistency continued during the year and were the primary drivers of group life premium growth of 22.3% in 1998. Claim block acquisitions generated one-time premiums for group life of $0.2 million and $3.6 million, respectively, for 1997 and 1996, and for reinsurance operations of $5.1 million and $16.3 million, respectively, for 1998 and 1996. Management intends to pursue additional claim block acquisitions in the future. The segment's operating expense ratio improved in 1998, primarily driven by continued expense management combined with the strong premium growth. In 1998, the segment's benefit ratio declined slightly, primarily due to favorable claims experience in most lines of business offset by unfavorable experience in certain reinsurance pools. 18 UNUM Corporation and Subsidiaries The increase in pretax operating income for 1997, as compared with 1996, was primarily due to strong premium growth in the group life business, lower expense ratio across most lines, increased investment income and additional fees and other income predominately from reinsurance underwriting management operations. These favorable factors were partially offset by higher benefit ratios in certain lines of business. COLONIAL PRODUCTS SEGMENT
(Dollars in millions) 1998 % Change 1997 % Change 1996 - - --------------------------------------- ------------ ---------- ------------ ---------- ------------ Revenues Premiums .............................. $ 552.7 5.2% $ 525.4 6.4% $ 493.7 Investment income ..................... 65.8 14.2 57.6 21.0 47.6 Fees and other income ................. 3.8 (29.6) 5.4 20.0 4.5 -------- ----- -------- ---- -------- Total operating revenues ............ 622.3 5.8 588.4 7.8 545.8 Benefits and expenses Benefits to policyholders ............. 268.7 3.5 259.7 8.5 239.3 Interest credited ..................... 16.6 37.2 12.1 61.3 7.5 Operating expenses .................... 139.4 7.1 130.2 6.2 122.6 Commissions ........................... 123.3 7.1 115.1 6.8 107.8 Increase in deferred policy acquisition costs ................................ (30.8) 12.0 (27.5) 14.1 (24.1) --------- ----- --------- ---- --------- Total benefits and expenses ......... 517.2 5.6 489.6 8.1 453.1 --------- ----- --------- ---- --------- Pretax operating income (a) ........... $ 105.1 6.4% $ 98.8 6.6% $ 92.7 ========= ===== ========= ==== ========= Supplemental information (b): Sales (annualized first month's premiums) ............................ $ 203.9 $ 224.7 $ 213.6 Benefit ratio (% of premiums) ......... 48.6% 49.4% 48.5% Operating expense ratio (% of premiums) ............................ 25.2% 24.8% 24.8%
- - -------- (a) For the definition of pretax operating income see the Consolidated Overview. (b) Information relating to sales is presented as an indicator of premium growth in the segment. Benefit ratios and operating expense ratios show the relative relationships among data to earned premiums in the segment's income statement. The Colonial Products segment includes Colonial Life & Accident Insurance Company ("Colonial") and affiliates. Colonial offers payroll-deducted, voluntary employee benefit products, including accident and sickness, disability, cancer and life insurance. These products are offered to employees at their worksites and are marketed by Colonial primarily through independent sales representatives. Pretax operating income for the Colonial Products segment increased for the year ended December 31, 1998, as compared with 1997. The increase was primarily attributable to additional investment income and a reduced benefit ratio in the accident, sickness and disability product line, partially offset by an increase in interest credited and a higher benefit ratio in the cancer product line. The increase in investment income and interest credited, is largely due to the assumption of worksite-marketed universal life insurance under reinsurance agreements Colonial entered into in 1998 and 1997. During 1998, management continued to implement organizational changes to focus on specific distribution channels to market Colonial products. Colonial's pretax operating income increased in 1997, as compared with 1996, primarily due to additional investment income, premium growth and reduced operating expense ratios across most lines of business. 19 RETIREMENT PRODUCTS SEGMENT
(Dollars in millions) 1998 1997 1996 - - -------------------------------------- --------- --------- ---------- Pretax operating income (a) .......... $ 1.0 $ 4.7 $ 13.6 ===== ===== ======
- - -------- (a) For the definition of pretax operating income see the Consolidated Overview. The Retirement Products segment includes products no longer actively marketed by UNUM including: TSAs, guaranteed investment contracts ("GICs"), deposit administration accounts ("DAs"), 401(k) plans, individual life and group medical insurance. For the years ended December 31, 1998, and 1997, the segment reported decreased pretax operating income as compared with the respective prior year. The decline in operating income in both periods was primarily the result of the sale of UNUM's TSA business in October 1996, as discussed in Item 8 Note 5 "Sale of Tax-Sheltered Annuity Business." For 1997, the decrease in TSA results was partially offset by favorable volatility in the run-off of certain other discontinued products. UNUM expects these blocks of business to continue to decline in size over several years and experience earnings volatility, reflecting their run-off nature. CORPORATE
(Dollars in millions) 1998 1997 1996 - - ------------------------------------ ----------- ----------- ----------- Pretax operating loss (a) .......... $ (58.0) $ (51.8) $ (37.5) ======= ======= =======
- - -------- (a) For the definition of pretax operating loss see the Consolidated Overview. Corporate includes transactions that are generally non-insurance related. For the year ended December 31, 1998, as compared with the same period in 1997, the increased pretax operating loss in Corporate was due to higher interest expense and decreased investment income, partially offset by lower operating expenses. The increased pretax operating loss for 1997, compared with 1996, was primarily due to decreased investment income, principally from the Company's increased use of capital to repurchase shares of its common stock, and higher operating expenses. INVESTMENTS Overview UNUM's investment objective is to optimize total asset return within appropriate risk criteria established for each product line. UNUM seeks to meet this objective through its asset/liability management process and active asset management of the portfolios. Asset/liability management requires a balance between investment risk and business risk and is a key element for managing certain market risks (see Item 7A "Quantitative and Qualitative Information about Market Risk" for further discussion). 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. In connection with the merger as described in the "Proposed Merger with Provident" section, UNUM is in the process of evaluating its investment strategy and overall asset allocation by investment type in anticipation of a combined entity. UNUM's investments are reported in the consolidated financial statements at net realizable value or net of applicable allowances for probable losses. Allowances for real estate held for sale and mortgages are established based on a review of specific assets as well as on an overall portfolio basis, considering the value of the underlying assets and collateral. If a decline in fair value is considered to be other than temporary or if a long-lived asset is deemed permanently impaired, 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. UNUM's invested assets were $9,837.7 million and $8,958.9 million at December 31, 1998, and 1997, respectively. The composition of UNUM's invested assets at December 31, 1998, was 80.3% fixed maturities, 13.2% mortgage loans, 2.6% real estate and 3.9% other invested assets. 20 UNUM Corporation and Subsidiaries Gross realized investment gains were $29.1 million, $24.4 million and $40.2 million, and gross realized investment losses were $8.1 million, $28.0 million and $36.8 million for the years ended December 31, 1998, 1997 and 1996, respectively. Fixed Maturities Fixed maturities at fair value were $7,896.9 million and $7,310.9 million at December 31, 1998, and 1997, respectively. Management believes UNUM's fixed maturity portfolio is well diversified by company and industry sector. The fixed maturity portfolio is primarily comprised of taxable corporate bonds. At December 31, 1998, and 1997, the fixed maturity portfolio included $89.1 million and $83.7 million, respectively, of below investment grade bonds (below "BAA") recorded at fair value. These bonds had an associated amortized cost of $86.2 million and $80.2 million, respectively. Fixed maturity ratings are obtained from external rating agencies or are determined internally by UNUM using similar methods if external ratings are not available. Below investment grade bonds are inherently more risky than investment grade bonds since the risk of default by the issuer, by definition and as exhibited by bond rating, is higher. Management does not expect any risks or uncertainties associated with below investment grade bonds to have a significant effect on UNUM's consolidated financial position or results of operations. There were no fixed maturities delinquent 60 days or more at December 31, 1998, and 1997. Mortgages At December 31, 1998, and 1997, UNUM's mortgage loans were $1,303.4 million and $1,131.0 million, respectively. Management uses a comprehensive rating system to evaluate the investment and credit risk of each mortgage loan and to identify specific properties for inspection and reevaluation. Management establishes allowances for mortgage loans based on a review of individual loans and the overall loan portfolio, considering the value of the underlying collateral. Management believes that its mortgage loan portfolio is well diversified geographically and among property types. UNUM's incidence of new problem mortgage loans and foreclosure activity has continued to remain very low in 1998, reflecting improvements in overall economic activity and improving real estate markets in the geographic areas where UNUM has mortgage loans. Management expects a modest level of delinquencies and problem loans in the future. There were no delinquent mortgage loans at December 31, 1998, and at December 31, 1997, the amount was 0.7% of the portfolio. At December 31, 1998, and 1997, impaired loans totaled $20.7 million and $43.4 million, respectively. Included in the $20.7 million of impaired loans at December 31, 1998, were $9.0 million of loans which had a related allowance for probable losses of $2.4 million, and $11.7 million of loans which had no related allowance for probable losses. Interest lost on impaired loans in 1998, 1997 and 1996 was not material. Realized investment losses related to impaired mortgage loans amounted to $2.3 million, $3.3 million and $1.0 million for 1998, 1997 and 1996, respectively. Impaired mortgage loans as of December 31, 1998, are not expected to have a significant impact on UNUM's results of operations, liquidity or capital resources. Restructured mortgage loans are those 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, 1998, restructured mortgage loans totaled $14.5 million, as compared with $39.3 million at December 31, 1997. Interest lost on restructured loans was not material in 1998, 1997 or 1996. Real Estate At December 31, 1998, investment real estate amounted to $250.6 million, compared with $231.5 million at December 31, 1997. Investment real estate is carried at cost less accumulated depreciation. Real estate acquired through foreclosure is valued at fair value at the date of foreclosure and may be classified as investment real estate if it meets UNUM's investment criteria. If investment real estate is determined to be permanently impaired, the carrying amount of the asset is reduced to fair value. Occasionally, investment real estate is reclassified and revalued as real estate held for sale when it no longer meets UNUM's investment criteria. Real estate acquired through foreclosure is not expected to have a significant effect on UNUM's results of operations, liquidity or capital resources. 21 At December 31, 1998, and 1997, real estate held for sale amounted to $15.6 million and $23.3 million, respectively. Real estate held for sale is included in other assets in the Consolidated Balance Sheets and is valued net of a valuation allowance that reduces the carrying value to the lower of fair value less estimated costs to sell or cost. This valuation allowance is periodically adjusted based on subsequent changes in UNUM's estimate of fair value less costs to sell. LIQUIDITY AND CAPITAL RESOURCES UNUM's businesses produce positive cash flows which are invested primarily in intermediate term, fixed maturity investments intended to reflect the anticipated cash obligations of insurance benefit payments and insurance contract maturities and to optimize investment returns at appropriate risk levels. Unexpected cash requirements and liquidity needs can be met through UNUM's investment portfolio of fixed maturities classified as available for sale, equity securities, cash and short-term investments. From time to time, dividend payments, which may be subject to approval by insurance regulatory authorities, are made from UNUM's affiliates to UNUM Corporation. These dividends, along with other funds, are used to service the needs of UNUM Corporation including: debt service, common stock dividends, corporate development, stock repurchase and administrative costs. Net statutory operating income, which excludes realized investment gains and losses net of tax, is one of the determinants of an insurance company's dividend capacity to its parent. 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 addition to the level of net statutory operating income, UNUM's determination of amounts to be dividended by affiliates to UNUM Corporation depends on other factors such as risk-based capital ratios, funding growth objectives at an affiliate level and maintaining appropriate capital adequacy ratios as defined by certain rating agencies (see "Ratings" section). The states of domicile for UNUM's subsidiaries generally limit dividend payments to the greater of the prior year's net statutory operating income or 10% of the prior year's statutory surplus. The amount available under current law for payment of dividends during 1999 to UNUM Corporation from all U.S. domiciled insurance subsidiaries without state insurance regulatory approval is approximately $150 million. UNUM Corporation also has the ability to draw a dividend from its United Kingdom-based affiliate, UNUM Limited. Such dividends are limited in amount, based on insurance company legislation in the United Kingdom which requires a minimum solvency margin. The amount available under current law for payment of dividends to UNUM Corporation from UNUM Limited during 1999 is approximately $20 million. It is not uncommon for an insurance entity to request regulatory approval for dividends in excess of amounts available without such approval. The risk-based capital ("RBC") standards for life insurance companies, as prescribed by the National Association of Insurance Commissioners, establish an RBC ratio comparing adjusted surplus to required surplus for each of UNUM's United States domiciled insurance subsidiaries. If the RBC ratio falls within certain ranges, regulatory action may be taken ranging from increased information requirements to mandatory control by the domiciliary insurance department. The RBC ratios for UNUM's insurance subsidiaries, measured at December 31, 1998, were significantly above the ranges that would require regulatory action. Cash flow requirements are also supported by a committed revolving credit facility totaling $500 million, which expires October 1, 2001. UNUM'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 that, among other provisions, require maintenance of certain levels of stockholders' equity and limits on debt levels. On December 15, 1998, UNUM Corporation issued $250 million of senior notes, which mature in 2028, under an omnibus shelf registration with the Securities and Exchange Commission, which became effective August 2, 1996. UNUM used the proceeds to repay short-term debt and for general corporate purposes. The shelf registration relates to $500 million of securities (including debt securities, preferred stock, common stock and other securities). On August 15, 1996, UNUM established a $250 million medium-term note ("MTN") program under the shelf registration. On December 4, 1997, UNUM borrowed [British pound]100 million ($168.3 million) through a private placement with an investor in the United Kingdom (see Item 8 Note 8 "Notes Payable"). The borrowing has an expected term of ten years. Upon issuance of the [British pound]100 million borrowing, UNUM entered into currency and interest rate swap agreements 22 UNUM Corporation and Subsidiaries that converted the principal amount to U.S. dollars and the interest obligation on the debt from a pound sterling based fixed rate to a U.S. dollar fixed rate. The borrowing is callable by either party over the life of the agreement, under certain circumstances. UNUM anticipates the debt will be called in 1999. Therefore, UNUM is currently evaluating various financing alternatives and intends to substitute a debt instrument to match the maturity and terms of the interest rate swap agreement. At December 31, 1998, UNUM had short-term and long-term debt totaling $283.5 million and $598.3 million, respectively. At December 31, 1998, approximately $414 million was available for additional financing under the existing revolving credit facility and $200 million of investment grade debt instruments was available for issuance under the shelf registration. In the normal course of business, UNUM enters into letters of credit, primarily to satisfy capital requirements related to certain subsidiary transactions. UNUM had outstanding letters of credit of $149.7 million and $84.6 million at December 31, 1998, and 1997, respectively. Effective November 23, 1998, UNUM's Board of Directors rescinded the company's stock repurchase program as a result of the pending merger agreement with Provident. During 1998, 1997 and 1996, UNUM acquired approximately 1.3 million, 7.1 million and 3.8 million shares, respectively, of its common stock in the open market at an aggregate cost of $65.0 million, $285.2 million and $119.1 million, respectively. UNUM was committed at December 31, 1998, to purchase invested assets in the amount of $45.7 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. 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 are available for the individual United States domiciled insurance company subsidiaries. Financial strength ratings are based primarily on U.S. statutory financial information for the individual U.S. domiciled insurance companies. Debt ratings for UNUM Corporation are based primarily on consolidated financial information prepared using generally accepted accounting principles. Both financial strength ratings and debt ratings incorporate qualitative analyses of UNUM companies done by rating agencies on an ongoing basis. 23 As a result of UNUM's announced plan to merge with Provident, on November 23, 1998, the aforementioned credit agencies put UNUM's credit ratings under review. The table below reflects the debt ratings for UNUM Corporation and the financial strength ratings for UNUM's United States domiciled insurance company subsidiaries at February 26, 1999:
Standard & Poor's Moody's A.M. Best --------------------------- ------------------------------------- -------------------------- UNUM Corporation Ratings: Senior Notes due A+ A1 December, 2028 (Strong) (Upper Medium Grade) CreditWatch with negative On review for possible implications downgrade Senior Debt A+ A1 (MTN program) (Strong) (Upper Medium Grade) CreditWatch with negative On review for possible implications downgrade Subordinated Debt A- A2 (Monthly Income (Strong) (Upper Medium Grade) Debt Securities) CreditWatch with negative On review for possible implications downgrade Commercial Paper A-1 P-1 (Strong) (Superior Ability) Rating affirmed, 11/23/98 Rating confirmed, 11/23/98 United States Subsidiaries' Ratings: UNUM America AA Aa2 A++ (Very Strong) (Excellent) (Superior) CreditWatch with negative On review for possible Under review with implications downgrade developing implications First UNUM AA Aa2 A+ (Very Strong) (Excellent) (Superior) CreditWatch with negative On review for possible Under review with implications downgrade developing implications Colonial AA Aa3 A+ (Very Strong) (Excellent) (Superior) CreditWatch with negative On review for possible Under review with implications upgrade developing implications
At February 26, 1999, the unsold portion of the shelf registration related to preferred stock carried a rating of "a1/a2" (Upper-Medium Quality) from Moody's. DERIVATIVES Refer to Item 8 Note 14 "Derivative Financial Instruments" for information. LITIGATION Refer to Item 8 Note 15 "Litigation" for information. EFFECT OF INFLATION 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 the company is 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. 24 UNUM Corporation and Subsidiaries YEAR 2000 DATE CONVERSION The following discussion regarding the Year 2000 Date Conversion contains forward-looking statements, and should be read in conjunction with the Forward-Looking Information disclosure made at the beginning of the Management's Discussion and Analysis. The year 2000 date conversion relates to whether computer systems will properly recognize date-sensitive information when the year changes to 2000. This inability to recognize the year 2000 may cause systems to process critical financial and operational information incorrectly. This, in turn, could cause disruptions of normal business operations, including the inability to process claims, bill and collect premium, and manage investment activities. UNUM has a corporate-wide program underway to address the year 2000 date conversion relating to its internal computer systems and critical dependencies of its business including suppliers, business partners, customers, facilities and telecommunications. UNUM has determined that it is required to modify or replace significant portions of its software so its computer systems will properly function using dates beyond December 31, 1999. Management is utilizing both internal and external resources to reprogram, or replace, and test the software for year 2000 compliance. UNUM's program for the year 2000 is organized into a number of phases for rectifying its internal computer systems, including assessment, code remediation, testing, and deployment. As of December 31, 1998, UNUM has completed the assessment phase for all its critical systems and for more than 90% of its non-critical systems. Coding remediation of UNUM's critical systems is virtually complete with approximately 95% of those remediated completing the testing phase. Greater than 85% of the non-critical systems have been remediated and tested. Deployment is underway for most critical systems and the majority of non-critical systems. Management has substantially completed all phases for its critical and non-critical systems as of December 31, 1998, and expects to complete all phases by the end of 1999. In addition, UNUM continues to assess critical external dependencies, including suppliers, business partners and customers, and non-systems aspects of the business such as facilities and telecommunication. As part of this due diligence program, UNUM has sent year 2000 compliance questionnaires to its critical third party suppliers, is reviewing responses received, performing cross-checks against other publicly available information and conducting due diligence meetings. UNUM is performing site visits to certain third party businesses, determining the frequency and timing of follow-up site visits, and planning to test specific systems for compliance. To date, no significant issues from critical external dependencies have been identified; however, there can be no guarantee that the computer systems of these third parties will be year 2000 compliant. UNUM is developing contingency plans to alleviate the potential business impact of third parties not being year 2000 compliant. Management expects all of these plans to be finalized and ready for implementation in third quarter 1999. UNUM estimates that total internal (opportunity costs) and external (out-of-pocket) costs for addressing the year 2000 date conversion will range from $70 million to $80 million, which are expensed as incurred. As of December 31, 1998, UNUM has incurred approximately $59 million in connection with its year 2000 program. The costs of the project and the date on which UNUM plans to complete year 2000 modifications are based on management's best estimates, derived using numerous assumptions about future events. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Failure by UNUM to make the required modifications to existing systems and conversions to new systems in a timely manner, or failure by third parties to successfully address year 2000 issues could have a material adverse effect on UNUM's results of operations, liquidity or capital resources; however, the potential impact and related costs, if any, are not known at this time. While management does not anticipate a material adverse effect, UNUM is developing contingency plans that would allow UNUM to devote its financial and personnel resources to correct the problem as soon as possible if UNUM's systems were to be non-compliant. With regard to non-compliance resulting from third party failure, contingency plans are being developed, as previously discussed, to attempt to mitigate the extent of this potential impact. 25 ACCOUNTING PRONOUNCEMENTS ADOPTED Refer to Item 8 Note 1 under the caption "Accounting Pronouncements Adopted" for information. NEW ACCOUNTING PRONOUNCEMENTS Refer to Item 8 Note 1 under the caption "New Accounting Pronouncements" for information. ITEM 7A. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK Market-Sensitive Instruments and Risk Management The following discussion about UNUM's risk-management activities includes "forward-looking statements" that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements (see "Forward-Looking Information" in Item 7). UNUM's financial instruments are exposed to market risk, which is the risk of market volatility and potential disruptions in the market that may result in certain financial instruments becoming less valuable. UNUM's primary market risk is interest rate risk, which is the sensitivity of earnings, cash flows and the fair value of financial instruments to changes in the level of interest rates. In accordance with the Securities and Exchange Commission's Financial Reporting Release No. 48, the following quantitative analysis provides the estimated loss in fair value of certain market sensitive financial assets and liabilities held at December 31, 1998, and 1997, given a hypothetical 10-percent adverse change in interest rates and related qualitative information on how UNUM manages interest rate risk. All of UNUM's financial instruments are held for purposes other than trading. Interest-Rate Risk UNUM's asset/liability duration management activities represent a key element for managing interest rate risk to the overall business. The objective of asset/liability duration management is to support the achievement of business strategies while minimizing levels of investment risk, which includes interest rate risk. As part of the Company's asset/liability duration management strategy, detailed actuarial models of the cash flows associated with each type of insurance liability are generated under various interest rate scenarios allowing the calculation of an estimated duration for each insurance product line. This duration measure can then be used to compare the price sensitivities of the insurance liabilities versus the price sensitivities of the financial assets held to provide the required liability cash flows. When the durations of assets and liabilities are equal, interest rate exposure is effectively neutralized on an economic basis as the change in value of financial assets should be largely offset by the change in the value of the liabilities. The model used in the following analysis included UNUM's fixed maturities, mortgage loans and deposit assets held at December 31, 1998, and 1997, and incorporated assumptions regarding the impact of changing interest rates on expected cash flows for certain financial assets with prepayment features, such as callable bonds, mortgage-backed securities and mortgage loans. The model used also assumed an immediate change in interest rates without any management of the investment portfolio in reaction to such change. The hypothetical reduction in the fair value of UNUM's financial assets included in the model resulting from a hypothetical 10-percent adverse change in interest rates prevalent at December 31, 1998, and 1997, was estimated to be $290 million and $323 million, respectively. In consideration of UNUM's ongoing strategy of asset/liability duration alignment, this hypothetical reduction in fair value would be largely offset by the corresponding decrease in the fair value of insurance reserves. UNUM has established policies and procedures governing its issuance of debt. UNUM manages its debt composition and related interest rate risk by considering such factors as the debt to equity ratio, fixed rate to variable rate debt ratio, future debt requirements, interest rate environment and market conditions. The sensitivity analysis of notes payable considered the impact of an immediate hypothetical interest rate change as of December 31, 1998, and 1997, and the effects of the interest rate swap agreement described in Item 8 Note 14 "Derivative Financial Instruments." Based upon the interest rate exposure relating to UNUM's notes payable at December 31, 1998, and 1997, a hypothetical 10-percent adverse change in interest rates in the near term would not materially affect the fair value of UNUM's notes payable. Additionally, UNUM periodically uses options, futures and interest rate swaps, which are common derivative financial instruments, to hedge interest rate risk associated with anticipated purchases and sales of investments and debt issuance (see Item 8 Note 14 "Derivative Financial Instruments" for further information on derivatives). 26 UNUM Corporation and Subsidiaries Foreign Currency Exchange Risk UNUM generally conducts its international businesses through foreign operating entities that maintain assets and liabilities in local currencies, substantially limiting foreign currency exchange rate risk to net assets denominated in foreign currencies. The unrealized foreign currency translation gains and losses are reported in other comprehensive income in stockholders' equity. After assessing UNUM's foreign currency exchange risk at December 31, 1998, and 1997, a hypothetical 10-percent adverse change in exchange rates in the near term would not materially affect UNUM's consolidated stockholders' equity at December 31, 1998, and 1997. Foreign exchange exposure was calculated by translating the local reporting currency into U.S. dollars using foreign currency exchange rates at December 31, 1998, and 1997, and applying a hypothetical 10-percent adverse change in foreign exchange rates to the translated amount. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX Page - - ------------------------------------------------------------------------------------------ ----- Report of Independent Accountants ........................................................ 28 Consolidated Financial Statements: Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 .. 29 Consolidated Balance Sheets as of December 31, 1998, and 1997 ........................... 30 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 ......................................................................... 31 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 .................................................................................. 32 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1998, 1997 and 1996 ......................................................................... 34 Notes to Consolidated Financial Statements ............................................... 35
27 REPORT OF INDEPENDENT ACCOUNTANTS To the Directors and Stockholders UNUM Corporation In our opinion, the consolidated financial statements listed in the index appearing under Item 8 on page 27 present fairly, in all material respects, the financial position of UNUM Corporation and its subsidiaries at December 31, 1998, and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 14(a) on page 71 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of UNUM's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP Portland, Maine February 2, 1999 28 UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, --------------------------------------------- (Dollars in millions, except per common share data) 1998 1997 1996 - - ------------------------------------------------------- ------------- ------------- ------------- Revenues Premiums .............................................. $ 3,841.7 $ 3,263.7 $ 3,151.5 Investment income ..................................... 661.4 661.0 803.3 Net realized investment gains (losses) ................ 21.0 (3.6) 3.4 Fees and other income ................................. 117.3 227.3 113.5 --------- ---------- --------- Total revenues ...................................... 4,641.4 4,148.4 4,071.7 Benefits and expenses Benefits to policyholders ............................. 2,886.2 2,438.8 2,342.2 Interest credited ..................................... 46.4 83.5 200.6 Salaries and related expenses ......................... 479.3 433.4 424.0 Other operating expenses .............................. 401.1 370.3 445.0 Commissions ........................................... 496.2 410.5 386.9 Increase in deferred policy acquisition costs ......... (235.1) (166.9) (109.3) Interest expense ...................................... 49.9 42.4 40.7 ---------- ---------- ---------- Total benefits and expenses ......................... 4,124.0 3,612.0 3,730.1 ---------- ---------- ---------- Income before income taxes ............................ 517.4 536.4 341.6 Income taxes Current ............................................... 27.9 68.3 122.3 Deferred .............................................. 126.1 97.8 (18.7) ---------- ---------- ---------- Total income taxes .................................. 154.0 166.1 103.6 ---------- ---------- ---------- Net income ............................................ $ 363.4 $ 370.3 $ 238.0 ========== ========== ========== Net income per common share: Basic ................................................ $ 2.63 $ 2.65 $ 1.63 Diluted .............................................. $ 2.57 $ 2.59 $ 1.61
See notes to consolidated financial statements. 29 UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ------------------------------ (Dollars in millions) 1998 1997 - - -------------------------------------------------------------- ------------- -------------- ASSETS Investments Fixed maturities available for sale--at fair value (amortized cost: 1998--$7,350.0; 1997--$6,893.0) ........... $ 7,896.9 $ 7,310.9 Equity securities available for sale--at fair value (cost:1998--$21.3; 1997--$21.1)............................. 31.0 30.7 Mortgage loans .............................................. 1,303.4 1,131.0 Real estate, net ............................................ 250.6 231.5 Policy loans ................................................ 137.6 128.5 Other long-term investments ................................. 2.0 1.8 Short-term investments ...................................... 216.2 124.5 ---------- ----------- Total investments ......................................... 9,837.7 8,958.9 Cash ......................................................... 80.5 56.8 Accrued investment income .................................... 167.4 160.3 Premiums due ................................................. 518.1 390.9 Deferred policy acquisition costs ............................ 1,266.0 1,031.7 Property and equipment, net .................................. 237.9 196.2 Reinsurance receivables ...................................... 1,770.0 1,441.2 Deposit assets ............................................... 729.7 688.3 Other assets ................................................. 540.3 486.2 Separate account assets ...................................... 35.3 29.6 ---------- ----------- Total assets .............................................. $ 15,182.9 $ 13,440.1 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Future policy benefits ...................................... $ 2,360.2 $ 2,108.4 Unpaid claims and claim expenses ............................ 6,841.2 5,944.4 Other policyholder funds .................................... 875.4 1,004.9 Income taxes Current .................................................... 47.3 20.7 Deferred ................................................... 625.8 496.2 Notes payable ............................................... 881.8 635.8 Other liabilities ........................................... 778.2 765.3 Separate account liabilities ................................ 35.3 29.6 ---------- ----------- Total liabilities ......................................... 12,445.2 11,005.3 Stockholders' equity Preferred stock, par value $0.10 per share, authorized 10,000,000 shares, none issued Common stock, par value $0.10 per share, authorized 240,000,000 shares, issued 199,975,916 shares .............. 20.0 20.0 Additional paid-in capital .................................. 1,151.2 1,123.0 Retained earnings ........................................... 2,444.9 2,162.5 Accumulated other comprehensive income: Unrealized gains, net ...................................... 248.4 211.4 Unrealized foreign currency translation adjustment ......... (19.4) (16.0) ---------- ----------- Total accumulated other comprehensive income .............. 229.0 195.4 ---------- ----------- 3,845.1 3,500.9 Less: Treasury stock, at cost (1998--61,266,501 shares; 1997--61,703,924 shares) .................................. 1,085.9 1,050.3 Restricted stock deferred compensation ...................... 21.5 15.8 ---------- ----------- Total stockholders' equity .................................. 2,737.7 2,434.8 ---------- ----------- Total liabilities and stockholders' equity ................ $ 15,182.9 $ 13,440.1 ========== ===========
See notes to consolidated financial statements. 30 UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Accumulated Stock Additional Other (Dollars in millions, $0.10 Par Paid-in Comprehensive except per common share data) Value Capital Income - - ------------------------------------- ----------- ------------ --------------- Balance at January 1, 1996 .......... $ 10.0 $ 1,088.2 $ 190.0 1996 Transactions: Net income ......................... Other comprehensive income ......... (108.9) Dividends to stockholders ($0.545 per common share).......... Treasury stock acquired ............ Employee stock option and other transactions ................ 15.2 ------- ---------- -------- Balance at December 31, 1996 ........ 10.0 1,103.4 81.1 1997 Transactions: Net income ......................... Other comprehensive income ......... 114.3 Two-for-one common stock split ..... 10.0 (10.0) Dividends to stockholders ($0.565 per common share).......... Treasury stock acquired ............ Employee stock option and other transactions ................ 29.6 ------- ---------- -------- Balance at December 31, 1997 ........ 20.0 1,123.0 195.4 1998 Transactions: Net income ......................... Other comprehensive income ......... 33.6 Dividends to stockholders .......... ($0.585 per common share) Treasury stock acquired ............ Employee stock option and other transactions ................ 28.2 ------- ---------- -------- Balance at December 31, 1998 ........ $ 20.0 $ 1,151.2 $ 229.0 ======= ========== ======== Restricted Stock (Dollars in millions, Retained Treasury Deferred except per common share data) Earnings Stock Compensation Total - - ------------------------------------- ------------- -------------- -------------- ------------- Balance at January 1, 1996 .......... $ 1,713.2 $ (691.6) $ (6.9) $ 2,302.9 1996 Transactions: Net income ......................... 238.0 238.0 Other comprehensive income ......... (108.9) Dividends to stockholders ($0.545 per common share).......... (79.8) (79.8) Treasury stock acquired ............ (119.1) (119.1) Employee stock option and other transactions ................ 18.5 (3.7) 30.0 ---------- ---------- -------- ---------- Balance at December 31, 1996 ........ 1,871.4 (792.2) (10.6) 2,263.1 1997 Transactions: Net income ......................... 370.3 370.3 Other comprehensive income ......... 114.3 Two-for-one common stock split ..... -- Dividends to stockholders ($0.565 per common share).......... (79.2) (79.2) Treasury stock acquired ............ (285.2) (285.2) Employee stock option and other transactions ................ 27.1 (5.2) 51.5 ---------- ---------- -------- ---------- Balance at December 31, 1997 ........ 2,162.5 (1,050.3) (15.8) 2,434.8 1998 Transactions: Net income ......................... 363.4 363.4 Other comprehensive income ......... 33.6 Dividends to stockholders .......... ($0.585 per common share) (81.0) (81.0) Treasury stock acquired ............ (65.0) (65.0) Employee stock option and other transactions ................ 29.4 (5.7) 51.9 ---------- ---------- -------- ---------- Balance at December 31, 1998 ........ $ 2,444.9 $ (1,085.9) $ (21.5) $ 2,737.7 ========== ========== ======== ==========
See notes to consolidated financial statements. 31 UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, --------------------------------------------- (Dollars in millions) 1998 1997 1996 - - ------------------------------------------------------------------- ------------- ------------- ------------- Operating activities: Net income ........................................................ $ 363.4 $ 370.3 $ 238.0 Adjustments to reconcile net income to net cash provided by operating activities: Increase in future policy benefits and unpaid claims and claim expenses .................................................. 980.1 726.6 743.0 Increase in reinsurance receivables .............................. (327.8) (277.5) (721.2) Increase in premiums due ......................................... (127.1) (94.8) (72.6) Increase in income tax liability ................................. 140.5 52.8 20.4 (Increase) decrease in deferred policy acquisition costs ......... (234.2) (163.3) 274.3 (Increase) decrease in deposit assets ............................ 12.3 (55.9) (432.1) Deferral (recognition) of gain on sale of tax-sheltered annuities ....................................................... (3.3) (72.6) 80.8 Charge for individual disability reinsurance fees ................ -- -- 49.7 Other ............................................................ 6.8 6.4 112.4 ---------- ---------- ---------- Net cash provided by operating activities ...................... 810.7 492.0 292.7 ---------- ---------- ---------- Investing activities: Maturities of fixed maturities available for sale ................. 405.4 457.7 775.2 Sales of fixed maturities available for sale ...................... 715.0 652.1 2,514.4 Sales and maturities of other investments ......................... 144.5 234.9 269.5 Purchases of fixed maturities available for sale .................. (1,557.0) (1,360.6) (1,890.9) Purchases of other investments .................................... (374.4) (216.3) (263.0) Net (increase) decrease in short-term investments ................. (91.7) 10.7 (1,063.9) Net additions to property and equipment ........................... (41.1) (26.1) (54.3) ---------- ---------- ---------- Net cash provided by (used in) investing activities ............... (799.3) (247.6) 287.0 ---------- ---------- ---------- Financing activities: Deposits and interest credited to investment contracts ............ 100.7 285.1 597.1 Maturities and withdrawals from investment contracts .............. (217.2) (327.2) (903.8) Dividends to stockholders ......................................... (81.0) (79.2) (79.8) Treasury stock acquired ........................................... (65.0) (285.2) (119.1) Proceeds from notes payable ....................................... 278.1 168.3 -- Repayment of notes payable ........................................ (68.1) (48.5) (15.0) Net increase (decrease) in short-term debt ........................ 36.0 (10.6) (42.3) Other ............................................................. 27.3 32.8 18.9 ---------- ---------- ---------- Net cash provided by (used in) financing activities ............ 10.8 (264.5) (544.0) ---------- ---------- ---------- Effect of exchange rate changes on cash ........................... 1.5 (1.0) (0.3) ---------- ---------- ---------- Net increase (decrease) in cash ................................... 23.7 (21.1) 35.4 Cash at beginning of year ......................................... 56.8 77.9 42.5 ---------- ---------- ---------- Cash at end of year ............................................... $ 80.5 $ 56.8 $ 77.9 ========== ========== ========== Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes ..................................................... $ 31.4 $ 76.1 $ 76.4 Interest ......................................................... $ 50.9 $ 43.3 $ 40.8
See notes to consolidated financial statements. 32 UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Supplemental disclosure of noncash operating and investing activities: For the year ended December 31, 1997, in connection with contractholder and participant consents for assumption reinsurance related to the tax-sheltered annuity business UNUM sold in 1996, UNUM reduced its deposit assets by $2,317.8 million, policy loan assets by $104.8 million, other policyholder fund liabilities by $2,486.5 million and separate account assets and liabilities by $526.5 million. Also, during 1996, fixed maturities available for sale of $588.6 million and short-term investments of $1,825.9 million were transferred to the buyer on October 1, 1996. Upon transfer, there was a corresponding increase in UNUM's deposit assets. See notes to consolidated financial statements. 33 UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31, ---------------------------------------- (Dollars in millions) 1998 1997 1996 - - ---------------------------------------------------------------- ----------- ----------- ------------ Net income ..................................................... $ 363.4 $ 370.3 $ 238.0 Other comprehensive income: Unrealized holding gains (losses) arising during the period, net ....................................... 47.4 131.2 (135.5) Reclassification adjustment for realized (gains) losses included in net income, net .................................. (10.4) (2.1) 4.7 -------- -------- --------- Changes in unrealized gains (losses), net .................... 37.0 129.1 (130.8) Foreign currency translation adjustments ...................... (3.4) (14.8) 21.9 -------- -------- --------- Total other comprehensive income ............................. 33.6 114.3 (108.9) -------- -------- --------- Comprehensive income ........................................... $ 397.0 $ 484.6 $ 129.1 ======== ======== ========= Supplemental disclosures of comprehensive income information: Tax (expense) benefit related to unrealized holding (gains) losses ........................................................ $ (20.8) $ (65.5) $ 41.8 Tax (expense) benefit related to reclassification adjustment for realized (gains) losses ....................................... $ (5.6) $ (1.1) $ 2.5 ========= ========= =========
See notes to consolidated financial statements. 34 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 ("GAAP"). The preparation of financial statements in conformity with GAAP 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 To better reflect the business of Duncanson & Holt Underwriters Ltd., as reported in the Special Risk Insurance segment, the results have been reflected on separate lines in UNUM's statements of income, balance sheets and statements of cash flows. Previously the operating results, financial position and cash flows were reported as net amounts in fees and other income and other assets. Prior year amounts have been reclassified for comparative purposes. Certain other 1997 and 1996 amounts have been reclassified in 1998 for comparative purposes. Investments Investments are reported as follows: o Fixed maturities available for sale (certain bonds and redeemable preferred stocks)--at fair value. o Equity securities available for sale (common stocks and non-redeemable preferred stocks)--at fair value. o Mortgage loans--at amortized cost less an allowance for probable losses. o Real estate--at cost less accumulated depreciation. o Policy loans--at unpaid principal balance. o Other long-term investments--at cost plus UNUM's equity in undistributed net earnings since acquisition. o 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 and claim expenses. 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. 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 or if a long-lived asset is deemed to be permanently impaired, the investment is reduced to its net realizable value and the reduction is accounted for as a realized investment loss. 35 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. Real estate held for sale is included in other assets in the Consolidated Balance Sheets and is valued net of a valuation allowance that reduces the carrying value to the lower of fair value less estimated costs to sell or cost. This valuation allowance is periodically adjusted based on subsequent changes in UNUM's estimate of fair value less costs to sell. 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. Deferred Policy Acquisition Costs The costs of acquiring new business that vary with and 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 group disability, individual disability, and group life and health business, the costs are amortized in proportion to expected future premiums. For universal life products, the costs are amortized in proportion to estimated gross profits from interest margins, mortality and other elements of performance under the contracts. Amortization may be 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) 1998 1997 1996 - - ----------------------------------------------------------- ----------- ----------- ----------- Deferred ............................................... $ 532.7 $ 393.8 $ 334.7 Less amortized ......................................... (297.6) (226.9) (225.4) -------- -------- -------- Increase in deferred policy acquisition costs ......... $ 235.1 $ 166.9 $ 109.3 ======== ======== ========
Separate Accounts Certain assets from tax-sheltered annuity ("TSA") 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 its 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 benefit of all Union Mutual's individual participating life and annuity policies and contracts. The assets of the PFA 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 2.4% and 2.7% of consolidated assets and 2.9% and 3.3% of consolidated liabilities at December 31, 1998, and 1997, respectively. 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 36 UNUM Corporation and Subsidiaries a plan of termination and communicates sufficient detail of the plan to employees. Liabilities for restructuring activities are included in other liabilities in the Consolidated Balance Sheets. 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. A valuation allowance is established for deferred tax assets when it is more likely than not that an amount will not be realized. 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. Recognition of Premium Revenues and Related Expenses Group insurance and individual disability premiums are recognized as income when due. Benefits and expenses are matched 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. Premium for UNUM's Lloyd's of London ("Lloyd's") business is based on participation in the individual syndicate underwriting years that generate premiums over a three-year period of time. UNUM has participated in the Lloyd's market for a number of years and uses its historical experience plus information obtained from its managing agents to estimate revenues, losses, expenses, and the related assets and liabilities. Additionally, an independent acturial review of the syndicates' open reserves is performed annually and management periodically reviews its estimates as information is received from the Lloyd's syndicates. Any resulting adjustment to the estimates is reflected in the current results. 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, benefits and expenses are stated net of reinsurance ceded to other companies. UNUM evaluates the financial condition of its reinsurers and monitors concentrations of credit risk to minimize exposure to significant losses from reinsurer insolvencies. Changes in Accounting Estimates During fourth quarter 1997, certain reinsurance pools managed by UNUM's wholly-owned subsidiary, Duncanson & Holt Inc. ("D&H"), received new claim information from ceding insurance enterprises about certain older pool years and completed an analysis of recent claims experience deterioration. As a result of these factors, certain pools have strengthened claim reserves. The impact to UNUM in fourth quarter 1997 from these pool claim reserve increases was an $11.7 million reduction in fee income and a $6.7 million increase in benefits to policyholders reported in the Special Risk Insurance segment, reducing net income by $12.0 million in the Consolidated Statement of Income. Accounting Pronouncements Adopted Effective January 1, 1998, UNUM adopted Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive Income," which established standards for reporting and display of comprehensive income and its components in a financial statement with the same prominence as other financial statements. Comprehensive income is defined as net income adjusted for changes in stockholders' equity resulting from events other than net income 37 or transactions related to an entity's capital instruments. UNUM has reclassified financial statements for earlier years as required by FAS 130. Effective January 1, 1998, UNUM adopted FAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which established standards for reporting information about operating segments. Generally, FAS 131 requires that financial information about operating segments be reported on the basis that is used internally for evaluating performance. UNUM has determined that its current segment reporting structure meets the requirements of FAS 131 and no restatement of financial information is needed. Additional segment information has been disclosed as required under FAS 131. Effective January 1, 1998, UNUM adopted FAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which revised disclosure requirements for employers' pension and other retiree benefits. FAS 132 did not change the measurement or recognition of pension or other postretirement benefit plans. UNUM has restated disclosures for earlier years presented, as required under FAS 132. Effective January 1, 1998, UNUM implemented Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use," which provided guidance on accounting for the costs of developing or obtaining computer software for internal use. The adoption of SOP 98-1 did not have a material effect on UNUM's results of operations or financial position. Effective December 31, 1997, UNUM adopted FAS No. 128, "Earnings Per Share," ("EPS") which changed the computation of EPS and requires dual presentation of "basic" and "diluted" EPS. FAS 128 superseded Accounting Principles Board ("APB") Opinion No. 15, "Earnings Per Share." Effective December 31, 1997, UNUM adopted FAS No. 129, "Disclosures of Information About Capital Structure," which consolidated disclosure requirements related to the type and nature of securities contained in an entity's capital structure. FAS 129 did not add to or change any of UNUM's disclosures. Effective January 1, 1997, UNUM adopted FAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which established accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. The statement provides guidance for recognition or derecognition of assets and liabilities, focusing on the concepts of control and extinguishment. The adoption of FAS 125 did not have a material effect on UNUM's results of operations or financial position. New Accounting Pronouncements In October 1998, the Accounting Standards Executive Committee ("AcSEC") issued SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk," which provides guidance on applying the deposit method of accounting to insurance and reinsurance contracts that do not transfer insurance risk. UNUM is required to adopt SOP 98-7 effective January 1, 2000. Previously issued financial statements should not be restated unless the SOP is adopted prior to the effective date and during an interim period. The adoption of SOP 98-7 is not expected to have a material impact on UNUM's results of operations, liquidity or financial position. In June 1998, the Financial Accounting Standards Board ("FASB") issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts, and for hedging activities. FAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative under FAS 133 depends on the intended use of the derivative and its hedging designation. UNUM is required to adopt FAS 133 effective January 1, 2000. UNUM has not yet determined the impact FAS 133 will have on its results of operations, liquidity or financial position. In December 1997, the AcSEC issued SOP 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments," which provides guidance on accounting for the recognition and measurement of liabilities for guaranty funds and other insurance-related assessments. UNUM is required to adopt SOP 97-3 effective January 1, 1999. Previously issued financial statements should not be restated unless the SOP is adopted prior to the effective date and during an interim period. The adoption of SOP 97-3 is not expected to have a material impact on UNUM's results of operations, liquidity or financial position. 38 UNUM Corporation and Subsidiaries NOTE 2. INVESTMENTS The following tables summarize the components of investment income, net realized investment gains (losses) and changes in unrealized gains (losses), net: Investment Income
Year Ended December 31, --------------------------------------- (Dollars in millions) 1998 1997 1996 - - ----------------------------------------------------------- ----------- ----------- ----------- Fixed maturities available for sale $ 541.8 $ 539.1 $ 642.2 Mortgage loans ......................................... 105.0 110.6 112.1 Real estate ............................................ 24.9 23.1 20.0 Policy loans ........................................... 8.3 6.7 10.2 Other long-term investments ............................ 0.1 2.8 7.3 Short-term investments ................................. 19.7 17.6 52.3 -------- -------- -------- Gross investment income ............................... 699.8 699.9 844.1 Less investment expenses ............................... (14.3) (14.5) (16.3) Less investment income on participating individual life insurance policies and annuity contracts ......... (24.1) (24.4) (24.5) -------- -------- -------- Investment income ..................................... $ 661.4 $ 661.0 $ 803.3 ======== ======== ========
Net Realized Investment Gains (Losses)
Year Ended December 31, ------------------------------------ (Dollars in millions) 1998 1997 1996 - - ----------------------------------------------------- ---------- ---------- ---------- Gross realized investment gains: Fixed maturities available for sale .............. $ 18.6 $ 17.1 $ 22.0 Equity securities available for sale ............. 0.1 0.7 -- Mortgage loans, real estate and other ............ 10.4 6.6 18.2 ------- ------- ------- Gross realized investment gains ................. 29.1 24.4 40.2 ------- ------- ------- Gross realized investment losses: Fixed maturities available for sale .............. (2.8) (14.6) (29.2) Mortgage loans, real estate and other ............ (5.3) (13.4) (7.6) ------- ------- ------- Gross realized investment losses ................ (8.1) (28.0) (36.8) ------- ------- ------- Net realized investment gains (losses) ......... $ 21.0 $ (3.6) $ 3.4 ======= ======== =======
Change in Unrealized Gains (Losses), Net
Year Ended December 31, ---------------------------------------- (Dollars in millions) 1998 1997 1996 - - ------------------------------------------------------ ----------- ----------- ------------ Fixed maturities available for sale ............... $ 129.0 $ 131.9 $ (265.9) Equity securities available for sale .............. -- 2.1 3.4 Marketable securities held in trust ............... 83.9 127.8 -- Unpaid claims adjustment .......................... (160.7) (68.4) 92.5 Deferred taxes .................................... (15.2) (64.3) 39.2 -------- -------- -------- Total change in unrealized gains (losses), net, as included in stockholders' equity ................ $ 37.0 $ 129.1 $ (130.8) ======== ======== ========
UNUM's fixed maturities are reported at fair value as a result of being classified as available for sale. Accordingly, the related liability for unpaid claims and claims expenses is adjusted to reflect the changes that would have been necessary if the related fixed maturities were sold at their fair value and the proceeds were reinvested at current yields. At December 31, 1998, 1997 and 1996, the net unrealized gain on available for sale fixed maturities was $546.9 million, $417.9 million and $286.0 million, respectively, and the related unpaid claims adjustment was $397.8 million, $237.1 million and $168.7 million, respectively. 39 The marketable securities held in trust relate to the individual disability reinsurance agreement (see Note 6 "Reinsurance"). Changes in fair value of the assets and the related adjustment to unpaid claims are reflected in the equity section of UNUM's Consolidated Balance Sheets. Fixed Maturities The amortized cost and fair value of fixed maturities available for sale at December 31, 1998, were as follows:
Gross Gross Amortized Unrealized Unrealized Fair (Dollars in millions) Cost Gains Losses Value - - ------------------------------------------- ----------- ------------ ------------ ------------ U.S. Government ........................ $ 21.6 $ 3.0 $ -- $ 24.6 U.S. States and municipalities ......... 1,189.4 56.1 -- 1,245.5 Foreign governments .................... 341.9 53.4 -- 395.3 Public utilities ....................... 1,408.8 121.6 (7.8) 1,522.6 Corporate bonds ........................ 4,280.5 334.3 (16.3) 4,598.5 Redeemable preferred stocks ............ 0.2 -- -- 0.2 Mortgage-backed securities ............. 107.6 2.6 -- 110.2 --------- ------- ------- --------- Total ................................ $ 7,350.0 $ 571.0 $ (24.1) $ 7,896.9 ========= ======= ======= =========
The amortized cost and fair value of fixed maturities available for sale at December 31, 1997, were as follows:
Gross Gross Amortized Unrealized Unrealized Fair (Dollars in millions) Cost Gains Losses Value - - ------------------------------------------- ----------- ------------ ------------ ------------ U.S. Government ........................ $ 48.8 $ 2.5 $ -- $ 51.3 U.S. States and municipalities ......... 942.5 36.6 (0.2) 978.9 Foreign governments .................... 359.6 40.3 -- 399.9 Public utilities ....................... 1,369.0 89.0 (0.1) 1,457.9 Corporate bonds ........................ 3,964.6 248.7 (1.1) 4,212.2 Redeemable preferred stocks ............ 3.5 -- (0.2) 3.3 Mortgage-backed securities ............. 205.0 2.4 -- 207.4 --------- ------- ------- --------- Total ................................ $ 6,893.0 $ 419.5 $ (1.6) $ 7,310.9 ========= ======= ======== =========
The amortized cost and fair value of fixed maturities available for sale at December 31, 1998, 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 - - --------------------------------------------------- ----------- ------------- Due in one year or less ........................ $ 384.7 $ 390.2 Due after one year through five years .......... 2,623.4 2,811.4 Due after five years through ten years ......... 3,690.8 3,982.1 Due after ten years ............................ 543.5 603.0 --------- ---------- 7,242.4 7,786.7 Mortgage-backed securities .................... 107.6 110.2 --------- ---------- Total ........................................ $ 7,350.0 $ 7,896.9 ========= ==========
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, 1998:
Fair (Dollars in millions) Cost Value - - ----------------------------------------------------- ---------- ---------- Common stocks: Industrial, miscellaneous and all other ......... $ 21.3 $ 31.0 ====== ======
40 UNUM Corporation and Subsidiaries Gross unrealized investment gains on equity securities available for sale totaled $10.5 million, $9.6 million, and $7.5 million at December 31, 1998, 1997 and 1996, respectively. Gross unrealized investment losses were not material at December 31, 1998, 1997 and 1996. Mortgages At December 31, 1998, and 1997, impaired loans totaled $20.7 million and $43.4 million, respectively. Included in the $20.7 million were $9.0 million of loans which had a related allowance for probable losses of $2.4 million, and loans of $11.7 million which had no related allowance for probable losses. Included in the $43.4 million of impaired loans at December 31, 1997, were $20.8 million of loans which had a related allowance for probable losses of $3.5 million, and loans of $22.6 million which had no related allowance for probable losses. Restructured mortgage loans amounted to $14.5 million and $39.3 million at December 31, 1998, and 1997, respectively. Troubled debt restructurings represent loans that are refinanced with terms more favorable to the borrower. Interest lost on restructured loans was not material for the years ended December 31, 1998, 1997, or 1996. Real Estate and Other Real estate acquired in satisfaction of debt cumulatively amounted to $62.4 million at December 31, 1998. Real estate held for sale amounted to $15.6 million at December 31, 1998, and $23.3 million at December 31, 1997. Real estate with a depreciated cost of $5.2 million and no bonds or mortgages were non-income producing for the twelve months ended December 31, 1998. Interest lost on these investments was not material in 1998, 1997, or 1996. UNUM was committed at December 31, 1998, to purchase fixed maturities and other invested assets in the amount of $45.7 million. NOTE 3. ALLOWANCE FOR PROBABLE LOSSES ON INVESTED ASSETS AND REAL ESTATE HELD FOR SALE Changes in the allowance for probable losses on mortgage loans 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, 1998 Mortgage loans .................... $ 33.9 $ 2.3 $ (3.4) $ 32.8 Real estate held for sale ......... 17.8 (1.0) -- 16.8 ------- ------ ------ ------- Total ............................ $ 51.7 $ 1.3 $ (3.4) $ 49.6 ======= ====== ====== ======= Year Ended December 31, 1997 Mortgage loans .................... $ 37.7 $ 3.3 $ (7.1) $ 33.9 Real estate held for sale ......... 14.8 3.0 -- 17.8 ------- ------ ------ ------- Total ............................ $ 52.5 $ 6.3 $ (7.1) $ 51.7 ======= ====== ====== ======= Year Ended December 31, 1996 Mortgage loans .................... $ 39.2 $ 1.0 $ (2.5) $ 37.7 Real estate held for sale ......... 19.1 (0.4) (3.9) 14.8 ------- ------ ------ ------- Total ............................ $ 58.3 $ 0.6 $ (6.4) $ 52.5 ======= ====== ====== =======
Additions represent charges to net realized investment gains (losses) less recoveries, and deductions represent reserves released upon disposal or restructuring of the related asset. NOTE 4. RESERVES 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 with actual experience and may be 41 revised if it is determined that future expected experience is worse than the reserve assumptions. Reserves for group insurance policies consist primarily of prepaid premiums. The interest rates used in the calculation of reserves for future policy benefits at December 31, 1998, and 1997, principally ranged from 4.5% to 9.5% and from 5.0% to 9.5%, respectively. Certain reserve calculations are based on variable interest rates within these ranges. 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. Management periodically performs a review of reserve estimates and assumptions. If management determines reserve assumptions need to be updated, any resulting adjustment to reserves is reflected in current operations. Given that insurance products contain inherent risks and uncertainties, 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, 1998, and 1997, were principally as follows:
1998 1997 --------------- ------------- Group long term disability (North America) ........... 7.76% 7.84% Group long term disability (United Kingdom) .......... 8.95% 9.27% Individual disability ................................ 5.5% to 8.95% 7.0% to 9.5%
The interest rate used to discount the disability reserves is a composite of the yields on assets specifically identified with each block of business. The discount rate may decline further depending on the interest rate environment. UNUM periodically adjusts prices on both existing and new business in an effort to mitigate the impact of the current interest rate environment. See Note 17 "Proposed Merger with Provident and Combined Condensed Pro Forma Financial Statements (Unaudited)," for a discussion of potential impacts to reserve discount rates subsequent to the proposed merger. For other accident and health business, reserves are based on projections of historical claims run-out patterns. Activity in the liability for unpaid claims and claim expenses is summarized as follows:
(Dollars in millions) 1998 1997 1996 - - ---------------------------------------- ------------- ------------- ------------- Balance at January 1 ................ $ 5,944.4 $ 5,334.7 $ 4,871.8 Reinsurance receivables ............. (636.6) (381.3) (125.6) Effect of unrealized gains .......... (236.9) (170.1) (261.2) ---------- ---------- ---------- Net balance at January 1 ............ 5,070.9 4,783.3 4,485.0 Incurred related to: Current year ....................... 2,356.7 1,897.6 1,692.0 Prior years ........................ 399.6 373.1 365.4 ---------- ---------- ---------- Total incurred ...................... 2,756.3 2,270.7 2,057.4 Paid related to: Current year ....................... 747.2 622.2 535.8 Prior years ........................ 1,481.9 1,360.9 1,223.3 ---------- ---------- ---------- Total paid .......................... 2,229.1 1,983.1 1,759.1 Net balance at December 31 .......... 5,598.1 5,070.9 4,783.3 Reinsurance receivables ............. 846.0 636.6 381.3 Effect of unrealized gains .......... 397.1 236.9 170.1 ---------- ---------- ---------- Balance at December 31 .............. $ 6,841.2 $ 5,944.4 $ 5,334.7 ========== ========== ==========
42 UNUM Corporation and Subsidiaries The components of the unpaid claims and claims expenses incurred and related to prior years were as follows:
(Dollars in millions) 1998 1997 1996 - - ---------------------------------------------------------- ----------- ----------- ----------- Interest accrued on reserves .......................... $ 309.3 $ 300.5 $ 292.9 Changes in reserve estimates and assumptions .......... 90.5 89.8 35.6 Changes in foreign exchange rates ..................... (0.2) (17.2) 36.9 -------- -------- -------- Incurred related to prior years ....................... $ 399.6 $ 373.1 $ 365.4 ======== ======== ========
The additional reserves for amounts incurred related to prior years 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. In connection with entering into the merger agreement with Provident in fourth quarter 1998 (see Note 17 "Proposed Merger with Provident and Combined Condensed Pro Forma Financial Statements (Unaudited),") UNUM anticipates that as a result of integrating its claim operations with Provident, there will be a temporary increase in claim costs. UNUM expects that fewer claims will be resolved or closed during the period when the two companies are planning and implementing the integration of their claims organizations. The average length of duration for claims will increase, resulting in more benefit payments being paid for a relatively short time until the consolidation of operations is complete. During the fourth quarter of 1998, UNUM increased its unpaid claims reserve by $59.4 million related to the expected increase in disability claim duration on existing claims. This reserve increase was reflected as a $49.0 million increase in benefits to policyholders and a $10.4 million reduction in fee income in the Disability Insurance segment. The reduction in fee income represents increased reserves for the United States non-cancellable individual disability business that is reinsured with Centre Life Reinsurance Limited ("Centre Re"). See Note 6 "Reinsurance" for further information on the reinsurance transaction. Management will continue to evaluate the impacts of the merger on disability claims experience and the assumptions around expected disability claims duration that were used in the determination of the claims reserve increase. NOTE 5. SALE OF TAX-SHELTERED ANNUITY BUSINESS On October 1, 1996, UNUM America and First UNUM closed the sale of their respective TSA businesses to The Lincoln National Life Insurance Company and Lincoln Life & Annuity Company of New York ("Lincoln"), both subsidiaries of Lincoln National Corporation. The sale involved approximately 1,700 group contractholders and assets under management of approximately $3.3 billion. The contracts were initially reinsured on an indemnity basis. Upon consent of the TSA contractholders and participants, the contracts are considered reinsured on an assumption basis, legally releasing UNUM America and First UNUM from future contractual obligation to the respective contractholders and participants. To effect the sale of the TSA business, UNUM transferred into a trust account held for the benefit of Lincoln approximately $2,690 million of assets. UNUM has recorded a deposit asset in its Consolidated Balance Sheet representing the assets which support the TSA contracts of those contractholders and participants that have not given consent for assumption reinsurance. At December 31, 1998, the deposit asset related to the TSA transaction was approximately $257 million. The sale resulted in a deferred pretax gain of $80.8 million, of which $72.6 million was recognized in income during 1997, reported as fees and other income, in proportion to contractholder and participant consents for assumption reinsurance. Additionally, the results for the year ended December 31, 1997, included $47.0 million of net income and basic and diluted net income per common share of $0.34 and $0.33, respectively, related to the recognition of the deferred pretax gain. Through December 31, 1998, consent for assumption reinsurance has been provided by TSA contractholders and participants owning substantially all assets under management. 43 NOTE 6. REINSURANCE UNUM, through its life insurance subsidiaries, is involved in both the cession and assumption of reinsurance with other companies. UNUM periodically monitors the financial condition, and in some cases holds substantial collateral as security in the form of funds, securities and/or letters of credit to mitigate credit risk from its reinsurers. At December 31, 1998, approximately 85% of the reinsurance receivable balance was due from five reinsurers. These reinsurers had a rating of A or better (Strong) from Standard & Poor's--a recognized insurance rating agency. Additionally, UNUM holds collateral in the form of securities comprising 53% of the balance. On October 23, 1996, UNUM announced the execution of a definitive reinsurance agreement between UNUM America and Centre Re, a Bermuda-based reinsurance specialist, for reinsurance coverage of the active life reserves of UNUM America's existing United States non-cancellable individual disability ("non-cancellable ID") block of business. This agreement reinsures all claims incurred on or after January 1, 1996. The agreement follows UNUM's announcement in late 1994 that it would no longer market the non-cancellable form of ID coverage in the United States. The agreement is a finite reinsurance arrangement. Under the agreement, Centre Re has an obligation to absorb losses within a defined risk layer. UNUM retains the risk for all experience up to Centre Re's defined risk layer, or attachment point. Once the attachment point is reached, Centre Re assumes the risk for all experience up to a contractually defined risk limit. Any experience above Centre Re's defined risk limit reverts back to UNUM. As of December 31, 1998, the attachment point had not been reached. The following discloses the various layers in the agreement at December 31, 1998:
(Dollars in millions) - - ------------------------------------------- Net GAAP reserves ...................... $486 UNUM's experience layer ................ 249 ---- Attachment point ...................... 735 Centre Re's defined risk layer ......... 235 ---- Defined risk limit .................... $970 ====
Under the agreement, UNUM funds a trust account equal to the amount of UNUM's exposure (i.e., up to the attachment point). These trust assets provide security (i.e., collateral) to Centre Re for amounts due by UNUM prior to reaching the attachment point. UNUM acts as the investment manager for 80% of the assets in the trust with Centre Re managing the remaining 20%. The actual operating results of the non-cancellable ID block of business are accounted for under FAS No. 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." This reinsurance agreement transfers risk and is accounted for as reinsurance in accordance with the requirements of FAS 113 for reinsurance of long-duration contracts. The underlying operating results of the reinsured block are reflected in fees and other income and realized gains and losses from sales of assets are reflected as realized investment gains (losses) in UNUM's Consolidated Statements of Income. UNUM has a deposit asset at December 31, 1998, of approximately $419 million reflected in the Consolidated Balance Sheet. The deposit asset is comprised of UNUM's experience layer and unrealized gains or losses on the marketable securities held in the trust. Unrealized gains or losses on marketable securities held in the trust and the related effects on claim reserves are reflected as unrealized gains or losses in the equity section of UNUM's Consolidated Balance Sheets. UNUM controls the management of the business, including premium collection and claims management, under this agreement. All premiums, less amounts for management expenses and claim payments, are transferred to the trust account on a quarterly basis. In 1994 UNUM recorded a premium deficiency reserve strengthening related to the non-cancellable ID block of business in conjunction with its announcement to exit the non-cancellable form of ID coverage in the United 44 UNUM Corporation and Subsidiaries States. The reinsurance fees due Centre Re are expenses that were not contemplated when reserves were strengthened in 1994. Since these fees would have caused the non-cancellable ID block of business to be in a loss situation, UNUM recognized a pretax charge of $49.7 million in the fourth quarter of 1996. The charge represented the present value of the anticipated minimum amount of fees to be paid to Centre Re under the agreement for a period of six years. UNUM has the right, but no obligation, to recapture the business after six years without penalty. UNUM paid $9.4 million in fees to Centre Re during 1998 and 1997. The effect of all reinsurance on premiums earned and written for the years ended December 31, 1998, 1997 and 1996, was as follows:
(Dollars in millions) 1998 1997 1996 - - ------------------------------- ------------- ------------- ------------- Premiums earned: Direct .................... $ 3,935.2 $ 3,384.9 $ 3,005.0 Assumed ................... 320.8 281.6 252.9 Ceded ..................... (414.3) (402.8) (106.4) ---------- ---------- ---------- Premiums earned .......... $ 3,841.7 $ 3,263.7 $ 3,151.5 ========== ========== ========== Premiums written: Direct .................... $ 3,918.9 $ 3,390.2 $ 3,039.2 Assumed ................... 380.4 330.3 289.3 Ceded ..................... (431.0) (436.3) (131.0) ---------- ---------- ---------- Premiums written ......... $ 3,868.3 $ 3,284.2 $ 3,197.5 ========== ========== ==========
For the years ended December 31, 1998, 1997 and 1996, recoveries recognized under reinsurance agreements offset benefits to policyholders by $376.3 million, $309.7 million and $90.8 million, respectively. NOTE 7. BUSINESS RESTRUCTURING AND OTHER CHARGES Business Restructuring Charges of $6.0 million and $7.2 million were recorded in 1997 and 1996, respectively. The charge in 1997 was related to a management and field office reorganization within the North American reinsurance operations, and consisted of $4.0 million of lease exit costs, $1.4 million of severance related costs, and $0.6 million of abandoned assets. The charge in 1996 was related to the merger of Commercial Life Insurance Company ("Commercial Life") into UNUM America. As of December 31, 1998, a liability was no longer being carried in the Consolidated Balance Sheet for these charges. Intangible Asset Write-offs and Future Loss Reserves In connection with the merger of Commercial Life into UNUM America, the sale of the tax-sheltered annuity business (see Note 5 "Sale of Tax-Sheltered Annuity Business"), as well as UNUM's continued efforts to strengthen its focus on its core products, the company initiated a review of certain products, which resulted in the recognition of pretax charges totaling $39.4 million during 1996. The charges included the write-off of certain intangible assets and the establishment of a reserve for the present value of expected future losses on certain discontinued products. These charges reduced income before income taxes by $13.1 million in the Disability Insurance segment, $11.3 million in the Special Risk Insurance segment, and $15.0 million in the Retirement Products segment. On an after tax basis the charges reduced net income by $26.3 million. 45 NOTE 8. NOTES PAYABLE Notes payable consisted of the following at December 31:
(Dollars in millions) 1998 1997 - - ------------------------------------------------------------------- ----------- ----------- Short-term debt: Commercial paper, with weighted-average interest rates of 5.5% and 6.3% in 1998 and 1997, respectively ................. $ 85.7 $ 50.9 Other notes payable, with weighted-average interest rates of 1.1% and 1.0% in 1998 and 1997, respectively ................. 8.9 7.7 Medium-term notes payable, due 1999, with interest rates of 7.0% ................................................ 21.4 68.0 Other borrowing with an effective interest rate of 5.8%, $168.3 million issued net of unamortized offering costs of $0.8 million and $0.6 million in 1998 and 1997, respectively ................................................. 167.5 -- -------- -------- Total short-term debt ....................................... 283.5 126.6 -------- -------- Long-term debt: Long-term notes payable, due 2028, with an interest rate of 6.75%, $250.0 million issued, net of unamortized hedging costs and issuance fees of $21.9 million..................... 228.1 -- Medium-term notes payable, due 2000 to 2028, with interest rates ranging from 5.9% to 7.5% .............................. 202.7 174.2 Monthly income debt securities, due 2025, with an interest rate of 8.8%, $172.5 million issued net of unamortized offering costs of $5.0 million and $5.2 million in 1998 and 1997, respectively ................................................. 167.5 167.3 Other borrowing, due 2007, with an effective interest rate of 5.8%, $168.3 million issued net of unamortized offering costs of $0.8 million and $0.6 million in 1998 and 1997, respectively ................................................. -- 167.7 -------- -------- Total long-term debt ........................................ 598.3 509.2 -------- -------- Total notes payable ......................................... $ 881.8 $ 635.8 ======== ========
At December 31, 1998, UNUM Corporation had a $500 million committed revolving credit facility that expires on October 1, 2001. UNUM'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 debt levels. On December 15, 1998, UNUM issued $250 million notes due December 15, 2028, with interest payable semi-annually. The notes are redeemable, in whole or in part, at the option of UNUM at any time at or above par. UNUM used the net proceeds to repay short term-debt and for general corporate purposes. On December 4, 1997, UNUM borrowed [British pound]100 million ($168.3 million) through a private placement with an investor in the United Kingdom. The borrowing has an expected term of 10 years. Upon issuance of the [British pound]100 million borrowing, UNUM entered into currency and interest rate swap agreements that converted the principal amount to U.S. dollars and the interest obligation on the debt from a pound sterling based fixed rate to a U.S. dollar fixed rate. The borrowing is callable by either party over the life of the agreement, under certain circumstances. UNUM anticipates the debt will be called in 1999. Therefore, UNUM is currently evaluating various financing alternatives and intends to substitute a debt instrument to match the maturity and terms of the interest rate swap agreement. Aggregate maturities of notes payable are as follows: 1999--$283.5 million; 2000--$60.0 million; 2001--none; 2002--$35.0 million, 2003 and thereafter--$503.3 million. 46 UNUM Corporation and Subsidiaries In the normal course of business, UNUM enters into letters of credit, primarily to satisfy capital requirements related to certain subsidiary transactions. UNUM had outstanding letters of credit of $149.7 million and $84.6 million at December 31, 1998, and 1997, respectively, which are not reflected in the Consolidated Balance Sheets. NOTE 9. EMPLOYEE BENEFIT AND INCENTIVE PLANS Pension Plans In 1997, UNUM changed the measurement date for the valuation of its pension plan and postretirement benefit plan assets and actuarially determined obligations from December 31, to September 30. The change in measurement date had no effect on 1997 or prior years' net pension and periodic postretirement benefit costs. Changes in the projected benefit obligation and plan assets, as determined by the plan's actuaries were as follows:
(Dollars in millions) 1998 1997 - - ---------------------------------------------------------------- ----------- ----------- Benefit obligation at beginning of period ................... $ 230.4 $ 203.2 Service cost--benefits earned during the period ............. 14.0 9.0 Interest cost ............................................... 16.7 11.4 Actuarial loss .............................................. 12.1 7.6 Benefits paid ............................................... (2.0) (0.8) -------- -------- Benefit obligation at end of period ........................ 271.2 230.4 -------- -------- Fair value of plan assets at beginning of period ............ 324.2 267.7 Actual return on plan assets ................................ 26.9 61.4 Employer contributions ...................................... 11.2 -- Benefits paid ............................................... (2.0) (0.8) Other transfers ............................................. -- (4.1) -------- -------- Fair value of plan assets at end of period ................. 360.3 324.2 -------- -------- Projected benefit obligation less than plan assets .......... 89.1 93.8 Unrecognized net actuarial gain ............................. (66.8) (86.8) Unrecognized prior service cost ............................. (23.1) (25.8) Unamortized net obligation .................................. 1.1 1.5 -------- -------- Prepaid (accrued) pension cost ............................. $ 0.3 $ (17.3) ======== =========
At December 31, 1998, the plan assets included 448,784 shares of UNUM Corporation common stock with a fair value of $26.2 million. The amount of dividends paid on these shares during 1998 was not material. Net pension cost included the following components:
Year Ended December 31, ------------------------------------- (Dollars in millions) 1998 1997 1996 - - ------------------------------------------------------------ ---------- ----------- ---------- Service cost--benefits earned during the period ......... $ 14.0 $ 12.9 $ 13.5 Interest cost ........................................... 16.7 15.2 15.1 Expected return on assets ............................... (30.3) (24.0) (19.5) Recognized prior service cost ........................... (2.7) (2.6) (1.0) Recognized net actuarial gain ........................... (4.5) (1.4) -- Amortization of net obligation .......................... 0.4 0.4 0.3 ------- -------- ------- Net pension cost (benefit) ............................. $ (6.4) $ 0.5 $ 8.4 ======== ======== =======
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 6.75% and 4.25%, respectively, at September 30, 1998, and 7.25% and 4.75%, respectively, at September 30, 1997. The expected long-term rate of return on plan assets was 9.25% in 1998 and 9.0% in 1997 and 1996. Prior year service costs are being amortized on a straight-line basis over expected employment periods for active employees. 47 Postretirement Health Care and Life Insurance Benefits UNUM provides certain health care and life insurance benefits for retired employees and covered dependents. The underlying plans are not currently funded. The cost of these plans was $4.5 million, $4.3 million and $10.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998, and 1997, the liability associated with these plans was $85.8 million and $83.2 million, respectively. Retirement Savings Plans Effective January 1, 1997, UNUM introduced a single retirement savings plan for all domestic employees. Dependent upon the employee's annual earnings, eligible employees may contribute up to 15% of their annual compensation, including incentive payouts. UNUM matches 100% of the employee's contribution up to 3% of the employee's compensation, plus 50% of the employee's contribution on the next 2% of the employee's compensation, to a maximum of 4% after eligibility requirements of one year of service is met. Employees become 100% vested immediately upon becoming eligible. Expense for the retirement savings plans amounted to $10.3 million, $9.6 million and $8.4 million in 1998, 1997 and 1996, 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 1998, 1997 and 1996, expense for these plans was $33.8 million, $37.2 million and $41.7 million, respectively. NOTE 10. STOCKHOLDERS' EQUITY Common Stock Effective November 23, 1998, UNUM's Board of Directors rescinded the Company's stock repurchase program, related to the announced merger with Provident Companies, Inc. On March 14, 1997, UNUM's Board of Directors authorized a two-for-one common stock split, subject to shareholder approval of a proposal to increase the number of authorized shares of common stock. On May 9, 1997, UNUM's shareholders approved an increase in the number of authorized shares of common stock to 240 million from 120 million. The stock split was completed on June 2, 1997, through the distribution of one additional share for each share of stock already issued, to holders of record on May 19, 1997. Accordingly, all numbers of common shares and per common share data were restated to reflect the stock split. Par value of $10.0 million was transferred to common stock from additional paid-in capital in second quarter 1997. Changes in the number of common shares outstanding were as follows:
(Shares in millions) 1998 1997 1996 - - --------------------------------------------------- ---------- ---------- ---------- Shares outstanding, beginning of year .......... 138.3 143.6 146.0 Shares issued under stock plans ................ 1.7 1.8 1.4 Shares reacquired .............................. (1.3) (7.1) (3.8) ------ ------ ------ Shares outstanding, end of year ................ 138.7 138.3 143.6 ====== ====== ======
Earnings Per Share Basic earnings per share ("EPS") is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding while giving effect to all dilutive potential common shares outstanding. The approximate number of shares used to calculate EPS was as follows:
(Shares in millions) 1998 1997 1996 - - ---------------------------------------------------- ---------- ---------- ---------- Weighted-average number of shares outstanding for basic EPS ...................................... 138.3 139.9 145.9 Effect of dilutive securities ................... 3.1 3.0 2.1 ----- ----- ----- Weighted-average number of shares outstanding for diluted EPS .................................... 141.4 142.9 148.0 ===== ===== =====
48 UNUM Corporation and Subsidiaries The following number of outstanding options to purchase shares were excluded from the diluted weighted-average calculation as the options' exercise prices were greater than the average market prices.
(Options in millions) 1998 1997 1996 - - ---------------------------------------------- -------- -------- -------- Antidilutive options outstanding .......... 1.7 0.2 0.1 === === ===
Stock Options At December 31, 1998, UNUM had four stock-based compensation plans, which are described below. Had compensation cost for options issued under UNUM's four stock-based compensation plans been determined based on the fair value at the grant dates, UNUM's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
(Dollars in millions except per common share data) 1998 1997 1996 - - ---------------------------------------------------- ----------- ----------- ----------- Net income: As reported ..................................... $ 363.4 $ 370.3 $ 238.0 Pro forma ....................................... $ 360.8 $ 361.4 $ 231.9 Earnings per common share: Basic As reported .................................... $ 2.63 $ 2.65 $ 1.63 Pro forma ...................................... $ 2.61 $ 2.58 $ 1.59 Diluted As reported .................................... $ 2.57 $ 2.59 $ 1.61 Pro forma ...................................... $ 2.55 $ 2.53 $ 1.57
The fair value of each option granted is estimated on the date of grant using a modified Black-Scholes option-pricing model with the following assumptions:
1998 1997 1996 ---------------- ---------------- --------------- Dividend yield ........................... 1.0% 1.0% 1.5% Expected stock price volatility .......... 23.8% to 26.4% 22.7% to 24.2% 23.1% to 24.8% Risk-free interest rate .................. 4.2% to 5.3% 5.7% to 6.8% 5.2% to 6.5% Expected option lives .................... 4 to 8 years 4 to 8 years 4 to 8 years
Forfeiture rates are updated based on actual experience, and the cumulative adjustments made to the current year's pro forma amounts. Because some options vest over several years and additional awards generally are made each year, the pro forma amounts above may not be representative of the effects on net income for future years. 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. Options were granted at the discretion of the Compensation Committee of the Board of Directors ("the Committee") and had vesting schedules of one to four years. The number of shares subject to options under the Option Plan could not exceed 5.0 million. Grants are no longer made under this plan. The 1990 Long-Term Stock Incentive Plan ("Incentive Plan") 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. Options may be granted annually at the discretion of the Committee and vest in one to five years. The Incentive Plan also provides for granting to key officers restricted stock awards whose vesting is contingent upon UNUM achieving prescribed financial performance objectives, with the exception of 11,600 shares granted in 1996 and 10,000 shares granted in 1995, which will vest upon the grantee remaining in UNUM's employ for a specified period of time or a defined change in control. Plan participants are entitled to voting rights on their respective shares at grant. The compensation cost related to restricted stock grants was not material in 1998, 1997 and 1996. The unamortized 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. 49 The number of shares subject to issuance under the Incentive Plan cannot exceed 13.6 million, including both options and shares of restricted stock. At December 31, 1998, 1997 and 1996, 1,617,701 shares, 1,603,580 shares, and 1,385,036 shares, respectively, were available for grant under the Incentive Plan. The 1996 Long-Term Stock Incentive Plan ("1996 Incentive Plan") 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. The 1996 Incentive Plan also provides for granting to key officers restricted stock awards whose vesting is contingent upon achieving prescribed financial performance objectives or upon the grantee remaining in UNUM's employ for a specified period of time. Options and restricted stock may be granted annually at the discretion of the Committee. The number of shares subject to issuance cannot exceed 7.0 million. At December 31, 1998, 1997 and 1996, 3,389,860 shares, 5,003,480 shares and 6,990,000 shares, respectively, were available for grant under the 1996 Incentive Plan. The 1998 Goals Stock Option Plan ("1998 Option Plan") provides for granting to all eligible employees up to 300 options to purchase UNUM Corporation common stock. The options will vest to the employee nine years from the date of grant. Vesting may be accelerated to an earlier date at the discretion of the plan administrator. Grants of 166,200 shares and 205,000 shares were made in 1997 and 1996 , respectively. No 1998 Option Plan grants were made in 1998, and no further grants can be made under this plan. For all of UNUM's stock-based compensation plans, the exercise price of each option is not less than 100% of the fair market value of UNUM's stock on the date of grant. In connection with the pending merger (see Note 17 "Proposed Merger with Provident and Combined Condensed Pro Forma Financial Statements (Unaudited),") outstanding options which have otherwise not vested will do so as a result of a change in control as defined by the plans. For outstanding options related to the Option Plan, Incentive Plan and the 1998 Option Plan, a change in control will occur at the time shareholders vote in favor of the merger. Outstanding options related to the 1996 Incentive Plan will vest upon the consummation of the merger. A summary of the status of UNUM's four stock-based compensation plans as of December 31, 1998, 1997 and 1996, and changes during the years then ended are presented below:
Restricted (Per share amounts are weighted-average) Options Stock - - ------------------------------------------------------------ --------------- ------------- Outstanding at January 1, 1996 .......................... 10,395,268 284,400 1996 Activity: Granted at $30.38 per share.............................. 2,161,380 -- Granted for restricted stock at $29.68 per share......... -- 186,600 Exercised at $18.86 per share............................ (1,274,522) -- Forfeited at $23.39 per share for options................ (543,482) (65,200) ---------- ------- Outstanding at December 31, 1996 ........................ 10,738,644 405,800 ---------- ------- 1997 Activity: Granted at $39.18 per share.............................. 2,064,820 -- Granted for restricted stock at $37.75 per share......... -- 224,700 Exercised at $20.59 per share............................ (1,617,469) -- Forfeited at $26.88 per share for options................ (734,850) (128,800) ---------- -------- Outstanding at December 31, 1997 ........................ 10,451,145 501,700 ---------- -------- 1998 Activity: Granted at $52.75 per share.............................. 1,659,455 -- Granted for restricted stock at $52.68 per share......... -- 124,660 Lapse of restrictions on restricted stock ............... -- (41,450) Exercised at $22.88 per share............................ (1,642,846) -- Forfeited at $31.84 per share for options................ (363,916) (68,950) ---------- -------- Outstanding at December 31, 1998 ........................ 10,103,838 515,960 ========== ========
The weighted-average exercise price of options outstanding at December 31, 1998, 1997 and 1996, was $31.07, $26.32 and $22.93 per share, respectively. 50 UNUM Corporation and Subsidiaries The number and weighted-average exercise price of exercisable shares as of December 31, 1998, 1997 and 1996, was 4,802,071 shares at $25.50 per share, 4,686,562 shares at $22.71 per share and 4,763,184 shares at $20.73 per share, respectively. The weighted-average fair value of options granted during the years ended December 31, 1998, 1997 and 1996, was $12.88, $8.56 and $6.92, respectively. The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable - - ------------------------------------------------------------------------ --------------------------------- Range of Number Weighted-Average Number Exercise Outstanding Remaining Weighted-Average Exercisable Weighted-Average Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price - - -------------- ------------- ------------------ ------------------ ------------- ----------------- $ 10 to 15 412,222 1.83 $ 12.22 412,222 $ 12.22 16 to 24 2,976,487 5.59 19.78 1,367,806 20.20 25 to 37 3,323,867 6.03 28.62 2,483,938 27.85 38 to 58 3,391,262 8.50 45.68 538,105 38.27 - - ------------ --------- ---- -------- --------- -------- $ 10 to 58 10,103,838 6.63 $ 31.07 4,802,071 $ 25.50 ========== =========
Between 1991 and 1994, certain officers were granted limited stock appreciation rights ("LSARs") in conjunction with their options for those years. If a change in control of UNUM Corporation, as defined in the plans, should occur, the option holder can exercise the LSAR. The LSARs were amended such that the proposed merger with Provident would not be a change in control of UNUM Corporation. An LSAR is meant to compensate an officer if the associated options lose value due to a change in control by allowing the officer to receive payment for the difference between the option exercise price and the higher of (a) highest price paid per share 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 sixty day period preceding the change of control. As an underlying stock option is exercised, the LSARs are automatically canceled. At December 31, 1998, 1997 and 1996, there were 495,750 LSARs, 557,800 LSARs and 796,600 LSARs outstanding, respectively. Preferred Stock Purchase Rights UNUM adopted a Shareholder Rights Plan on March 13, 1992. Under the Plan, each Right, under 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 Shareholder Rights Plan was amended in 1998 such that Provident, as a result of the merger and related transactions contemplated by the merger, will not be deemed to be an Acquiring Person as defined in the Rights Agreement. 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 11. 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. The amount available under current law for payment of dividends during 1999 to UNUM Corporation from all U.S. domiciled insurance subsidiaries without state insurance regulatory approval is approximately $150 million. 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 $1,330 million and $1,186 million, at December 31, 1998, and 1997, respectively. The aggregate statutory net operating income, which excludes realized investment gains and losses net of tax, of UNUM Corporation's United States domiciled insurance subsidiaries was approximately $55 million, $227 million and $167 million for 1998, 1997 and 1996, 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 from its United Kingdom-based affiliate, UNUM Limited. Such dividends are limited in amount, based on insurance company legislation in the United Kingdom, which requires a minimum solvency margin. The amount available under current law for payment of dividends to UNUM Corporation from UNUM Limited during 1999 is approximately $20 million. 51 NOTE 12. INCOME TAXES 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) 1998 1997 1996 - - ---------------------------------------------- ----------- ----------- ----------- Tax at federal statutory rate of 35% ......... $ 181.1 $ 187.7 $ 119.6 Tax-exempt income ............................ (26.9) (20.3) (18.8) Other ........................................ (0.2) (1.3) 2.8 -------- -------- -------- Income taxes ................................. $ 154.0 $ 166.1 $ 103.6 ======== ======== ========
Deferred income tax liabilities and assets consist of the following:
December 31, ------------------------- (Dollars in millions) 1998 1997 - - -------------------------------------------- ----------- ----------- Deferred tax liabilities: Deferred policy acquisition costs ......... $ 292.0 $ 239.4 Policy reserve adjustments ................ 175.7 118.0 Net unrealized gains ...................... 204.1 144.0 Value of business acquired ................ 25.9 23.2 Invested assets ........................... 28.3 12.0 Other ..................................... 48.0 12.2 -------- -------- Gross deferred tax liabilities ........... 774.0 548.8 -------- -------- Deferred tax assets: Alternative minimum tax credits ........... 35.2 -- Net realized losses ....................... 17.6 6.9 Postretirement benefits ................... 30.4 26.6 Deferred gains ............................ 1.6 2.2 Accrued liabilities ....................... 34.5 13.3 Other ..................................... 37.1 10.6 -------- -------- Gross deferred tax assets ................ 156.4 59.6 Less valuation allowance ................... 8.2 7.0 -------- -------- Net deferred tax assets .................. 148.2 52.6 -------- -------- Net deferred tax liability ................. $ 625.8 $ 496.2 ======== ========
UNUM has not provided for a deferred tax liability of approximately $11 million that arose prior to 1984, which related to the policyholders' surplus accounts of UNUM's life insurance subsidiaries. Under current law, management believes the conditions under which such taxes would be paid to be remote. UNUM's Consolidated Statements of Income for 1998, 1997 and 1996, included the following amounts of income subject to foreign taxation and the related foreign income tax expense:
Year Ended December 31, ------------------------------------ (Dollars in millions) 1998 1997 1996 - - ------------------------------------ ---------- ---------- ---------- Pretax income subject to foreign taxation .......................... $ 46.2 $ 46.7 $ 27.4 ======= ======= ======= Foreign income tax expense (credit): Current ........................... $ 6.7 $ 23.3 $ 10.4 Deferred .......................... 9.8 (7.6) 1.8 ------- ------- ------- Total ............................ $ 16.5 $ 15.7 $ 12.2 ======= ======= =======
52 UNUM Corporation and Subsidiaries UNUM subsidiaries had operating loss carryforwards totaling $15.3 million and alternative minimum tax credit carryforwards totaling $35.2 million as of December 31, 1998. The operating loss carryforwards will expire, if not utilized, in 1999 through 2004; the alternative minimum tax credits do not expire. NOTE 13. 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. The following table summarizes the carrying amounts and fair values of UNUM's financial instruments at December 31, 1998, and 1997:
1998 1997 ----------------------------- ----------------------------- Carrying Fair Carrying Fair (Dollars in millions) Amount Value Amount Value - - --------------------------------------------- ------------- ------------- ------------- ------------- Financial assets: Fixed maturities available for sale ..... $ 7,896.9 $ 7,896.9 $ 7,310.9 $ 7,310.9 Equity securities available for sale..... 31.0 31.0 30.7 30.7 Mortgage loans .......................... 1,303.4 1,425.2 1,131.0 1,243.7 Policy loans ............................ 137.6 137.6 128.5 128.5 Short-term investments .................. 216.2 216.2 124.5 124.5 Cash .................................... 80.5 80.5 56.8 56.8 Accrued investment income ............... 167.4 167.4 160.3 160.3 Deposit assets .......................... 729.7 729.7 688.3 688.3 Financial liabilities: Other policyholder funds: ............... Investment-type insurance contracts: ..... With defined maturities ................. $ 69.3 $ 84.6 $ 141.6 $ 159.3 With no defined maturities .............. 259.5 257.4 332.0 328.0 Individual annuities and supplementary contracts not involving life contingencies ............ 63.9 63.9 67.1 67.1 Notes payable ........................... 881.8 944.0 635.8 656.0 Off-balance sheet financial instruments: Interest rate futures contracts ......... -- 110.7 -- --
The following methods and assumptions were used in estimating fair value disclosures for financial instruments: Fixed Maturities Available for Sale: 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, Accrued Investment Income and Deposit Assets: 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 53 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. 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. Off-Balance Sheet Financial Instruments: Fair value for off-balance sheet financial instruments are based on current settlement values. NOTE 14. DERIVATIVE FINANCIAL INSTRUMENTS UNUM periodically uses options, futures, forward exchange contracts and interest rate swaps, which are common derivative financial instruments, to hedge certain risks associated with anticipated purchases and sales of investments, anticipated debt issuance and certain payments denominated in foreign currencies, primarily British pounds sterling, Canadian dollars 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. Additionally, UNUM uses swap agreements to convert foreign currency based debt instruments to U.S. dollars and to convert variable rate debt to a fixed rate. In using these instruments, UNUM is subject to the off-balance-sheet credit risk that the counterparties of the transactions will fail to perform as contracted. UNUM manages this risk by only entering into contracts with highly rated institutions and listed exchanges. UNUM does not hold or issue derivative financial instruments for the purpose of trading. Historically, all positions UNUM has taken in derivative contracts have qualified for hedge accounting in accordance with the criteria established by FAS 52, "Foreign Currency Translation," and FAS 80, "Accounting for Futures Contracts." Upon entering a derivative contract, UNUM uses this criteria to evaluate the correlation of risk protection provided by a derivative contract to the risk created by market fluctuations to ensure hedge accounting is appropriate for the contract. Accordingly, gains or losses related to qualifying hedges of firm commitments or anticipated transactions involving investment purchases and debt issuance are deferred and recognized as an adjustment to the carrying amount of the underlying asset or liability when the hedged transaction occurs. Gains or losses related to qualifying hedges of anticipated transactions involving the sale of investments are deferred and recognized in income when the hedged transaction occurs. No gains or losses related to qualifying hedges of anticipated transactions involving payments denominated in foreign currencies are recorded if the hedged transaction is likely to occur. The amount of any deferred gains or losses on outstanding interest rate futures contracts, which require daily cash settlement, are included in fixed maturities in UNUM's Consolidated Balance Sheets. The fair values of any outstanding forward exchange rate contracts, options and swap agreements, which do not require daily cash settlement, are not recognized in UNUM's Consolidated Balance Sheets. Any resulting gains or losses from early termination of a derivative designated as a hedge are deferred and recognized in income or as an adjustment of the carrying amount of the underlying asset or liability when the hedged transaction occurs. Any gains or losses that result when the designated item is extinguished, such as maturity, sale, or termination, or when the hedged transaction is no longer likely to occur, are included in income in the period in which the extinguishment takes place or it is known that the hedged anticipated transaction will not occur. On December 4, 1997, UNUM borrowed [British pound]100 million ($168.3 million) through a private placement with an investor in the United Kingdom (see Note 8 "Notes Payable"). Upon issuance of the [British pound]100 million borrowing, UNUM entered into currency and interest rate swap agreements that converted the principal amount to U.S. dollars and 54 UNUM Corporation and Subsidiaries the interest obligation on the debt from a pound sterling based fixed rate to a U.S. dollar fixed rate. No gains or losses on the swap agreements, which qualify for hedge accounting, are recorded while the related debt is outstanding. These swap agreements expire in December 2007 and have notional amounts that equal the principal amount of the loan. In addition to the swap agreements discussed previously, UNUM had open interest rate futures contracts at December 31, 1998, with notional amounts of $111.0 million to hedge anticipated cash flows in 1999. These futures contracts had a related net unrealized loss of $0.3 million at December 31, 1998. Other than the swap agreements discussed previously, UNUM had no other open derivative financial instruments at December 31, 1997. NOTE 15. 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, 1998. In some instances, these proceedings include claims for punitive damages and similar types of relief in unspecified or substantial amounts, in addition to amounts for alleged contractual liability or other compensatory damages. In the opinion of management, the ultimate liability, if any, arising from this litigation is not expected to have a material adverse effect on the consolidated financial position, operating results or liquidity of UNUM. On December 29, 1993, UNUM filed a suit in the United States District Court for the District of Maine, seeking a federal income tax refund. The suit was based on a claim for a deduction in certain prior tax years for $652 million in cash and stock distributed to policyholders in connection with the 1986 conversion of Union Mutual Life Insurance Company to a stock company. UNUM fully paid, and provided for in prior years' financial statements, the tax at issue in this litigation. On May 23, 1996, the District Court issued its decision that the distribution in question was not a deductible expenditure. On December 2, 1997, the United States Court of Appeals affirmed the decision of the District Court denying UNUM's claim for refund. UNUM filed a petition requesting that the United States Supreme Court review the decision of the United States Court of Appeals, which was denied October 5, 1998; no further appeal is available. NOTE 16. SEGMENT INFORMATION UNUM's four reportable operating segments include: Disability Insurance, Special Risk Insurance, Colonial Products and Retirement Products. Each operating segment represents a product grouping based on the similarity of the products in such areas as risk-relief, economic characteristics, market potential and the specific markets being targeted for these products. The Disability Insurance segment includes disability products offered in North America, the United Kingdom and Japan including: group long term disability, group short term disability, long term care, individual disability and disability reinsurance operations. The Special Risk Insurance segment includes group life, accidental death and dismemberment, travel and voluntary accident insurance, special risk reinsurance operations and other special risk insurance products. The Colonial Products segment includes Colonial Life & Accident Insurance Company and affiliates, which offer payroll-deducted, voluntary employee benefit products, including accident and sickness, disability, cancer and life insurance. The Retirement Products segment includes products no longer actively marketed by UNUM including: tax-sheltered annuities, guaranteed investment contracts, deposit administration accounts, 401(k) plans, individual life and group medical insurance. In addition, UNUM records transactions that are generally non-insurance related in Corporate. Interest expense is reported by Corporate and totaled $49.9 million, $42.4 million and $40.7 million in 1998, 1997 and 1996, respectively. UNUM's markets for its insurance products are the United States, its principal market, Canada, the United Kingdom, the Pacific Rim and Argentina. 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 educators, consultants, health care providers, accountants and engineers. UNUM evaluates performance and allocates resources based on pretax operating income, which is defined as income (loss) before income taxes exclusive of realized investment gains (losses) and special items. Realized investment gains (losses) are excluded from management's evaluation of segment performance as management believes the volatility in gains and losses associated with the selling of invested assets in the financial markets is not representative of ongoing operations. Special items are excluded from management's evaluation of segment performance as management considers them as being not representative of ongoing operations and believes a discussion of the results on a pretax operating income basis provides a better understanding of the results of ongoing operations. The accounting polices of the operating segments are the same as those described in Note 1, "Summary of Significant Accounting Policies." 55 Investment income and net realized investment gains and losses are allocated to the segments based on designation of ownership of assets identified to the products in each segment. Operating expenses are allocated to the segments based on direct association with a product whenever possible. If 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. Summarized financial information for the four reportable operating segments and Corporate is as follows:
Year Ended December 31, --------------------------------------------- (Dollars in millions) 1998 1997 1996 - - ------------------------------------------ ------------- ------------- ------------- Premiums: Disability Insurance .................... $ 2,125.9 $ 1,816.5 $ 1,889.9 Special Risk Insurance .................. 1,159.1 915.5 748.2 Colonial Products ....................... 552.7 525.4 493.7 Retirement Products ..................... 4.0 6.3 19.7 ---------- ---------- ---------- Total premiums ......................... $ 3,841.7 $ 3,263.7 $ 3,151.5 ========== ========== ========== Investment Income: Disability Insurance .................... $ 473.8 $ 471.1 $ 468.8 Special Risk Insurance .................. 78.7 70.1 57.3 Colonial Products ....................... 65.8 57.6 47.6 Retirement Products ..................... 39.0 55.5 214.4 Corporate ............................... 4.1 6.7 15.2 ---------- ---------- ---------- Total investment income ................ $ 661.4 $ 661.0 $ 803.3 ========== ========== ========== Deferred acquisition cost amortization: Disability Insurance .................... $ 64.8 $ 52.1 $ 87.3 Special Risk Insurance .................. 143.3 94.0 53.9 Colonial Products ....................... 89.5 80.7 72.5 Retirement Products ..................... -- 0.1 -- ---------- ---------- ---------- Total amortization ..................... $ 297.6 $ 226.9 $ 213.7 ========== ========== ========== Pretax operating income (loss): Disability Insurance .................... $ 348.3 $ 315.8 $ 278.4 Special Risk Insurance .................. 159.4 124.8 90.2 Colonial Products ....................... 105.1 98.8 92.7 Retirement Products ..................... 1.0 4.7 13.6 Corporate ............................... (58.0) (51.8) (37.5) ---------- ---------- ---------- Total pretax operating income .......... 555.8 492.3 437.4 Taxes on pretax operating income ......... 167.6 150.6 135.7 ---------- ---------- ---------- Operating income ....................... $ 388.2 $ 341.7 $ 301.7 ========== ========== ==========
December 31, ------------------------------------------------ (Dollars in millions) 1998 1997 1996 - - ---------------------------------- -------------- -------------- -------------- Identifiable Assets: Disability Insurance ............ $ 9,683.4 $ 8,546.6 $ 7,846.8 Special Risk Insurance .......... 2,268.2 1,821.6 1,410.0 Colonial Products ............... 1,519.4 1,334.7 1,094.1 Retirement Products ............. 966.3 1,115.9 4,478.8 Corporate ....................... 374.5 254.0 396.7 Individual Participating Life and Annuity ......................... 371.1 367.3 354.0 ----------- ----------- ----------- Total assets ................... $ 15,182.9 $ 13,440.1 $ 15,580.4 =========== =========== ===========
56 UNUM Corporation and Subsidiaries Information concerning principal geographic areas is as follows:
Year Ended December 31, --------------------------------------------- (Dollars in millions) 1998 1997 1996 - - ----------------------------------- ------------- ------------- ------------- Geographic information on premiums: United States .................... $ 3,391.7 $ 2,938.1 $ 2,900.4 Foreign countries ................ 450.0 325.6 251.1 ---------- ---------- ---------- Total premiums .................. $ 3,841.7 $ 3,263.7 $ 3,151.5 ========== ========== ==========
Year Ended December 31, --------------------------------------- (Dollars in millions) 1998 1997 1996 - - ------------------------------------- ----------- ----------- ----------- Geographic information on income before income taxes: United States ...................... $ 473.3 $ 497.5 $ 315.2 Foreign countries .................. 44.1 38.9 26.4 -------- -------- -------- Total income before income taxes .. $ 517.4 $ 536.4 $ 341.6 ======== ======== ========
December 31, ------------------------------------------------ (Dollars in millions) 1998 1997 1996 - - -------------------------------------- -------------- -------------- -------------- Geographic information on identifiable assets: United States ....................... $ 13,703.7 $ 11,941.7 $ 14,239.8 Foreign countries ................... 1,479.2 1,498.4 1,340.6 ----------- ----------- ----------- Total assets ....................... $ 15,182.9 $ 13,440.1 $ 15,580.4 =========== =========== ===========
UNUM's long-lived assets are not material to the total consolidated assets and are not presented by geographic region. The following is provided to reconcile certain financial information for the reportable segment totals to consolidated totals and provide a description of the reconciling items:
Year Ended December 31, --------------------------------------- (Dollars in millions) 1998 1997 1996 - - --------------------------------------------- ----------- ----------- ----------- Deferred acquisition cost amortization: Total amortization for reportable segments ................................... $ 297.6 $ 226.9 $ 213.7 Special item -- deferred acquisition cost write-offs (a) ........................ -- -- 11.7 -------- -------- -------- Total consolidated amortization ........... $ 297.6 $ 226.9 $ 225.4 ======== ======== ======== Income before income taxes: Total pretax operating income for reportable segments and Corporate .......... $ 555.8 $ 492.3 $ 437.4 Realized investment gains (losses) ......... 21.0 (3.6) 3.4 Special items: Disability claims reserve increase (b) ............................ (59.4) -- -- TSA deferred gain recognition (c) ......... -- 72.6 -- Reorganization costs (a) .................. -- (6.5) -- Reinsurance pool results (d) .............. -- (18.4) -- Individual disability reinsurance fees (e) ................................. -- -- (49.7) Write-offs and future loss reserves (a) ............................ -- -- (39.4) Merger and integration costs (f) .......... -- -- (10.1) -------- -------- -------- Total consolidated income before income taxes ............................ $ 517.4 $ 536.4 $ 341.6 ======== ======== ========
57 As previously discussed, management's evaluation of segment performance excludes realized investment gains (losses) and special items. The following describes or references the special items that reconcile total segment amounts to total consolidated amounts: (a) See Note 7 "Business Restructuring and Other Charges." The $13.1 million charge in the Disability Insurance segment included an $11.7 million write-off of deferred acquisition costs. Additionally, $0.5 million of direct costs, primarily relocation expenses, were recognized during fourth quarter 1997. (b) See Note 4 "Reserves." (c) See Note 5 "Sale of Tax-Sheltered Annuity Business." (d) See the Changes in Accounting Estimates section of Note 1 "Summary of Significant Accounting Policies." (e) See Note 6 "Reinsurance." (f) During third quarter 1996, actions related to the merger of Commercial Life into UNUM America resulted in a $10.1 million increase in operating expenses for Corporate. NOTE 17. PROPOSED MERGER WITH PROVIDENT AND COMBINED CONDENSED PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) The following unaudited pro forma combined condensed financial statements and explanatory notes are presented to show the impact on the historical financial positions and results of operations of UNUM and Provident of the planned merger under the "pooling of interests" method of accounting. The unaudited pro forma combined condensed financial statements combine the historical financial information of UNUM and Provident as of December 31, 1998, and for the years ended December 31, 1998, 1997 and 1996. The unaudited pro forma combined condensed statements of income give effect to the merger as if it had been completed at the beginning of the earliest period presented. The unaudited pro forma combined condensed balance sheet assumes the merger was completed on December 31, 1998. On November 22, 1998, UNUM entered into an agreement with Provident, pursuant to which UNUM and Provident will merge under the name UNUMProvident. Under the merger agreement, each outstanding share of Provident common stock will be reclassified and converted into 0.73 of a share of UNUMProvident common stock and each outstanding share of UNUM common stock will be converted into one share of UNUMProvident common stock. The merger will be accounted for as a pooling of interests. The merger is subject to regulatory and UNUM stockholder and Provident stockholder approval. The unaudited combined condensed pro forma financial statements as of December 31, 1998, and for each of the three years ended December 31, 1998, 1997 and 1996, are based on and derived from, and should be read in conjunction with the UNUM and Provident historical consolidated financial statements and related notes. On the date the merger is completed or on an earlier date if required by generally accepted accounting principles, UNUMProvident will record an expense for merger related costs of approximately $210 million ($148 million net of income taxes). These costs include amounts for severance and related costs, early retirement, exit costs for duplicate facilities and asset impairments, and merger related costs such as investment banker, legal and accountant fees. The estimated merger related expenses represent management's best estimates based on available information at this time. Actual charges may differ from these estimates. The unaudited pro forma financial statements are presented for comparative purposes only and are not necessarily indicative of the results of operations that would have been realized had the merger been completed during the periods or as of the date for which the pro forma financial statements are presented, nor are they necessarily indicative of the results of operations in future periods or the future financial position of UNUMProvident. 58 UNUM Corporation and Subsidiaries UNUM/Provident Unaudited Combined Condensed Pro Forma Consolidated Statements of Income (a)
Year Ended December 31, --------------------------------------------- (Dollars and shares in millions except per common share data) 1998 1997 1996 - - --------------------------------------------------------------- ------------- ------------- ------------- Revenues Premium income ............................................. $ 6,189.1 $ 5,317.4 $ 4,327.2 Net investment income ...................................... 2,035.4 2,015.7 1,893.4 Net realized investment gains .............................. 55.0 11.5 (5.2) Other income ............................................... 299.9 357.0 148.2 --------- --------- ---------- Total revenues ............................................ 8,579.4 7,701.6 6,363.6 Benefits and Expenses Policyholder benefits ...................................... 5,509.8 4,880.4 4,204.0 Commissions ................................................ 826.5 716.2 555.2 Operating expenses ......................................... 1,462.2 1,286.7 1,087.1 Increase in deferred policy acquisition costs .............. (325.8) (236.0) (116.7) Amortization of value of business acquired and goodwill .................................................. 66.6 52.7 7.7 Interest and debt expense .................................. 119.9 84.9 58.5 ---------- ---------- ---------- Total benefits and expenses ............................... 7,659.2 6,784.9 5,795.8 ---------- ---------- ---------- Income before income taxes ................................. 920.2 916.7 567.8 Income taxes ............................................... 302.8 299.1 184.2 ---------- ---------- ---------- Net income ................................................ 617.4 617.6 383.6 Preferred stock dividends .................................. 1.9 12.7 12.7 ---------- ---------- ---------- Net income available to common shareholders ............... $ 615.5 $ 604.9 $ 370.9 ========== ========== ========== Net income per common share Basic ..................................................... $ 2.60 $ 2.62 $ 1.75 Diluted ................................................... $ 2.54 $ 2.57 $ 1.72 ========== ========== ========== Average shares outstanding--basic (a) ...................... 237.0 230.7 212.4 Average shares outstanding--diluted (a) .................... 242.3 235.8 215.3
(a) The above unaudited combined condensed pro forma consolidated statements of income reflect the combined results of the operations of UNUM and Provident for the periods presented. No adjustments have been made to arrive at net income available to common shareholders. The pro forma combined basic and diluted earnings per share for the respective periods presented are based on the combined weighted-average number of common and dilutive potential common shares and adjusted weighted-average shares of UNUM and Provident. The number of weighted-average common shares and adjusted weighted-average shares, including all dilutive potential common shares, reflect the reclassification of Provident common stock on a 0.73 to 1.0 basis and the conversion of each outstanding share of UNUM common stock into one share of UNUMProvident common stock in the merger. 59 UNUM Corporation and Provident Companies, Inc. Unaudited Combined Condensed Pro Forma Balance Sheet As of December 31, 1998
Historical ------------------------------- UNUM/Provident Pro Forma Pro Forma UNUM Provident Adjustments Combined -------------- -------------- ----------------- --------------- (Dollars in millions) - - ----------------------------------------- ASSETS Invested assets ...................... $ 9,837.7 $ 17,332.7 $ -- $ 27,170.4 Reinsurance receivables .............. 1,770.0 3,101.0 -- 4,871.0 All other assets ..................... 3,539.9 2,276.7 -- 5,816.6 Separate account assets .............. 35.3 377.7 -- 413.0 ----------- ----------- --------- ----------- Total assets ........................ $ 15,182.9 $ 23,088.1 $ -- $ 38,271.0 =========== =========== ========= =========== LIABILITIES AND STOCKHOLDERS' EQUITY Policy liabilities, accruals and unearned premiums ................... $ 9,201.4 $ 14,343.0 $ 230.0(b) $ 23,774.4 Other policyholders' funds ........... 875.4 3,227.3 -- 4,102.7 All other liabilities ................ 2,333.1 1,431.6 (80.0)(b) 3,684.7 Separate account liabilities ......... 35.3 377.7 -- 413.0 ----------- ----------- --------- ----------- Total liabilities ................... 12,445.2 19,379.6 150.0 31,974.8 Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Soley Junior Subordinated Debt Securities of the Company ........... -- 300.0 -- 300.0 ----------- ----------- --------- ----------- Common stock ......................... 20.0 135.7 (131.9)(c) 23.8 Additional paid-in capital ........... 1,151.2 762.0 (954.0)(c) 959.2 Accumulated other comprehensive income .............................. 229.0 685.7 -- 914.7 Retained earnings .................... 2,444.9 1,834.3 (150.0)(b) 4,129.2 Treasury stock ....................... (1,085.9) (9.2) 1,085.9 (c) (9.2) Restricted stock deferred compensation ........................ (21.5) -- -- (21.5) ----------- ----------- --------- ----------- Total stockholders' equity .......... 2,737.7 3,408.5 ( 150.0) 5,996.2 ----------- ----------- --------- ----------- Total liabilities and stockholders' equity ............................ $ 15,182.9 $ 23,088.1 $ -- $ 38,271.0 =========== =========== ========= ===========
(b) UNUM and Provident are in the process of reviewing their accounting policies and financial statement classifications. One aspect of this preliminary review has indicated that UNUM's process and assumptions used to calculate the discount rate for claim reserves of certain disability businesses differs from that used by Provident. It has been determined that Provident's process and assumptions are more appropriate in the context of a combined entity. Upon completion of the merger, UNUM will reduce the rates used to discount unpaid claims reserves for group long term disability, individual disability and the disability businesses of UNUM Limited. The preliminary estimates of discount rate reductions will result in an estimated increase to UNUM's unpaid claims reserves upon consummation of the merger of approximately $230 million ($150 million after tax). This estimated merger related adjustment has not been reflected in the unaudited combined condensed pro forma statements of income and related per share calculations. (c) The pro forma adjustments to common stock, additional paid-in capital and treasury stock reflect the retirement of shares of UNUM common stock held in treasury, the reduction in par value of Provident common stock from 60 UNUM Corporation and Subsidiaries one dollar to ten cents, and the reclassification of Provident common stock on a 0.73 to 1.0 basis that results in 98.7 million shares issued to replace the 135.2 million shares of Provident common stock held by Provident stockholders on December 31, 1998, and the issuance to UNUM stockholders of 138.7 million shares of UNUMProvident common stock pursuant to the merger (calculated by multiplying the number of shares of UNUM common stock outstanding at December 31, 1998, of 138.7 million by the exchange ratio of 1.0 to 1.0 representing the number of shares UNUM stockholders will receive for each share of UNUM common stock they own immediately prior to consummation of the merger). The number of shares of UNUMProvident common stock that will be issued after completion of the merger will be based on the actual number of shares of UNUM common stock, and Provident common stock (after reclassification on a 0.73 to 1.0 basis) outstanding at the effective time of the merger. NOTE 18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of unaudited quarterly results of operations for 1998 and 1997:
1998 (Dollars in millions, except per common share data) ----------------------------------------------------- 4th 3rd 2nd 1st Premiums ......................................... $ 983.9 $ 977.2 $ 962.2 $ 918.4 Investment income ................................ 168.0 164.9 165.2 163.3 Net realized investment gains .................... 8.4 7.2 2.3 3.1 Benefits to policyholders ........................ 779.9 717.2 710.0 679.1 Net income ....................................... 66.8 104.4 98.7 93.5 Basic net income per common share ................ 0.48 0.75 0.71 0.68 Diluted net income per common share .............. 0.47 0.74 0.70 0.66
1997 ----------------------------------------------------- 4th 3rd 2nd 1st ----------- ----------- ----------- ----------- Premiums ....................................... $ 860.5 $ 833.8 $ 786.7 $ 782.7 Investment income .............................. 165.5 164.3 165.7 165.5 Net realized investment gains (losses) ......... (1.1) 2.7 (3.0) (2.2) Benefits to policyholders ...................... 635.7 629.6 585.0 588.5 Net income ..................................... 76.2 91.5 87.6 115.0 Basic net income per common share .............. 0.55 0.66 0.63 0.81 Diluted net income per common share ............ 0.54 0.64 0.62 0.79
61 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 Set forth below is information about each director, including age, position(s) held with UNUM, principal occupation, business history for at least five years and other directorships held.
Age (as of Term Name March 31, 1999) Director Since Position(s) held Expires - - -------------------------- ----------------- ---------------- ------------------------- -------- James F. Orr III 56 1986 Chairman, President and 1999 Chief Executive Officer Gayle O. Averyt 65 1993 Director 2000 Robert E. Dillon, Jr. 67 1990 Director 1999 Gwain H. Gillespie 67 1991 Director 2000 Ronald E. Goldsberry 56 1993 Director 1999 Donald W. Harward 59 1990 Director 1999 George J. Mitchell 65 1995 Director 2001 Cynthia A. Montgomery 46 1990 Director 2000 James L. Moody, Jr. 67 1988 Director 2000 Lawrence R. Pugh 66 1988 Director 2001 Lois Dickson Rice 66 1993 Director 2001 John W. Rowe 53 1988 Director 2001
Mr. Orr, Chairman, President and Chief Executive Officer, UNUM, was elected Chairman of the Board of UNUM in February 1988. Additionally, he has served as President and Chief Executive Officer since September 1987. Mr. Orr joined UNUM in 1986. Mr. Orr also serves as a director of Nashua Corporation. Mr. Averyt retired as Chairman of Colonial Companies, Inc. in December 1993, a post he had held since 1989. Additionally, Mr. Averyt served as Chairman of Colonial Life & Accident Insurance Company from 1970 to December 1993. Mr. Dillon retired as Executive Vice President of Sony Electronics Inc., a New Jersey-based electronics firm, in December 1995, a post he had held since 1981. Mr. Gillespie retired as Vice Chairman of UNUM in October 1992, a post he had held since 1991. Mr. Gillespie joined UNUM in September 1988. Dr. Goldsberry is Vice President of Global Service Business Strategy at Ford Motor Company, a post he has held since January 1999. Previously, Dr. Goldsberry served as Global Vice President and General Manager of Global Ford Customer Service Operations from January 1997 to January 1999 and General Manager of the Customer Service Division from February 1994 to December 1996. He is also Chairman of UNC Ventures, Inc., a venture capital firm and serves as director of Case Corporation. Dr. Harward is President of Bates College in Maine, a post he has held since October 1989. Senator Mitchell associated with the firm of Verner, Liipfert, Bernhard, McPherson & Hand, Washington, D.C., as special counsel in January 1995 and associated with the firm of Preti, Flaherty, Beliveau & Pachios, Portland, Maine, as senior counsel in April 1997. He also serves as an advisor to B.T. Wolfensohn, an investment banking firm. At the request of the British and Irish governments, he served as chairman of the peace negotiations in Northern Ireland. Previously, he served as a United States senator from Maine from 1980 to 1994 and additionally as Senate 62 UNUM Corporation and Subsidiaries Majority Leader from 1989 to 1994. Senator Mitchell also serves as a director or trustee of Federal Express Corporation, KTI, Inc., Staples, Inc., Starwood Hotels and Resorts, Unilever PLC, The Walt Disney Company and Xerox Corporation. Ms. Montgomery is a professor of competition and strategy at Harvard University Graduate School of Business Administration, a post she has held since 1989, and was named Timken Professor of Business Administration in 1998. She also serves as a director of Newell Co. and certain Merrill Lynch mutual funds. Mr. Moody retired as Chairman of Hannaford Bros. Co. ("Hannaford"), a Maine-based food retailing company, in May 1997, a post he had held since 1984. Mr. Moody joined Hannaford in 1959. He is also a director of Empire Company Limited, IDEXX Laboratories, Inc., Penobscot Shoe Company, Staples, Inc. and several funds of the Colonial Group of mutual funds. Mr. Pugh retired as Chairman of VF Corporation, an apparel company in Pennsylvania, in October 1998, a post he had held since 1983. Additionally, Mr. Pugh served as Chief Executive Officer from 1983 to 1995. He is also a director of Mercantile Stores Company, Inc. and Milliken & Company. Ms. Dickson Rice is a guest scholar at The Brookings Institution, a post she has held since October 1991. She also serves as a director of Fleet Financial Group, Inc., HSB Group, Inc., International Multifoods Corporation and The McGraw-Hill Companies. Mr. Rowe is Chairman, President and Chief Executive Officer of Unicom Corporation and its principal subsidiary, Commonwealth Edison Company, a post he assumed in March 1998. Previously, Mr. Rowe was President and Chief Executive Officer of New England Electric System from 1989 to February 1998. He is also a director of Bank of Boston Corporation, First National Bank of Boston and Wisconsin Central Transportation Corp. B. Executive Officers of the Registrant The executive officers of UNUM are as follows:
Age (as of An Officer Name March 30, 1999) Position held with UNUM Since - - ----------------------- ----------------- --------------------------- ----------- James F. Orr III 56 Chairman, President and 1986 Chief Executive Officer Robert E. Broatch 50 Senior Vice President and 1996 Chief Financial Officer Robert W. Crispin 52 Executive Vice President 1995 Peter J. Moynihan 55 Senior Vice President 1979 Kevin P. O'Connell 53 Executive Vice President 1987 Elaine D. Rosen 46 Executive Vice President 1983 Robert E. Staton* 52 President, Colonial 1993
- - -------- *Denotes an officer of a subsidiary who is not an officer of UNUM but who is considered an "executive officer" under regulations of the Securities and Exchange Commission ("SEC"). 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. Mr. Orr joined UNUM in 1986. He also serves as a director of Nashua Corporation. Mr. Broatch was elected Senior Vice President of UNUM in May 1996. In addition, he was elected as Chief Financial Officer in September 1997. Prior to joining UNUM in 1996, Mr. Broatch served as Senior Vice President of Finance at Aetna Life & Casualty Company from 1993 until May 1996. 63 Mr. Crispin was elected Executive Vice President of UNUM in January 1995. In addition, he served as Chief Financial Officer from August 1995 until September 1997. Prior to joining UNUM in 1995, Mr. Crispin served as Vice Chairman and Chief Investment Officer of The Travelers Insurance Companies from July 1991 to January 1995. 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. Mr. O'Connell was elected Executive Vice President of UNUM in February 1996 and Executive Vice President of UNUM America in May 1995. 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 in May 1998 and President of UNUM America in January 1997. Previously, she served as Executive Vice President of UNUM America from May 1995 to December 1996 and as Senior Vice President of UNUM America from November 1988 to May 1995. She joined UNUM America in 1975. Mr. Staton was elected President of Colonial in January 1997. Previously he served as Chairman of Colonial from December 1993 to December 1996, and additionally as Chief Executive Officer from July 1995 to December 1996. Previously, he served as Senior Vice President from February 1990 to December 1993; General Counsel from August 1985 to November 1993; and Corporate Secretary from February 1992 to August 1993. Colonial's parent company merged with UNUM in March 1993. Item 11. EXECUTIVE AND DIRECTOR COMPENSATION The following Summary Compensation Table shows compensation paid by UNUM Corporation and by UNUM America, a wholly-owned subsidiary of UNUM Corporation, to the Chief Executive Officer and the other four most highly compensated executive officers of UNUM during any of the past three fiscal years during which such person served as an executive officer. 64 UNUM Corporation and Subsidiaries SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation Awards ----------------------- --------------------------------- Number of Securities Name and Incentive Restricted Underlying All Other Principal Position Year Salary Payment(1) Stock Award (2) Options Compensation (5) - - ------------------------------- ------ ----------- ------------ -------------------- ------------- ----------------- James F. Orr III 1998 $860,000 $1,006,200 $ 0 (3) 400,000 (3) $ 20,000 Chairman, President and CEO 1997 $838,461 $1,142,000 $1,642,084 (4) 79,000 $ 20,000 1996 $739,923 $ 740,000 $ 912,600 (4) 82,400 $ 9,000 Robert W. Crispin 1998 $549,999 $ 426,900 $ 651,775 (4) 28,190 $ 20,000 Executive Vice President 1997 $540,384 $ 324,200 $ 687,384 (4) 33,200 $227,673 1996 $500,000 $ 363,000 $ 450,450 (4) 40,600 $266,884 Elaine D. Rosen 1998 $431,666 $ 265,000 $ 462,550 (4) 20,000 $ 20,000 Executive Vice President 1997 $340,000 $ 249,000 $ 565,182 (4) 27,200 $ 12,605 1996 $296,154 $ 184,900 $ 228,150 (4) 20,500 $ 9,000 Robert E. Broatch 1998 $359,999 $ 235,200 $ 344,810 (4) 14,910 $ 95,749 Senior Vice President and CFO 1997 $312,693 $ 172,000 $ 400,974 (4) 19,300 $ 83,872 Kevin P. O'Connell 1998 $308,333 $ 177,600 $ 336,400 (4) 14,550 $ 18,333 Executive Vice President 1997 $300,000 $ 212,000 $ 412,430 (4) 19,800 $ 18,782 1996 $296,154 $ 169,500 $ 228,150 (4) 20,500 $ 9,000
(1) Cash incentive payments for 1998, 1997 and 1996 performance have been listed in the year earned, but were actually paid in the following fiscal year. Such amounts include special cash payments relative to 1997 for Mr. Orr: $270,000; Ms. Rosen: $62,000; and Mr. O'Connell: $62,000. (2) The aggregate number and average market value as of December 31, 1998, ($58.97 per share) of shares of restricted stock held by the five named executive officers were as follows: Mr. Orr: 74,200, $4,375,574; Mr. Crispin: 45,800, $2,700,826; Ms. Rosen: 31,400, $1,851,658; Mr. Broatch: 36,460, $2,150,046; and Mr. O'Connell: 25,000, $1,474,250. (3) In 1998, 400,000 options were granted to Mr. Orr in recognition of his record of leadership. Due to the magnitude of that grant, no restricted stock was awarded to Mr. Orr in 1998 for the 1998-2000 performance cycle. (4) The restrictions may lapse on some or all of the shares represented by the restricted stock awards shown for each named executive, provided that UNUM attains targeted three-year return-on-equity goals and that the executive remains in the company's employ as provided in the 1990 and 1996 plans. If no determination has been made concerning achievement of such return-on-equity goals at the time of a "change in control" as defined in the applicable plan (consummation of the merger for grants made in 1998 and 1997, and shareholder approval of the merger for grants made in 1996), restrictions will lapse on all shares. (5) Except as noted below, the stated amounts are UNUM's matching contributions to UNUM's qualified and nonqualified 401(k) plans. In the case of Mr. Crispin, UNUM made payments of $220,000 in 1997 and 1996 to compensate him for foregone compensation from his previous employer and provided relocation assistance of $37,384 relative to 1996. In the case of Mr. Broatch, UNUM paid $75,000 in 1998 and 1997 to compensate him for foregone compensation from his previous employer. 65 OPTION GRANTS IN FISCAL 1998
Number of Securities % of Total Underlying Options Granted Potential Realized Value Options to Employees in Exercise Expiration At Expiration(3) Name Granted Fiscal Year Price Date 0%($) 5%($) 10%($) - - -------------------- ------------- ----------------- ---------- ----------- ------- -------------- -------------- James F. Orr III 400,000 (1) 24.10% $ 52.59 3/13/08 $0 $13,230,383 $33,528,389 Robert W. Crispin 28,190 (2) 1.70% $ 52.59 3/13/08 $0 $ 932,411 $ 2,362,913 Elaine D. Rosen 20,000 (2) 1.21% $ 52.59 3/13/08 $0 $ 661,519 $ 1,676,419 Robert E. Broatch 14,910 (2) 0.90% $ 52.59 3/13/08 $0 $ 493,163 $ 1,249,771 Kevin P. O'Connell 14,550 (2) 0.88% $ 52.59 3/13/08 $0 $ 481,255 $ 1,219,595
(1) Options were granted under the 1996 Incentive Plan on March 13, 1998, based on the average market value on that date. Twenty-five percent of the options became exercisable on March 13, 1999. An additional 25 percent will become exercisable on each of March 13, 2000, 2001 and 2002, or upon consummation of the merger, whichever is earlier. (2) Options were granted under the 1996 Incentive Plan on March 13, 1998, based on the average market value on that date. Thirty-three percent of the options became exercisable on March 13, 1999. An additional 33 and 34 percent become exercisable on March 13, 2000, and 2001, respectively, or upon consummation of the merger, whichever is earlier. (3) Potential realizable value at expiration is based on an assumption that the stock price of UNUM Corporation common stock appreciates at the annual rate shown (compounded annually) from the date of grant until the end of the ten-year term. These numbers are calculated based on the requirements promulgated by the SEC and do not reflect UNUM's estimate of future stock price growth. AGGREGATED OPTION EXERCISES IN FISCAL 1998 AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Shares Acquired Options at Fiscal Year-End at Fiscal Year-End(1) On Exercise Value ------------------------------- --------------------------------- Name Of Options Realized Exercisable Unexercisable Exercisable Unexercisable - - -------------------- ---------------- ---------- ------------- --------------- ------------- -------------- James F. Orr III -- -- 473,254 481,246 $17,653,083 $4,503,684 Robert W. Crispin -- -- 147,752 64,538 $ 5,132,505 $1,064,664 Elaine D. Rosen -- -- 46,306 45,494 $ 1,357,830 $ 729,271 Robert E. Broatch -- -- 31,099 51,811 $ 840,161 $1,051,026 Kevin P. O'Connell 12,000 $307,874 31,864 35,086 $ 906,475 $ 589,777
(1) Potential unrealized value is (i) the average fair market value as of December 31, 1998, ($58.97 per share) less the option exercise price times (ii) the number of shares acquired on exercise of options. 66 UNUM Corporation and Subsidiaries PENSION PLAN The following table illustrates the combined estimated annual benefits payable under the UNUM Employees Pension Plan and Trust (the "Pension Plan") and the Supplemental Retirement Plan (the "Supplemental Plan") upon normal retirement of participants with varying Final Average Earnings (as defined below) and years of Credited Service. The amounts shown are annual payments for the life of a participant who retires at age 65. As of December 31, 1998, Messrs. Orr, Crispin, Broatch and O'Connell, and Ms. Rosen had 12, 8, 6, 30 and 23 years of Credited Service, respectively. If each of the above were to continue his or her employment until age 65, the respective years of Credited Service would be 21, 27, 23, 42 and 42 for purposes of computing benefits.
Estimated Annual Benefits by Years of Credited Service ------------------------------------------------------------------------------------------------- Final Average Earnings 10 15 20 25 30 35 40 45 - - -------------- ---------- ----------- ----------- ----------- ----------- ------------ ------------ ------------ $ 500,000 $ 75,400 $114,700 $155,200 $196,800 $239,400 $ 272,900 $ 306,300 $ 339,700 600,000 91,100 138,700 187,600 237,900 289,400 329,800 370,200 410,600 700,000 106,900 162,700 220,100 279,000 339,400 386,800 434,100 481,400 800,000 122,700 186,700 252,500 320,100 389,400 443,700 498,000 552,200 900,000 138,500 210,700 285,000 361,200 439,400 500,600 561,900 623,100 1,000,000 154,300 234,700 317,400 402,300 489,400 557,600 625,700 693,900 1,100,000 170,000 258,700 349,900 443,400 539,400 614,500 689,600 764,700 1,200,000 185,800 282,700 382,300 484,500 589,400 671,500 753,500 835,600 1,300,000 201,600 306,700 414,700 525,600 639,400 728,400 817,400 906,400 1,400,000 217,400 330,700 447,200 566,800 689,400 785,400 881,300 977,200 1,500,000 233,100 354,700 479,600 607,900 739,400 842,300 945,200 1,048,100 1,600,000 248,900 378,700 512,100 649,000 789,400 899,300 1,009,100 1,118,900 1,700,000 264,700 402,700 544,500 690,100 839,400 956,200 1,073,000 1,189,700 1,800,000 280,500 426,700 577,000 731,200 889,400 1,013,100 1,136,900 1,260,600 1,900,000 296,300 450,700 609,400 772,300 939,400 1,070,100 1,200,700 1,331,400 2,000,000 312,000 474,700 641,900 813,400 989,400 1,127,000 1,264,600 1,402,200
The above table reflects the amendment of the Pension Plan to a Lifecycle formula effective January 1, 1997. Retirement benefits under this plan include a Basic Benefit based upon age at retirement, years of Credited Service, Final Average Earnings and Social Security Covered Compensation and an additional Transition Benefit based on the preceding factors and also upon each participant's age at December 31, 1996. The plan also includes limited duration grandfathered formulas in effect prior to 1997. "Final Average Earnings" is defined as the average of salary plus annual cash incentive payments for the five years in which earnings were highest within the last 10 years of employment. "Social Security Covered Compensation" means the average of the annual Social Security taxable wage bases in effect during the 35 year period ending when the employee reaches Social Security Retirement Age. Accrued benefits are 100 percent vested after five years of service. Because the Transition Benefit varies based upon age at December 31, 1996, and Social Security Covered Compensation varies with year of birth, the retirement benefits shown above are averages; benefits for individual executives may be 10 to 15 percent higher or lower than shown. The Supplemental Plan provides benefits equal to the difference between what the Pension Plan can pay reflecting the limits imposed by Sections 401(a)(17) and 415 of the Code and what the Pension Plan otherwise would have paid had these limits not existed. All participants in the Pension Plan who retire or terminate after January 1, 1983, and are affected by the limits are eligible to participate in the Supplemental Plan, including Messrs. Orr, Crispin, O'Connell and Broatch, and Ms. Rosen. Effective January 1, 1997, the Supplemental Plan also pays benefits that would have been paid by the Pension Plan had compensation not been deferred. The Supplemental Executive Retirement Plan (the "SERP") provides benefits for certain executives who have been designated to participate by UNUM's board, including certain of the named executive officers. The SERP benefits for Messrs. Orr and Crispin equal 2.5 percent of Final Average Earnings for each year of Credited Service, up to a maximum of 20 years, less benefits payable from the Pension and Supplemental Plans. Mr. O'Connell and Ms. Rosen are eligible to participate in a modified SERP; however, their benefits under the Pension and Supplemental Plans are expected to exceed the minimum benefits guaranteed under the SERP formula. 67 COMPENSATION OF DIRECTORS Non-employee directors are paid an annual retainer of $27,500 by UNUM. Directors who chair a committee of UNUM's board are paid an additional annual retainer of $4,000. Directors are also paid an attendance fee of $1,000 for each board meeting attended, and an additional $1,000 for each committee meeting attended. Directors may defer their compensation pursuant to a nonqualified deferred compensation plan, including an opportunity to invest in phantom UNUM Corporation common stock. Directors are also reimbursed for out-of-pocket expenses relating to attendance at meetings. In order to further align the interests of the directors with those of the stockholders, during 1997 the Board of Directors adopted stock ownership expectations which provide that over a five-year period each director is to accumulate UNUM stock (exclusive of stock options) valued at three-times the annual retainer paid to the director. In addition, during 1997, the Board determined to discontinue the consulting fee arrangement that was previously in place in favor of a stock-based form of compensation. Specifically, effective as of the 1997 Annual Meeting, further benefits under that consulting fee arrangement ceased to accrue, so that upon termination of Board service, each eligible director will be entitled to receive an annual consulting fee fixed at $27,500 for only the number of full years each such director had served as of May 31, 1997. In lieu of the continued accrual of benefits under the consulting fee arrangement, the Board of Directors voted to increase the size of the existing annual non-employee director stock option grants under the 1990 Long-Term Stock Incentive Plan. As of May 10, 1997, each continuing non-employee director receives an annual automatic grant of an option to purchase 4,000 shares of UNUM Corporation common stock. Each newly elected non-employee director will receive an automatic grant of an option to purchase 6,000 shares of UNUM Corporation common stock. OTHER AGREEMENTS AND TRANSACTIONS Severance Agreements UNUM has entered into severance agreements (the "Severance Agreements") with each of Messrs. Orr, Crispin, and Broatch and Ms. Rosen providing for payments and other benefits to the officer if, within two years after a Change in Control of UNUM, as defined in the Severance Agreements, his or her employment is terminated (a) involuntarily other than for willful and continued failure by the officer to perform substantially his or her duties or willful conduct which is demonstrably and materially injurious to the employer; or (b) voluntarily by the officer, if for Good Reason as defined in the Severance Agreements. Under the Severance Agreements, an officer whose employment so terminates will receive, in addition to accrued salary and prorated incentive compensation, (1) a lump sum payment equal to three times the sum of his or her salary in effect at termination or immediately prior to the Change in Control, whichever is greater, plus three times the average of the annual incentive compensation awards received by the officer in respect of the preceding three years; (2) a lump sum payment equal to the present value of the reduction in retirement payments resulting from the termination, assuming employment had continued for three additional years; and (3) continuation of life, disability and accident and health insurance benefits for a maximum of three years, except to the extent that equivalent benefits are provided by a subsequent employer. In the event of a Potential Change in Control, as defined in the Severance Agreements, UNUM is obligated to fund a trust in an amount sufficient to provide for all cash payments under the such agreements. Employment Agreements Pursuant to an agreement entered into between UNUM and Mr. Crispin at the time of his hire, Mr. Crispin is entitled to a partially nonqualified pension arrangement whereby he receives the equivalent of two years credit under the Corporation's retirement plans in which executive officers participate for each of his first ten years of employment. Furthermore, in the event of termination of Mr. Crispin's employment for any reason (except in connection with a change of control of the Corporation) other than resignation or cause during the first five years of employment, the agreement provides that Mr. Crispin will receive a severance payment equivalent to two years' base salary. Pursuant to an agreement entered into between UNUM and Mr. Broatch at the time of his hire, Mr. Broatch is entitled to a partially nonqualified pension arrangement whereby he receives the equivalent of two years credit under the Corporation's retirement plans in which executive officers participate for each of his first five years of employment. Furthermore, in the event of termination of Mr. Broatch's employment for any reason (except in connection with a change of control of the Corporation) other than resignation or cause, the agreement provides that Mr. Broatch will receive a severance payment equivalent to one years' base salary. 68 UNUM Corporation and Subsidiaries Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Indicated below is the number of shares beneficially owned as of December 31, 1998, by a holder of more than five percent of UNUM Corporation common stock as reported to the SEC by such holder on Form 13G and the percentage of the total shares of UNUM Corporation common stock outstanding, which such holdings represented on such date. o FMR Corp., 82 Devonshire Street, Boston, MA 02109, reported beneficial ownership of 8,593,853 shares (6.2%), including sole voting power over 422,883 shares and sole dispositive power over all such shares. 69 SECURITY OWNERSHIP The following table sets forth information regarding the beneficial ownership of UNUM Corporation common stock, as of March 1, 1999, by each director, nominee and named executive officer, and by all directors, nominees and executive officers of UNUM as a group. The share holdings reported for all directors, nominees and executive officers as a group total 1.67 percent of the outstanding shares on March 1, 1999, as calculated pursuant to the rules of the SEC. All other amounts reported total less than one percent of the outstanding shares on such date.
Number of Shares Beneficially Owned Shares Subject to Options Total Shares Directors and Named Beneficially Exercisable as of Beneficially Executive Officers Owned(1)(2) April 30, 1999 Owned(1)(2) - - ----------------------------------------------------- ------------------ -------------------- ---------------- James F. Orr III ................................. 302,967(3) 627,340 930,307(3) Gayle O. Averyt .................................. 300,251(4) 6,000 306,251(4) Robert E. Dillon, Jr. ............................ 11,647 17,000 28,647 Gwain H. Gillespie ............................... 63,356(5) 12,000 79,356(5) Ronald E. Goldsberry ............................. 7,537 14,000 21,537 Donald W. Harward ................................ 6,000(6) 12,000 18,000(6) George J. Mitchell ............................... 3,583 10,000 15,583 Cynthia A. Montgomery ............................ 9,071(7) 18,000 27,071(7) James L. Moody, Jr. .............................. 8,898 20,000 28,898 Lawrence R. Pugh ................................. 15,988 20,000 35,988 Lois Dickson Rice ................................ 2,382 14,000 16,382 John W. Rowe ..................................... 3,938 12,000 15,938 Robert W. Crispin ................................ 101,041 181,814 282,855 Elaine D. Rosen .................................. 62,662 68,852 131,514 Robert E. Broatch ................................ 39,323 54,958 94,281 Kevin P. O'Connell ............................... 58,024 50,169 108,193 All directors and executive officers as a group (18 persons including the above named)* ......... 1,116,204(8) 1,305,075 2,421,279(8)
- - -------- (1) The number of shares reflected which, under applicable SEC regulations, are deemed to be beneficially owned. Unless otherwise indicated, the person indicated holds sole voting and dispositive power. (2) Includes restricted stock units with a value equivalent to 30,400 shares of UNUM Corporation common stock held by Mr. Crispin; the following number of shares of phantom UNUM Corporation common stock credited to the named executive officers' accounts under UNUM's Nonqualified 401(k) Plan: Mr. Orr: 2,108 shares; Mr. Crispin: 2,080 shares; Ms. Rosen: 1,333 shares; Mr. Broatch: 1,198 shares; and Mr. O'Connell: 1,831 shares; and the following number of shares of phantom UNUM Corporation common stock credited to the non-employee directors' accounts under UNUM's Director Deferred Compensation Plan: Mr. Dillon: 6,047; Mr. Gillespie: 5,610; Dr. Goldsberry: 5,737; Senator Mitchell: 2,583; Ms. Montgomery: 1,871; Mr. Moody: 898; Mr. Pugh: 11,988; Ms. Rice: 1,782; and Mr. Rowe: 2,938. (3) Includes 30,459 shares held by Mr. Orr's spouse and child. (4) Includes 33,349 shares held by Mr. Averyt's spouse and 111,698 shares held in trust for the benefit of the family members under various trusts pursuant to which Mr. Averyt, as trustee, has sole or shared voting or dispositive power. Mr. Averyt disclaims beneficial ownership of 19,077 of these shares held in trust. (5) Includes 51,694 shares held jointly with or by Mr. Gillespie's spouse. (6) Includes 6,000 shares held jointly with Dr. Harward's spouse. (7) Includes 7,200 shares held jointly with Ms. Montgomery's spouse. (8) Includes 192,806 shares held in the name of a spouse, child or certain other relative sharing the same home as the director or executive officer, or held by the director or executive officer, or the spouse of the director or executive officer, as a trustee or as a custodian for family members. * Includes officers of subsidiaries who are not officers of UNUM but are considered "executive officers" of UNUM under rules of the SEC. 70 UNUM Corporation and Subsidiaries Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See Item 11 "Executive and Director Compensation" under the caption "Other Agreements and Transactions" for this information. 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 ----- Report of Independent Accountants ........................... 28 Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 .......................... 29 Consolidated Balance Sheets as of December 31, 1998 and 1997 .................................................. 30 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 .............. 31 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 .................... 32 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1998, 1997 and 1996 .......... 34 Notes to Consolidated Financial Statements .................. 35 2. Financial Statement Schedules II Condensed Financial Information of UNUM Corporation (Registrant) 73 III Supplementary Insurance Information 77 IV Reinsurance 78 V Valuation and Qualifying Accounts and Reserves 79
3. Exhibits. See Index to Exhibits on page 80 of this report. (b) Reports on Form 8-K: On November 30, 1998, UNUM filed a current report on Form 8-K/A which amended and replaced in its entirety Form 8-K filed on November 25, 1998, with respect to UNUM entering into an Agreement and Plan of Merger dated as of November 22, 1998, pursuant to which UNUM and Provident will merge under the name UNUMProvident Corporation. On December 11, 1998, in connection with the previously announced plan to merge between UNUM and Provident, UNUM filed a current report on Form 8-K for the purpose of filing the Condensed Consolidated Financial Statements and notes thereto of Provident for the periods ended September 30, 1998, December 31, 1997, December 31, 1996, and Condensed Pro Forma Combined Financial Statements and notes thereto of UNUM and Provident at September 30, 1998, and for the nine months ended September 30, 1998 and 1997, and for the years ended December 31, 1997, 1996 and 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. 71 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 31, 1999. 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 March 31, 1999 - - --------------------------------------------------------- Chief Executive Officer (James F. Orr III) /s/ ROBERT E. BROATCH Senior Vice President - - --------------------------------------------------------- and Chief Financial Officer March 31, 1999 (Robert E. Broatch) /s/ JOHN M. LANG, JR. Vice President and - - --------------------------------------------------------- Corporate Controller March 31, 1999 (John M. Lang, Jr.) * - - --------------------------------------------------------- Director March 31, 1999 (Gayle O. Averyt) * - - --------------------------------------------------------- Director March 31, 1999 (Robert E. Dillon, Jr.) * - - --------------------------------------------------------- Director March 31, 1999 (Gwain H. Gillespie) * - - --------------------------------------------------------- Director March 31, 1999 (Ronald E. Goldsberry) * - - --------------------------------------------------------- Director March 31, 1999 (Donald W. Harward) * - - --------------------------------------------------------- Director March 31, 1999 (George J. Mitchell) * - - --------------------------------------------------------- Director March 31, 1999 (Cynthia A. Montgomery) * - - --------------------------------------------------------- Director March 31, 1999 (James L. Moody, Jr.) * - - --------------------------------------------------------- Director March 31, 1999 (Lawrence R. Pugh) * - - --------------------------------------------------------- Director March 31, 1999 (Lois Dickson Rice) * - - --------------------------------------------------------- Director March 31, 1999 (John W. Rowe) /s/ KEVIN J. TIERNEY - - --------------------------------------------------------- *(Kevin J. Tierney, as Attorney-in-fact for each of the persons indicated) (Senior Vice President, General Counsel & Secretary)
72 UNUM CORPORATION (Parent Company) SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME
Year Ended December 31, -------------------------------------- (Dollars in millions) 1998 1997 1996 - - ---------------------------------------------------------- ---------- ----------- ----------- Revenues Dividends from subsidiaries* ......................... $ 44.2 $ 462.4 $ 259.7 Investment income .................................... 0.2 0.1 0.3 Interest income on loans to subsidiaries* ............ 3.3 2.6 2.5 Fees and other income ................................ -- 0.1 -- ------- -------- -------- Total revenues ...................................... 47.7 465.2 262.5 Expenses Operating expenses ................................... 7.5 8.3 4.7 Interest expense ..................................... 40.9 41.7 40.7 Interest expense on loans from subsidiaries* ......... 17.4 2.5 0.1 ------- -------- -------- Total expenses ...................................... 65.8 52.5 45.5 ------- -------- -------- Income (loss) before income taxes ..................... (18.1) 412.7 217.0 Income tax benefit .................................... 29.6 17.3 15.1 ------- -------- -------- Income before equity in undistributed net income (loss) of subsidiaries ............................... 11.5 430.0 232.1 Equity in undistributed net income (loss) of subsidiaries* ........................................ 351.9 ( 59.7) 5.9 ------- -------- -------- Net income ............................................ $ 363.4 $ 370.3 $ 238.0 ======= ======== ========
- - -------- *Eliminated in consolidation See note to condensed financial statements. 73 UNUM CORPORATION (Parent Company) SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS
December 31, ----------------------------- (Dollars in millions) 1998 1997 - - ---------------------------------------------------------------- ------------- ------------- Assets Investments Investment in subsidiaries* ............................... $ 3,661.5 $ 3,085.2 Short-term investments .................................... 4.5 2.1 ---------- ---------- Total investments ........................................ 3,666.0 3,087.3 Cash ....................................................... 0.1 -- Amounts receivable from subsidiaries, net* ................. -- 16.2 Notes receivable from subsidiary* .......................... 51.3 35.7 Income taxes receivable .................................... 9.0 -- Other assets ............................................... 5.1 -- Property and equipment, net ................................ 31.5 28.8 ---------- ---------- Total assets ............................................. $ 3,763.0 $ 3,168.0 ========== ========== Liabilities and Stockholders' Equity Liabilities Notes payable ............................................ $ 713.5 $ 467.5 Notes payable to subsidiary* ............................. 257.1 245.8 Amounts payable to subsidiaries, net* .................... 54.7 -- Income taxes ............................................. -- 8.3 Other liabilities ......................................... -- 11.6 ---------- ---------- Total liabilities ....................................... 1,025.3 733.2 Stockholders' Equity Preferred stock, par value $0.10 per share, authorized 10,000,000 shares, none issued Common stock, par value $0.10 per share, authorized 240,000,000 shares, issued 199,975,916 shares ............ 20.0 20.0 Additional paid-in capital ................................. 1,098.7 1,086.0 Unrealized gains, net ...................................... 300.9 248.4 Unrealized foreign currency translation adjustment ......... (19.4) (16.0) Retained earnings (including undistributed earnings of subsidiaries of $1,694.0 million and $1,342.1 million in 1998 and 1997, respectively) ............................. 2,444.9 2,162.5 ---------- ---------- 3,845.1 3,500.9 Less: Treasury stock, at cost (1998--61,266,501 shares; 1997-- 61,703,924 shares) ....................................... 1,085.9 1,050.3 Restricted stock deferred compensation ..................... 21.5 15.8 ---------- ---------- Total stockholders' equity ................................ 2,737.7 2,434.8 ---------- ---------- Total liabilities and stockholders' equity ................ $ 3,763.0 $ 3,168.0 ========== ==========
- - -------- *Eliminated in consolidation See note to condensed financial statements. 74 UNUM CORPORATION (Parent Company) SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS
Year Ended December 31, --------------------------------------- (Dollars in millions) 1998 1997 1996 - - -------------------------------------------------------------- ----------- ----------- ----------- Operating activities: Net income ............................................... $ 363.4 $ 370.3 $ 238.0 Adjustments to reconcile net income to net cash provided by operating activities: Increase (decrease) in income tax liability ............. (17.3) (8.2) 11.7 (Increase) decrease in amounts due to/from subsidiaries* .......................................... 70.9 (1.2) (8.4) Other ................................................... (6.6) 11.3 16.1 Equity in undistributed net income of subsidiaries* .......................................... (351.9) (104.1) (5.9) -------- -------- -------- Net cash provided by operating activities .............. 58.5 268.1 251.5 -------- -------- -------- Investing activities: Investment in subsidiaries, net* ......................... (174.9) (107.8) (13.1) Issuance of notes receivable from subsidiaries* .......... (15.6) (3.2) (32.5) Repayment of notes receivable from subsidiaries* ......... -- -- 50.0 Net increase in short-term investments ................... (2.4) (1.5) -- Net additions to property and equipment .................. (4.1) (10.7) (8.6) -------- -------- -------- Net cash used in investing activities .................. (197.0) (123.2) (4.2) -------- -------- -------- Financing activities: Dividends to stockholders ................................ (81.0) (79.2) (79.8) Treasury stock acquired .................................. (65.0) (285.2) (119.1) Proceeds from notes payable .............................. 278.1 -- -- Repayment of notes payable ............................... (68.0) (48.5) (15.0) Net increase (decrease) in short-term debt ............... 36.0 (10.6) (42.3) Proceeds from notes payable to subsidiaries* ............. 11.3 245.8 -- Repayment of notes payable to subsidiaries* .............. -- -- (10.0) Other .................................................... 27.2 32.8 18.9 -------- -------- -------- Net cash provided by (used in) financing activities ............................................. 138.6 (144.9) (247.3) -------- -------- -------- Net increase in cash ...................................... 0.1 -- -- Cash at beginning of year ................................. -- -- -- -------- -------- -------- Cash at end of year ....................................... $ 0.1 $ -- $ -- ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid (received) during the year for: Income taxes ........................................... $ (13.2) $ (10.6) $ (25.8) Interest ............................................... $ 40.3 $ 43.3 $ 40.8 Interest to subsidiaries* .............................. $ 17.5 $ -- $ 0.2
Supplemental disclosure of noncash operating and investing activities: During 1997, UNUM Corporation received a $168.3 million note receivable in satisfaction of a dividend payment from one affiliate, which was immediately contributed to another affiliate. - - -------- *Eliminated in consolidation. See note to condensed financial statements. 75 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. 76 UNUM CORPORATION AND SUBSIDIARIES SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION (Dollars in millions)
(1)(2) Future policy Deferred benefits, and (4)(5) policy unpaid claims (3) Net acquisition and claim Premium investment Segment costs expenses revenue income - - ------------------------------------------- ------------- --------------- ------------- ------------ Year Ended December 31, 1998 Disability Insurance ..................... $ 651.8 $ 6,721.6 $ 2,167.5 $ 491.4 Special Risk Insurance ................... 281.3 1,318.2 1,208.4 80.6 Colonial Products ........................ 332.9 533.9 556.5 67.7 Retirement Products ...................... -- 627.7 26.6 38.6 Corporate ................................ -- -- -- 4.1 --------- ---------- ---------- -------- Total ................................... $ 1,266.0 $ 9,201.4 $ 3,959.0 $ 682.4 ========= ========== ========== ======== Year Ended December 31, 1997 Disability Insurance ..................... $ 526.7 $ 5,977.4 $ 1,882.6 $ 468.0 Special Risk Insurance ................... 202.9 1,001.3 947.2 71.5 Colonial Products ........................ 302.1 458.6 530.8 57.6 Retirement Products ...................... -- 615.5 130.3 54.4 Corporate ................................ -- -- 0.1 5.9 --------- ---------- ---------- -------- Total ................................... $ 1,031.7 $ 8,052.8 $ 3,491.0 $ 657.4 ========= ========== ========== ======== Year Ended December 31, 1996 Disability Insurance ..................... $ 443.1 $ 5,526.0 $ 1,917.7 $ 468.5 Special Risk Insurance ................... 150.5 727.9 783.3 57.6 Colonial Products ........................ 274.6 410.8 498.2 47.3 Retirement Products ...................... 0.9 618.6 65.8 217.2 Corporate ................................ -- -- -- 16.1 --------- ---------- ---------- -------- Total ................................... $ 869.1 $ 7,283.3 $ 3,265.0 $ 806.7 ========= ========== ========== ======== Amortization Benefits to of deferred (5) policyholders policy Other (6) and interest acquisition operating Premiums Segment credited costs expenses written - - ------------------------------------------- --------------- ------------- ----------- ------------- Year Ended December 31, 1998 Disability Insurance ..................... $ 1,794.7 $ 64.8 $ 492.9 $ 2,114.8 Special Risk Insurance ................... 803.3 143.3 181.1 414.5 Colonial Products ........................ 285.3 89.5 142.4 484.0 Retirement Products ...................... 49.3 -- 15.3 0.8 Corporate ................................ -- -- 62.1 -- ---------- -------- -------- ---------- Total ................................... $ 2,932.6 $ 297.6 $ 893.8 $ 3,014.1 ========== ======== ======== ========== Year Ended December 31, 1997 Disability Insurance ..................... $ 1,503.9 $ 52.1 $ 481.9 $ 1,828.5 Special Risk Insurance ................... 643.9 94.0 179.5 311.2 Colonial Products ........................ 271.8 80.7 137.1 467.2 Retirement Products ...................... 102.7 0.1 5.7 2.5 Corporate ................................ -- -- 58.6 -- ---------- -------- -------- ---------- Total ................................... $ 2,522.3 $ 226.9 $ 862.8 $ 2,609.4 ========== ======== ======== ========== Year Ended December 31, 1996 Disability Insurance ..................... $ 1,514.9 $ 99.0 $ 557.0 $ 1,893.0 Special Risk Insurance ................... 524.0 53.9 183.8 251.2 Colonial Products ........................ 246.8 72.5 133.8 446.5 Retirement Products ...................... 257.1 -- 24.5 15.0 Corporate ................................ -- -- 62.8 -- ---------- -------- -------- ---------- Total ................................... $ 2,542.8 $ 225.4 $ 961.9 $ 2,605.7 ========== ======== ======== ==========
(1) Excludes other policyholder funds, as follows:
December 31, -------------------------------------- Segment 1998 1997 1996 - - ------------------------------------- --------- ------------ ----------- Disability Insurance ........... $ 5.9 $ 2.4 $ 5.9 Special Risk Insurance ......... 13.3 15.4 12.7 Colonial Products .............. 287.5 258.1 156.6 Retirement Products ............ 568.7 729.0 3,358.4 ------- --------- --------- Total .......................... $ 875.4 $ 1,004.9 $ 3,533.6 ======= ========= =========
(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. 77 UNUM CORPORATION AND SUBSIDIARIES SCHEDULE IV--REINSURANCE (Dollars in millions)
Percentage Ceded to Assumed of amount Gross other from other Net assumed Amount companies companies Amount to net --------------- -------------- ------------ --------------- ----------- Year Ended December 31, 1998 Life insurance inforce ..................... $ 314,783.7 $ 15,755.0 $ 670.6 $ 299,699.3 0.2% ============ =========== ========= ============ ==== Premiums Life insurance and individual annuities .... $ 788.9 $ 38.3 $ 16.3 $ 766.9 2.1% Accident and health insurance .............. 3,145.5 376.0 304.5 3,074.0 9.9% Group annuities ............................ 0.8 -- -- 0.8 -- ------------ ----------- --------- ------------ ---- Total premiums ........................... $ 3,935.2 $ 414.3 $ 320.8 $ 3,841.7 ============ =========== ========= ============ Year Ended December 31, 1997 Life insurance inforce ..................... $ 260,014.8 $ 16,036.5 $ 2,069.7 $ 246,048.0 0.8% ============ =========== ========= ============ ==== Premiums Life insurance and individual annuities ... $ 650.7 $ 33.9 $ 9.0 $ 625.8 1.4% Accident and health insurance ............. 2,656.7 368.9 272.6 2,560.4 10.6% Group annuities ........................... 2.5 -- -- 2.5 -- ------------ ----------- --------- ------------ ---- Total premiums ........................... $ 3,309.9 $ 402.8 $ 281.6 $ 3,188.7 ============ =========== ========= ============ Year Ended December 31, 1996 Life insurance inforce ..................... $ 199,019.2 $ 11,476.5 $ -- $ 187,542.7 -- ============ =========== ========= ============ ==== Premiums Life insurance and individual annuities ... $ 552.0 $ 28.6 $ -- $ 523.4 -- Accident and health insurance ............. 2,406.9 77.8 252.9 2,582.0 9.8% Group annuities ........................... 15.0 -- -- 15.0 -- ------------ ----------- --------- ------------ ---- Total premiums ........................... $ 2,973.9 $ 106.4 $ 252.9 $ 3,120.4 ============ =========== ========= ============
78 UNUM CORPORATION AND SUBSIDIARIES SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (Dollars in millions)
Additions ------------------------------ Balance at Charged to beginning costs and Charged to Balance at end Description of period expenses other accounts Deductions of period - - --------------------------------------- ------------ ----------- ---------------- ------------ --------------- Allowances for probable losses: Mortgage loans .................... $ 33.9 $ 2.3 $-- $ (3.4) $ 32.8 Real estate held for sale ......... $ 17.8 $ (1.0) $-- $ -- $ 16.8
79 UNUM CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS
Number Description Method of Filing - - -------- ------------------------------ -------------------------------------------------------------------- 3.1 Certificate of Incorporation Filed as Exhibit 3.1 to the Registrant's Annual Report on Form of UNUM Corporation, as 10-K dated March 10, 1998, and incorporated herein by reference. amended 3.2 By-Laws of UNUM Filed as Exhibit 3.2 to the Registrant's Annual Report on Form Corporation 10-K dated March 25, 1997, 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 and as amended and filed as Exhibit 1 to the Registrant's Registration Statement on Form 8-A/A dated June 21, 1996, and as amended and filed as Exhibit 3 to the Registrant's Registration Statement on Form 8-A/A dated November 25, 1998. 10.1 Deferred Compensation Plan Filed as Exhibit 10.1 to the Registrant's Annual Report on Form 10-K dated March 27, 1996, and incorporated herein by reference. 10.2 Incentive Compensation Plan Filed as Exhibit 3.2 to the Registrant's Annual Report on Form for Designated Executive 10-K dated March 25, 1997, and incorporated herein by reference. Officers 10.3 1987 Executive Stock Filed as Exhibit 10.3 to the Registrant's Annual Report on Form Option Plan 10-K dated March 27, 1996, and incorporated herein by reference. 10.4 1990 Long-Term Stock Filed herewith. Incentive Plan 10.5 1996 Long-Term Stock Filed herewith. Incentive Plan 10.6 Supplementary Retirement Filed as Exhibit 10.4 to the Registrant's Registration Statement on Plan Form S-1 (Registration No. 33-6571) dated June 18, 1986, and incorporated herein by reference. 10.7 Supplemental Executive Filed as Exhibit 10.6 to the Registrant's Annual Report on Form Retirement Plan 10-K dated March 26, 1991, and incorporated herein by reference. 10.8 Form of Executive Filed as Exhibit 10.7 to the Registrant's Annual Report on Form Severance Agreement 10-K dated March 25, 1992, and incorporated herein by reference. 10.9 Non-Qualified 401(k) Plan Filed as Exhibit 3.2 to the Registrant's Annual Report on Form 10-K dated March 25, 1997, and incorporated herein by reference. 10.10 (a) Employment Letter Filed as Exhibit 10.10 to the Registrant's Annual Report on Form 10-K dated March 27, 1996, and incorporated herein by reference. (b) Employment Letter Filed as Exhibit 10.9(b) to the Registrant's Annual Report on Form 10-K dated March 10, 1998, and incorporated herein by reference. 10.11 $500 Million Revolving Filed as Exhibit 10.9 to the Registrant's Annual Report on Form Credit Agreement 10-K dated March 24, 1995, and incorporated herein by reference. 12 Computation of Ratio of Filed herewith. Earnings to Fixed Charges
80
Number Description Method of Filing - - -------- ------------------------- ----------------- 21 Subsidiaries of UNUM Filed herewith. Corporation 23 Consent of Independent Filed herewith. Accountants 24 Power of Attorney Filed herewith. 27 Financial Data Schedule Filed herewith.
81 EX-10.4 2 MATERIAL CONTRACTS 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 or Restricted Stock Unit Award 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. "Restricted Stock Unit" shall have the meaning provided in 10(a). "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. 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 13,600,000 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. (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, 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. 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. 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. Restricted Stock Units. (a) The Committee may, in its discretion, grant Restricted Stock Units to such eligible Participants as it may select. Restricted Stock Units shall entitle the Participant to receive one share of Common Stock per Unit at the times and subject to the conditions determined by the Committee. The Committee shall determine the number of Units to be granted to each Participant, whether or not the Restricted Stock Units are designed to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder, the duration of the Restricted Period (if any) during which, and the conditions under which, the Restricted Stock Units may be forfeited to the Corporation, the schedule for settlement, and any other terms and conditions relating to each grant, not inconsistent with the terms of this Plan, as the Committee shall deem advisable. The Committee may provide that the holder of a Restricted Stock Unit Award shall receive cash or Common Stock equal in value to the dividends paid with respect to a specified number of shares of the Common Stock, as such dividends accrue or upon settlement of the Restricted Stock Unit Award, in which case dividends may be deemed to have been reinvested in additional Common Stock or such other investment vehicles as the Committee may specify. (b) Restricted Stock Units may not be sold, assigned, transferred, pledged or otherwise encumbered. (c) Subject to the renumbered Section 12 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 Unit Award, or any cancellation or forfeiture of shares of Restricted Stock Units 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 Unit Award, or in guidelines established by the Committee and made applicable to such Restricted Stock Unit Award. SECTION 11. 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 11 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 11. (c) (i) Recipients of Options under this Section 11 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 1997, 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 4,000 shares of Common Stock and, beginning in 1990, each newly elected non-employee director shall be granted an Option to purchase 6,000 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 11 without the approval of the stockholders of the Corporation. SECTION 12. Change of Control. Notwithstanding anything to the contrary contained herein, unless otherwise set forth in any agreement relating to an Award, 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 or Restricted Stock Units 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 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 12(i), (iii) or (iv) of this Section 12) 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 13. 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. (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 or Restricted Stock Units 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 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 or Restricted Stock Units 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. EX-10.5 3 MATERIAL CONTRACTS 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. "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 Restricted Stock Unit or Performance Share Award. With respect to any Restricted Stock, Restricted Stock Unit 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. "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. "Restricted Stock Unit" shall have the meaning provided in Section 10(a). "Restriction Period" shall mean a period designated by the Committee during which the Performance Measures and other conditions applicable to a Restricted Stock Award, Restricted Stock Unit 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 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 7,000,000 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 400,000 shares of the Common Stock, and (ii) the sum of all shares of Restricted Stock plus all Restricted Stock Units plus all Performance Shares granted to any individual Participant shall not exceed 200,000. 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 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, 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. (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 (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. (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. Restricted Stock Units. (a) Grant. The Committee may, in its discretion, grant Restricted Stock Units to such eligible Participants as it may select. Restricted Stock Units shall entitle the Participant to receive one share of Common Stock per Unit at the times and subject to the conditions determined by the Committee. The Committee shall determine the number of Units to be granted to each Participant, whether or not the Restricted Stock Units are designed to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder, the duration of the Restricted Period (if any) during which, and the conditions under which, the Restricted Stock Units may be forfeited to the Corporation, the schedule for settlement, and any other terms and conditions relating to each grant, not inconsistent with the terms of this Plan, as the Committee shall deem advisable. The Committee may provide that the holder of a Restricted Stock Unit Award shall receive cash or Common Stock equal in value to the dividends paid with respect to a specified number of shares of the Common Stock, as such dividends accrue or upon settlement of the Restricted Stock Unit Award, in which case dividends may be deemed to have been reinvested in additional Common Stock or such other investment vehicles as the Committee may specify. (b) Assignability. Restricted Stock Units may not be sold, assigned, transferred, pledged or otherwise encumbered. (c) Termination of Employment. Subject to the renumbered Section 12 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 Unit Award, or any cancellation or forfeiture of shares of Restricted Stock Units 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 Unit Award, or in guidelines established by the Committee and made applicable to such Restricted Stock Unit Award. SECTION 11. 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 12 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 12. Change of Control. Notwithstanding anything to the contrary contained herein, unless otherwise set forth in any agreement relating to an Award, 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, Restricted Stock Units 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, Restricted Stock Unit 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 condition pertaining to the vesting of any such Award shall be waived) and such shares or Award 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 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 13. 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 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 or Restricted Stock Unit 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, Restricted Stock Units 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. (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, Restricted Stock Units 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-12 4 STATEMENT RE: COMPUTATION OF RATIOS EXHIBIT 12 UNUM CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Year Ended December 31, ---------------------------- (Dollars in millions) 1998 1997 1996 - - ---------------------------------------------------------------------------- Earnings: Income before income taxes $517.4 $536.4 $341.6 Add: Fixed charges 59.8 53.4 52.2 ------ ------ ------- Earnings as adjusted $577.2 $589.8 $393.8 ============================================================================= Fixed charges: Interest expense $ 49.9 $ 42.4 $ 40.7 Interest portion of rent expense 9.9 11.0 11.5 ------ ------- ---- Total fixed charges $ 59.8 $ 53.4 $ 52.2 ============================================================================= Ratio of earnings to fixed charges 9.7 11.0 7.5 ============================================================================ For purposes of computing the ratio of earnings to fixed charges, earnings as adjusted consist of income before income taxes plus fixed charges. Fixed charges consist of interest expense and the estimated interest portion of rent expense. EX-21 5 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF UNUM CORPORATION Listed below are the subsidiaries of UNUM Corporation, as of December 31, 1998, with their respective jurisdiction of incorporation. UNUM Holding Company (Delaware) First UNUM Life Insurance Company (New York) Claims Service International, Inc. (Delaware) UNUM International Underwriters Inc. (Delaware) UNUM Life Insurance Company of America (Maine) Colonial Companies, Inc. (Delaware) Colonial Life & Accident Insurance Company (South Carolina) BenefitAmerica, Inc. (South Carolina) Options and Choices, Inc. (Wyoming) UNUM European Holding Company Limited (United Kingdom) UNUM Management Company Limited (United Kingdom) UNUM Limited (United Kingdom) Claims Services International Limited (United Kingdom) Duncanson & Holt, Inc. (New York) Duncanson & Holt Services, Inc. (Maine) Duncanson & Holt Administrative Services, Inc. (Delaware) Duncanson & Holt Canada Ltd. (Canada) Duncanson & Holt Asia PTE Ltd. (Singapore) Duncanson & Holt Europe Ltd. (United Kingdom) Duncanson & Holt Underwriters Ltd. (United Kingdom) Duncanson & Holt Agencies Ltd. (United Kingdom) Duncanson & Holt Syndicate Management Ltd. (United Kingdom) Trafalgar Underwriting Agencies Ltd. (United Kingdom) UNUM Japan Accident Insurance Company Limited (Japan) UNUM International Ltd. (Bermuda) Boston Compania Argentina de Seguros (Argentina) EX-23 6 CONSENTS OF EXPERTS AND COUNSEL 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 2, 1999, on our audits of the consolidated financial statements and the financial statements schedules of UNUM Corporation and subsidiaries as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997, and 1996, which report is included in the Annual Report on Form 10-K: Form S-8 No. 33-31270 pertaining to the UNUM Employees 401(k) Plan (formerly 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 (additional shares) Form S-3 No. 33-36873 pertaining to the 1990 Debt Securities Form S-3 No. 33-69132 pertaining to the 1993 Debt Securities, Preferred Stock, Common Stock and Warrants Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 No. 33-55870 pertaining to the issuance of UNUM Corporation shares upon the exercise of stock options granted under the Colonial Plans as defined therein Form S-3 No. 333-08187 pertaining to the 1996 Debt Securities, Preferred Stock, Common Stock and Warrants Form S-8 No. 333-41917 pertaining to the 1998 Goals Stock Option Plan Form S-8 No. 333-41897 pertaining to the 1996 Long-Term Stock Incentive Plan /s/ PRICEWATERHOUSECOOPERS LLP Portland, Maine March 31, 1999 EX-24 7 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kevin J. Tierney 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, 1998 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 his said attorney-in-fact and agent, 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 February 12, 1999 - - ----------------------------------- Gayle O. Averyt /s/ Robert E. Dillon, Jr. Director February 12, 1999 - - ----------------------------------- Robert E. Dillon, Jr. /s/ Gwain H. Gillespie Director February 12, 1999 - - ----------------------------------- Gwain H. Gillespie /s/ Ronald E. Goldsberry Director February 12, 1999 - - ----------------------------------- Ronald E. Goldsberry /s/ Donald W. Harward Director February 12, 1999 - - ----------------------------------- Donald W. Harward /s/ George J. Mitchell Director February 12, 1999 - - ----------------------------------- George J. Mitchell /s/ Cynthia A. Montgomery Director February 12, 1999 - - ---------------------------------- Cynthia A. Montgomery Signature Title Date --------- ----- ---- /s/ James L. Moody, Jr. Director February 12, 1999 - - ----------------------------------- James L. Moody, Jr. /s/ Lawrence R. Pugh Director February 12 1999 - - ----------------------------------- Lawrence R. Pugh /s/ Lois Dickson Rice Director February 12, 1999 - - ----------------------------------- Lois Dickson Rice /s/ John W. Rowe Director February 12, 1999 - - ----------------------------------- John W. Rowe EX-27 8 FINANCIAL DATA SCHEDULE
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 for the year ended December 31, 1998. 0000795581 UNUM Corporation U.S. DOLLARS 1,000 12-MOS DEC-31-1998 DEC-31-1998 1 7,896,900 0 0 31,000 1,303,400 250,600 9,837,700 80,500 1,770,000 1,266,000 15,182,900 9,201,400 0 0 875,400 881,800 0 0 20,000 2,717,700 15,182,900 3,841,700 661,400 21,000 117,300 2,886,200 (235,100) 0 517,400 154,000 363,400 0 0 0 363,400 2.63 2.57 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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