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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999.
Commission file number 1-11834
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UnumProvident Corporation
(Exact name of registrant as specified in its charter)
DELAWARE 62-1598430
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 FOUNTAIN SQUARE 2211 CONGRESS STREET
CHATTANOOGA, TENNESSEE 37402 PORTLAND, MAINE 04122
(Address of principal executive offices) (Address of principal executive offices)
423.755.1011 207.770.2211
(Registrant's telephone number, including (Registrant's telephone number, including
area code) area code)
2211 CONGRESS STREET
PORTLAND, MAINE 04122
(Former name, former address and former fiscal year, if changed since last
report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common stock, $0.10 par value New York Stock 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
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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 the 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. [_]
As of March 20, 2000, there were 240,583,007 shares of the registrant's common
stock outstanding. The aggregate market value of the shares of common stock,
based on the closing price of those shares on the New York Stock Exchange, Inc.,
held by non-affiliates was approximately $3.0 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the annual meeting of shareholders to be
held May 19, 2000 are incorporated by reference into Part III.
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TABLE OF CONTENTS
PART I
Page
Cautionary Statement Regarding Forward-Looking Statements............... 1
1. Business........................................................... 2
A. General......................................................... 2
B. Business Strategies............................................. 4
C. Reporting Segments.............................................. 5
D. Reinsurance..................................................... 10
E. Reserves........................................................ 10
F. Competition..................................................... 12
G. Regulation...................................................... 12
H. Risk Factors.................................................... 13
I. Selected Data of Segments....................................... 14
J. Employees....................................................... 14
2. Properties......................................................... 14
3. Legal Proceedings.................................................. 15
4. Submission of Matters to a Vote of Security Holders................ 15
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters............................................................ 16
6. Selected Financial Data............................................ 17
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 17
7A. Quantitative and Qualitative Information about Market Risk......... 37
8. Financial Statements and Supplementary Data........................ 38
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 91
PART III
10. Directors and Executive Officers of the Registrant................. 92
11. Executive and Director Compensation................................ 92
12. Security Ownership of Certain Beneficial Owners and Management..... 93
13. Certain Relationships and Related Transactions..................... 93
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 94
Signatures......................................................... 95
Index to Exhibits.................................................. 106
PART I
Cautionary Statement Regarding Forward-Looking Statements
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
actual results to differ materially from the forward-looking statements.
UnumProvident Corporation (the Company) 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 the Company, is or may be
considered as forward-looking. Examples of disclosures that contain such
information include, among others, sales estimates, income projections,
reserves and related assumptions, and the year 2000 date conversion. Forward-
looking statements are those not based on historical information, but rather
relate to future operations, strategies, financial results, or other
developments. These statements may be made directly in this document or may be
made part of this document by reference to other documents filed with the
Securities and Exchange Commission by the Company, which is known as
"incorporation by reference." You can find many of these statements by looking
for words such as "may," "should," "believes," "expects," "anticipates,"
"estimates," "intends," "projects," "goals," "objectives," or similar
expressions in this document or in documents incorporated herein.
These forward-looking statements are subject to numerous assumptions, risks,
and uncertainties. Factors that may cause actual results to differ materially
from those contemplated by the forward-looking statements include, among
others, the following possibilities:
. Competitive pressures in the insurance industry may increase
significantly through industry consolidation, competitor
demutualization, or otherwise.
. General economic or business conditions, both domestic and foreign,
whether relating to the economy as a whole or to particular sectors, may
be less favorable than expected, resulting in, among other things, lower
than expected revenues, and the Company could experience higher than
expected claims or claims with longer duration than expected.
. Insurance reserve liabilities can fluctuate as a result of changes in
numerous factors, and such fluctuations can have material positive or
negative effects on net income.
. Actual persistency may be lower than projected persistency, resulting in
lower than expected revenues and higher than expected amortization of
deferred policy acquisition costs.
. Reorganization of the Company's field sales force and integrated product
offerings may initially adversely impact new sales and renewals.
. Costs or difficulties related to the integration of the business of the
Company following the merger may be greater than expected, including
costs or difficulties related to the management of claims.
. Legislative or regulatory changes may adversely affect the businesses in
which the Company is engaged.
. Necessary technological changes may be more difficult or expensive to
make than anticipated, and subsequent non-compliance resulting from year
2000 data systems issues may occur.
. Adverse changes may occur in the securities market.
. Changes in the interest rate environment may adversely affect profit
margins and the Company's investment portfolio.
. The rate of customer bankruptcies may increase.
. Incidence and recovery rates may be influenced by, among other factors,
the emergence of new diseases, new trends and developments in medical
treatments, and the effectiveness of risk management programs.
. Retained risks in the Company's reinsurance operations are influenced by
many factors and can fluctuate as a result of changes in these factors,
and such fluctuations can have material positive or negative effects on
net income.
For further discussion of risks and uncertainties which could cause actual
results to differ from those contained in the forward-looking statements, see
"Risk Factors" contained herein in Item 1.
All subsequent written and oral forward-looking statements attributable to
the Company or any person acting on its behalf are expressly qualified in their
entirety by the cautionary statements contained or referred to in this section.
The Company does not undertake any obligation to release publicly any revisions
to such forward-looking statements to reflect events or circumstances after the
date of this document or to reflect the occurrence of unanticipated events.
ITEM 1. BUSINESS
General
The Company, a Delaware business corporation, is the parent holding company
for a group of insurance companies that collectively operate throughout North
America and in the United Kingdom, Japan, and Argentina. The Company's
principal operating subsidiaries are Unum Life Insurance Company of America
(Unum America), Provident Life and Accident Insurance Company (Accident), The
Paul Revere Life Insurance Company (Paul Revere Life), and Colonial Life &
Accident Insurance Company (Colonial). The Company, through its subsidiaries,
is the largest provider of group and individual disability insurance in North
America, the United Kingdom, and Japan. It also provides a complementary
portfolio of life insurance products, including long-term care insurance, life
insurance, employer- and employee-paid group benefits, and related services.
The Company is the surviving corporation in the merger on June 30, 1999 of
Provident Companies Inc. (Provident), the leading individual disability
insurance provider in North America, with Unum Corporation (Unum), the leading
group disability insurance provider. In the merger, Provident shareholders
received 0.73 shares of the Company's common stock for each Provident share,
and Unum shareholders received one share of the Company's common stock for each
Unum share.
During the years preceding the merger, both Provident and Unum pursued
strategies of divesting non-core businesses and leveraging their respective
disability insurance expertise.
In Provident's case, this strategy was the continuation of a new business
focus initiated by J. Harold Chandler after joining Provident in 1993.
Provident successfully undertook a number of major initiatives in pursuing this
strategy prior to the merger with Unum. Specifically, Provident (i) sold its
group medical business for $231.0 million in cash and stock, (ii) began winding
down its guaranteed investment contracts (GICs) business which carried high
capital requirements, (iii) reduced the annual dividend on the common stock to
preserve capital to fund future growth, (iv) simplified the corporate legal
structure and eliminated a dual class of common stock that had special voting
rights in order to present a more conventional corporate structure profile to
the investing market, (v)sold in six transactions $1,459.6 million in
commercial mortgage loans as part of repositioning its investment portfolio,
(vi) restructured its marketing and distribution channels, along with the
support areas of product development, underwriting, and claims, to better reach
and serve individual and employee benefits customers, (vii) strengthened its
claims management procedures in the disability income insurance business, and
(viii) began restructuring its disability income products to discontinue over a
reasonable period the sale of policies which combined noncancelable contracts
with long-term own-occupation provisions and to offer in their place an income
replacement contract with more reasonable limits and better pricing for
elective provisions.
In addition, Provident acquired The Paul Revere Corporation (Paul Revere)
and GENEX Services, Inc. (GENEX) in early 1997 and disposed of certain non-core
lines of business. These actions strengthened
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Provident's disability insurance capabilities and enabled Provident to offer a
comprehensive and well-focused portfolio of products and services to its
customers. From 1989 through 1997 Paul Revere was the largest provider of
individual disability insurance in North America on the basis of in-force
premiums. By combining Paul Revere's operations with those of Provident,
Provident realized significant operating efficiencies, including leveraging
both companies' knowledge of disability risks, specialized claims and
underwriting skills, and sales expertise. Provident also realized cost savings
as a result of combining the corporate, administrative, and financial
operations of the two companies. GENEX provides specialized skills in
disability case management and vocational rehabilitation that advance the goal
of providing products that enable disabled policyholders to return to work.
As it continued to assess acquisition opportunities that could complement
its core business, Provident also continued to assess and exit non-core lines.
In 1997, Provident transferred its dental business to another insurer. The
dental block, which was acquired in the Paul Revere acquisition, produced $39.2
million of premium income in 1997.
Effective January 1, 1998, Provident entered into an agreement with
Connecticut General Life Insurance Company (Connecticut General) for
Connecticut General to reinsure, on a 100% coinsurance basis, Provident's in-
force medical stop-loss insurance coverages sold to clients of CIGNA Healthcare
and its affiliates (CIGNA). This reinsured block constitutes substantially all
of Provident's medical stop-loss insurance business.
Effective April 30, 1998, Provident closed the sale of its in-force
individual and tax-sheltered annuity business to American General Annuity
Insurance Company and The Variable Annuity Life Insurance Company, affiliates
of American General Corporation (American General). American General also
acquired a number of miscellaneous group pension lines of business sold in the
1970s and 1980s which are no longer actively marketed. The sale did not include
Provident's block of GICs or group single premium annuities (SPAs), which will
continue in a run-off mode.
On July 15, 1997, the Board of Directors authorized Provident to repurchase
up to 1,000,000 shares (2,000,000 shares following a subsequent stock split) of
its common stock. In May 1998, Provident purchased 200,000 shares of common
stock under this repurchase program for a total price of $7.7 million and at an
average price of $38.43 per share. Provident discontinued this program in
anticipation of the merger with Unum.
In the years prior to the merger Unum also pursued a strategy it had adopted
after its demutualization in 1986 of focusing on its core disability
businesses. In March 1993, Unum merged with Colonial Companies, Inc., the
parent company of Colonial, a leader in payroll marketing of supplemental
insurance, focused on accident, cancer, and a range of life insurance products.
In October 1996, Unum closed the sale of its 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 from future contractual obligation. As of December 31,
1999, consents for assumption reinsurance have been received relating to
substantially all assets under management.
Through the continued development of Unum Japan Accident Insurance Company
Limited (Unum Japan) and the purchase in 1997 of Boston Compania Argentina de
Seguros, SA in Argentina, Unum also furthered its expansion into foreign
disability markets that began with the acquisition in 1990 of Unum Limited, the
leading disability insurer in the United Kingdom.
In April 1999, Unum decided to exit its reinsurance operations, including
the reinsurance management operations of Duncanson & Holt, Inc. (D&H); risk
assumption by Unum America, including reinsurance pool participation, direct
reinsurance which includes accident and health (A&H), long-term care (LTC), and
long-term disability coverages; and Lloyd's of London (Lloyd's) syndicate
participations. On December 31, 1999 the
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Company completed the sale of certain divisions of the North American
reinsurance management operations of D&H and the reinsurance of the Company's
risk participation in these facilities. At this time, the Company plans to
continue to operate its North America long-term disability reinsurance
operation and to refocus it with the objective of improving profitability. With
respect to Lloyd's, the Company has decided to implement a strategy which
limits participation in year 2000 underwriting risks, ceases participation in
Lloyd's underwriting risks after year 2000, and manages the run-off of its risk
participation in open years of account of Lloyd's reinsurance syndicates. The
Company has also decided to discontinue its accident reinsurance business in
London beginning in year 2000. See Note 13 of the "Notes to Consolidated
Financial Statements" for further discussion.
Business Strategies
The Company's objective is to grow its business and improve its
profitability by following the three strategies set forth below.
Provide Integrated Product Choices
The Company offers a comprehensive portfolio of income protection products
and services. These coverage choices, available in the employee benefit,
individual, and voluntary market segments, meet the diverse needs of the
marketplace. The Company seeks to achieve a competitive advantage by offering
group, individual, and voluntary/work site products that can combine with
other coverages to provide integrated product solutions for customers.
Employees are increasingly turning to the workplace for access to quality
insurance protection. Through return-to-work expertise and a comprehensive
portfolio of basic employee benefits, as well as supplemental, voluntary, and
executive product offerings, the Company offers companies of all sizes highly
competitive benefits to protect the incomes and lifestyles of employees and
their families. Income protection solutions include integrated short-term and
long-term disability income protection plans with flexible coverage and
funding options. Lifestyle protection solutions include term and universal
life insurance and long-term care insurance.
The Company's broad portfolio also includes individual income protection
products that help protect individual customers and their families from the
financial effects of accidents or illnesses. The products feature choices
suited to different ages, incomes, family needs, and lifestyles. Also offered
are lifestyle protection solution products including long-term care insurance,
level term life insurance, and universal life insurance.
In order to give the appropriate focus to these three primary business
markets, the Company has established national practice groups to focus on
large employers, executive benefits, and voluntary benefits. These national
practice groups work with the Company's sales force to present coverage
solutions to potential customers and to manage existing customer accounts.
Provide Benefits Emphasizing Returning People to Work and to an Independent
Lifestyle
For corporate and individual customers, the Company offers expert resources
to help claimants recover their ability to earn an income and regain an
independent lifestyle. These resources include the following:
Benefits Management and Client Care
The Company's benefits organization is focused on helping customers who
have suffered an accident or illness to return to work and to an
independent lifestyle. The Company's extensive resources reflect the
significant investments which have been made in this area. This coordinated
effort focuses centralized home office knowledge and local case management
and support specialists across North America on making the best resources
available for each customer's specific situation.
Specialized Support
Once a customer submits a claim, it's immediately assigned to an expert
for handling based on the severity and type of condition. Specialized
claims representatives, rehabilitation specialists, nurse case managers,
and physicians work directly with each claimant and, where appropriate,
with the claimant's medical providers and employer. These specialized
resources may also be able to assist a claimant's medical provider in
developing treatment plans or return-to-work goals for the claimant. When a
claimant is ready to return to work, the Company offers reimbursement to
employers for eligible work site accommodations to enable an employee's
transition back to the workplace. If a claimant is unable to return to
work, the Company can provide employment counseling, vocational assessment,
analysis of skills, and assistance with education or retraining to help the
claimant find a new career.
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Social Security Disability Income Assistance
For those claimants who are not able to return to work for a
considerable time, the Company can help initiate the social security
application process by working with the claimants in the application and
appeals process to help seek benefits for which the claimant might be
eligible.
Returning to an Independent Lifestyle
For customers who experience accidents or illnesses and are not able to
return to work, the Company offers resources to enable a transition back to
the most independent lifestyle possible. The Company provides information
resources for customers and family members of those living with
disabilities and provides the assistance of claims specialists who fully
understand the dynamics of adjusting to life with longer-term impairments.
Integrated Information Services and Pre-Disability Planning
The Company helps employers identify disability patterns and provides
insight into how to better manage the total cost of disability, including
worker's compensation and other lost time expenses. The Company's managed
disability planning process and return-to-work dividend program can help
employers reduce absenteeism, increase the number of employees who return
to work following a disability, lower employee replacement and retraining
costs, reduce premiums for medical benefits, increase productivity, and
improve employee morale.
Provide Highly Responsive Service for Customers and their Advisors
The Company is committed to providing customers with easy access to the
Company's resources through increased use of technology and through a broad and
multi-channel distribution network. The Company offers work site enrollment and
marketing capabilities and provides advanced sales support to brokers, agents,
and other business partners.
For corporate customers, the Company offers programs to help companies
better understand the causes, cost, and impacts of disability; creative return-
to-work solutions; research initiatives and ongoing studies in the scientific
and human aspects of disability; claims professionals trained in the disabling
condition affecting the employee, with coordinated resources and information
focused on helping the individual return to work; local case management;
reimbursement for qualified workplace accommodations; information, support,
assistance, and referrals for living with a disabling condition; independent
financial counseling to assist family members after the death of an employee;
no-cost cash management services for life insurance beneficiaries immediately
on payment of a policy benefit; 24 hour access for employees to counselors
trained to help with personal problems; and assistance for people who suffer
accidents or illnesses away from home.
For individual customers, the Company offers personalized claim service from
professionals trained in the disabling condition affecting the claimant;
information, support, assistance, and referrals for living with a disabling
condition; 24 hour access to information on aging and long-term care; no-cost
cash management services for life insurance beneficiaries immediately on
payment of a policy benefit; and research initiatives and ongoing studies in
the scientific and human aspects of disability.
Reporting Segments
The Company is organized around its customers, with reporting segments that
reflect its major market segments: Employee Benefits, Individual, and Voluntary
Benefits. The Other segment includes products that the Company no longer
actively markets. The Corporate segment includes investment income on corporate
assets not specifically allocated to a line of business, corporate interest
expense, amortization of goodwill, and certain corporate expenses not allocated
to a line of business. The Employee Benefits segment includes group long-term
and short-term disability insurance, group life insurance, group long-term
care, accidental death and dismemberment coverages, and the results of managed
disability. The Company's Individual reporting segment
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includes individual disability, individual life, and individual long-term care.
The Voluntary Benefits segment includes products sold to employees through
payroll deduction at the work site. These products include life insurance and
health products, primarily disability, accident and sickness, and cancer. The
Other segment includes the results from reinsurance pools and management and
other products no longer actively marketed, including corporate-owned life
insurance, group pension, and individual annuities.
Employee Benefits
The Employee Benefits segment includes the results of group products sold to
employers for the benefit of employees and the results of managed disability,
primarily GENEX. Group long-term and short-term disability comprises the
majority of the segment, with $2,508.4 million of premium income in 1999. Group
life generated $1,158.2 million of premium income in 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained herein in Item 7.
Group long-term disability insurance provides employees with insurance
coverage for loss of income in the event of extended work absences due to
sickness or injury. Services are offered to employers and insureds to encourage
and facilitate rehabilitation, retraining, and re-employment. Most policies
begin providing benefits following 90 or 180 day waiting periods and continue
providing benefits until the employee reaches a certain age between 65 and 70.
The benefits are limited to specified maximums as a percentage of income.
Premiums for this product are generally based on expected claims of a pool of
similar risks plus provisions for administrative expenses and profit. Some
cases, however, carry experience rating provisions. Premiums for experience
rated group disability business are based on the expected experience of the
client given their industry group, adjusted for the credibility of the specific
claim experience of the client. A few accounts are handled on an administrative
services only basis with responsibility for funding claim payments remaining
with the customer.
Group short-term disability insurance provides coverage from loss of income
due to injury or sickness, effective immediately for accidents, and after one
week for sickness, for up to 26 weeks, to specified maximums as a percentage of
income. Short-term disability is sold primarily on a basis permitting periodic
repricing to address the underlying claims experience and the interest rate
environment.
Profitability of group disability insurance is affected by deviations of
actual claims experience from expected claims experience, investment returns,
persistency, and the ability of the Company to control its administrative
expenses. Morbidity is an important factor in disability claims experience.
Also important is the general state of the economy; for example, during a
recession the incidence of claims tends to increase under this type of
insurance. In general, experience rated disability coverage for large groups
has narrower profit margins and represents less risk to the Company than
business of this type sold to small employers. This is because the Company must
bear all of the risk of adverse claims experience in small case coverages while
larger employers often bear much of this risk themselves. For disability
coverages, case management and rehabilitation activities with regard to claims,
along with appropriate pricing and expense control, are important factors
contributing to profitability.
Group life insurance consists primarily of renewable term life insurance
with the coverages frequently linked to employees' wages. Profitability in
group life is affected by deviations of actual claims experience from expected
claims experience, investment returns, persistency, and the ability of the
Company to control administrative expenses. The Company also markets several
group benefits products and services including accident and sickness indemnity
and accidental death and dismemberment policies.
Group long-term care insurance pays a benefit upon the loss of two or more
"activities of daily living" (e.g. bathing, dressing, feeding) and the
insured's requirement of standby assistance or cognitive impairment. Payment is
made on an indemnity basis, regardless of expenses incurred, up to a lifetime
maximum. Benefits start after an elimination period, generally 90 days or less.
Long-term care insurance is marketed on a
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guaranteed renewable basis. Profitability is affected by deviations of actual
claims experience from expected claims experience, investment returns,
persistency, and the ability of the Company to control administrative expenses.
GENEX provides specialized skills in disability case management and
vocational rehabilitation to assist disabled claimants to return to work. GENEX
provides a full range of disability management services, including work site
injury management, telephonic early intervention services for injured workers,
medical case management, vocational rehabilitation, and disability cost
analysis, to third party administrators, corporate clients, and insurance
companies. In addition to its historical focus on the workers' compensation
market, GENEX and the Company are working together to offer customized
disability programs for the employee benefits market that are intended to
integrate and simplify coverages, control costs, and improve efficiency for
employers with significant disability and related claims. GENEX plays an
increasingly significant role in helping the Company to manage its own exposure
to individual and group disability claims.
Individual
Individual disability comprises the majority of the Individual segment, with
$1,553.5 million of premium income in 1999. Individual life insurance products
generated $85.1 million of premium income in 1999, and individual long-term
care had premium income of $92.0 million.
Individual disability income insurance provides the insured with a portion
of earned income lost as a result of sickness or injury. Under an individual
disability income policy, monthly benefits generally are fixed at the time the
policy is written. The benefits typically range from 30 percent to 75 percent
of the insured's monthly earned income. Various options with respect to length
of benefit periods and waiting periods before payment begins are available and
permit tailoring of the policy to a specific policyholder's needs. The Company
also markets individual disability income policies which include payments for
transfer of business ownership and business overhead expenses. Individual
disability income products do not provide for the accumulation of cash values.
Premium rates for these products are varied by age, sex, and occupation
based on assumptions concerning morbidity, persistency, policy related
expenses, and investment income. The Company develops its assumptions based on
its own claims experience and published industry tables. The Company's
underwriters evaluate the medical and financial condition of prospective
policyholders prior to the issuance of a policy.
The majority of the Company's in-force individual disability income
insurance was written on a noncancelable basis. Under a noncancelable policy,
as long as the insured continues to pay the fixed annual premium for the
policy's duration, the policy cannot be canceled by the Company nor can the
premium be raised. Due to the noncancelable, fixed premium nature of the
policies marketed in the past, profitability of this part of the business of
Accident and Provident Life and Casualty Insurance Company (Casualty) is
largely dependent upon achieving the morbidity and interest rate assumptions
set in the 1993 loss recognition study with respect to the business written in
1993 and prior and those set in the pricing of business written after 1993. The
profitability of the Paul Revere business will be largely dependent upon
achieving the assumptions as to morbidity, persistency, interest earned rates,
and expense levels assumed when pricing the acquisition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained herein in Item 7.
In November 1994, the Company announced its intention to discontinue the
sale of individual disability products that combined lifetime benefits and
short elimination periods with own-occupation provisions (other than conversion
policies available under existing contractual arrangements). At the same time
the Company began introducing products that insured loss of earnings as opposed
to occupations, and these products generally contained more limited benefit
periods and longer elimination periods. Since the acquisition of Paul Revere in
March 1997, the Company has discontinued the sale of certain Paul Revere
products that are not consistent with the Company's strategic direction for its
product portfolio.
7
In contrast to traditional noncancelable own-occupation policies, for which
benefits are determined based on whether the insured can work in his or her
original occupation, the loss of earnings policy requires the policyholder to
satisfy two conditions for benefits to begin: reduced ability to work due to
accident or sickness and earnings loss of at least 20 percent. These policies
are aimed at repositioning the individual disability income product by making
it more attractive to a broader market of individual consumers, including
middle to upper income individuals and corporate benefit buyers.
The Company also offers lifelong disability coverage for loss of income due
to injury or sickness on a guaranteed renewable basis, with the right to
reprice in-force policies subject to regulatory approval. Lifelong disability
coverage 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 a long-
term care policy at retirement age.
The Company is developing a new portfolio of individual disability products
for release in the second half of 2000. This product line will consolidate the
current offerings of Provident, Paul Revere, and Unum into one new simplified
product portfolio. The new portfolio will utilize a modular approach offering
customers a range of product options and features. This portfolio has been
designed to combine the best features from prior Company offerings and will
include return-to-work incentives and optional long-term care conversion
benefits and/or benefits for catastrophic disabilities.
The Company's life insurance offerings include term, universal life, and
interest-sensitive life insurance products. Universal life products provide
permanent life insurance with adjustable interest rates applied to the cash
value and are designed to achieve specific policyholder objectives such as
higher accumulation values and/or flexibility with respect to amount of
coverage and premium payments. The principal difference between fixed premium
and universal life insurance policies centers around policy provisions
affecting the amount and timing of premium payments. Under universal life
policies, policyholders may vary the frequency and size of their premium
payments, and policy benefits may fluctuate accordingly. Premium payments under
the fixed premium policies are not variable by the policyholder and, as a
result, generally reflect lower administrative costs than universal life
products for which extensive monitoring of premium payments and policy benefits
is required.
Premium rates for the Company's life insurance products are based on
assumptions as to future mortality, investment yields, expenses, and lapses.
Although a margin for profit is included in setting premium rates, the actual
profitability of products is significantly affected by the variation of actual
experience from assumed experience. Profitability of fixed premium products is
also dependent upon investment income on reserves. The profitability of
interest-sensitive products is determined primarily by the ultimate
underwriting experience and the ability to maintain anticipated investment
spreads. The Company believes that the historical claims experience for these
products has been satisfactory.
From the Company's viewpoint, the risks involved with interest-sensitive
products include actual versus assumed mortality, achieving investment returns
that at least equal the current declared rate, competitive position of declared
rates on the policies, meeting the contractually guaranteed minimum crediting
rate, and recovery of policy acquisition costs. From the policyholder's
perspective, the risk involved with interest-sensitive products is whether or
not the declared rates on the policy will compare favorably with the returns
available elsewhere in the marketplace.
Individual long-term care is offered on a single customer basis and to
smaller employer groups and is marketed on a guaranteed renewable basis.
Individual long-term care insurance pays a benefit upon the loss of two or more
"activities of daily living" and the insured's requirement of standby
assistance or cognitive impairment. Payment is made on an indemnity basis,
regardless of expenses incurred, up to a lifetime maximum. Benefits start after
an elimination period, generally 90 days or less. Profitability is affected by
deviations of actual claims experience from expected claims experience,
investment returns, persistency, and the ability of the Company to control
administrative expenses.
8
Voluntary Benefits
The Voluntary Benefits segment includes a broad line of products sold to
groups of employees through payroll deduction at the work site. These products
include life insurance and health products. Premium income for this segment
totaled $691.6 million in 1999.
The life insurance products principally include universal life, interest-
sensitive life, and whole life insurance. The Company markets accident and
sickness policies that provide benefit payments for disability income, death,
dismemberment, or major injury and are designed to supplement social security,
workers' compensation, and other insurance plans. The Company markets cancer
insurance policies designed to provide payments for hospitalization and
scheduled medical benefits. The accident and health products qualify as fringe
benefits that can be purchased with pre-tax employee dollars as part of a
flexible benefits program pursuant to Section 125 of the Internal Revenue Code.
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 the
Company's ability to continue marketing its products this way. However, the
Company believes its products provide value to its policyholders, which will
remain even if the tax advantages offered by flexible benefit programs are
eliminated.
Profitability of voluntary benefits products is affected by the level of
employee participation, persistency, deviations of actual morbidity and
mortality experience from expected experience, investment returns, and the
ability of the Company to control administrative expenses. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained herein in Item 7.
Other
The Other operating segment includes results from reinsurance pools and
management and other products no longer actively marketed, including corporate-
owned life insurance, group pension products, and individual annuities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained herein in Item 7.
During 1999, the Company concluded that the reinsurance pools and management
operations were not solidly aligned with the Company's strength in the
disability insurance market. The Company decided to exit these operations
through a combination of a sale, reinsurance, and/or placing certain components
in run-off. No potential buyers expressed interest in acquiring the entire
domestic and international reinsurance management operations. However, in
October 1999, the Company entered into an agreement to sell the reinsurance
management operations of its A&H and LTC reinsurance facilities and to reinsure
the Company's risk participation in these facilities.
Because of the limited interest expressed by potential buyers in the
reinsurance management operations, the Company reevaluated its strategy to exit
the reinsurance operations. The Company decided to continue to operate its
North America long-term disability reinsurance operation and to refocus it with
the objective of improving profitability. With respect to Lloyd's, the Company
decided to implement a strategy which limits participation in year 2000
underwriting risks, ceases participation in Lloyd's underwriting risks after
year 2000, and manages the run-off of its risk participation in open years of
account of Lloyd's reinsurance syndicates. The Company also decided to
discontinue its accident reinsurance business in London beginning in year 2000.
See Note 13 of the "Notes to Consolidated Financial Statements" for further
discussion of the reinsurance businesses.
Corporate-owned life insurance is a tax-leveraged policy sold from 1983 to
1990, with most of the block having been sold before mid-1986. Beginning in
1986, Congress began to enact tax legislation that significantly reduced the
ability of policyholders to deduct policy loan interest on these products which
detracted from the internal rate of return which theretofore had been
available. In 1988, Congress went further by enacting legislation that had
adverse tax consequences for distributions/policy loans from modified endowment
contracts.
9
Under this legislation, new sales of the majority of the Company's COLI
products would have been subject to adverse tax treatment as modified endowment
contracts due to their high premium level. As a consequence, many of these
products were withdrawn, and revised products which would not be considered
modified endowment contracts were introduced. Policies issued prior to the 1986
tax legislation, however, were grandfathered from the modified endowment
provisions. In 1996, Congress enacted tax legislation that generally eliminates
tax deductions for policy loan interest on corporate-owned life insurance
products issued subsequent to the 1986 tax legislation.
The Company no longer markets GICs, but continues to service its block of
existing business. The Company previously marketed GICs for use in corporate
tax-qualified retirement plans. Under GICs, the Company guarantees the
principal and interest to the contract holder for a specified period, generally
three to five years and derives profits on the spread between the amount of
interest earned on invested funds and the fixed rate guaranteed in the GIC.
Sales of group SPAs have also been discontinued. Group SPAs are used as funding
vehicles primarily when defined benefit pension plans are terminated. Under
SPAs, the Company received a one-time premium payment and in turn agreed to pay
a fixed monthly retirement benefit to specified employees. The Company
continues to adjust the investment portfolio to meet the obligations of the
scheduled maturities of the GICs.
As previously discussed, the Company sold its in-force individual and tax-
sheltered annuity business during 1998 and its group tax-sheltered annuity
business during 1996.
Corporate
The Corporate segment consists of revenue earned on corporate assets,
interest expense on corporate debt, amortization of goodwill, and certain
corporate expenses not allocated to a line of business.
Reinsurance
The Company routinely reinsures portions of its business with other
insurance companies. In a reinsurance transaction a reinsurer agrees to
indemnify another insurer for part or all of its liability under a policy or
policies it has issued for an agreed upon premium. The maximum amount of risk
retained by the Company and not reinsured is $500,000 on any group or
individual life insured and $500,000 on group and individual accidental death
insurance. The amount of risk retained by the Company on individual disability
income products varies by policy type and year of issue.
Since the ceding of reinsurance by the Company does not discharge its
primary liability to the policyholder, the Company has control procedures with
regard to reinsurance ceded. The Company evaluates the financial condition of
reinsurers and monitors concentration of credit risk to minimize this exposure.
These procedures include the exchange and review of financial statements filed
with regulatory authorities, exchange of Insurance Regulatory Information
System results, review of ratings by A.M. Best Company, determination of states
in which the reinsurer is licensed to do business, on-site visits before
entering a contract to assess the operations and management of the reinsurer,
consideration of the need for collateral, such as letters of credit, and audits
of the Company's reinsurance activities by its Internal Audit staff. The
Company also assumes reinsurance from other insurers. The reinsurance
receivable at December 31, 1999, relates to over 140 reinsurance relationships.
Of the six major relationships which account for approximately 75 percent of
the reinsurance receivable amount at December 31, 1999, all are with companies
rated A or better by A.M. Best Company or are fully securitized by investment-
grade fixed maturity securities held in trust.
See Note 13 of the "Notes to Consolidated Financial Statements" for further
discussion of the Company's reinsurance activities.
Reserves
The applicable insurance laws under which insurance companies operate
require that they report, as liabilities, policy reserves to meet future
obligations on their outstanding policies. These reserves are the
10
amounts which, with the additional premiums to be received and interest thereon
compounded annually at certain assumed rates, are calculated to be sufficient
to meet the various policy and contract obligations as they mature. These laws
specify that the reserves shall not be less than reserves calculated using
certain specified mortality and morbidity tables, interest rates, and methods
of valuation. The reserves reported in the Company's financial statements
incorporated herein by reference are calculated based on generally accepted
accounting principles followed in the United States (GAAP) and differ from
those specified by the laws of the various states and carried in the statutory
financial statements of the life insurance subsidiaries. These differences
arise from the use of mortality and morbidity tables and interest assumptions
which are believed to be more representative of the actual business than those
required for statutory accounting purposes and from differences in actuarial
reserving methods.
The consolidated statements of operations include the annual change in
reserves for future policy and contract benefits. The change reflects a normal
accretion for premium payments and interest buildup and decreases for policy
terminations such as lapses, deaths, and benefit payments.
Prior to the merger, Unum's process and assumptions used to calculate the
discount rate for claim reserves of certain disability businesses differed from
that used by Provident. While Unum's and Provident's methods were both in
accordance with GAAP, management believed that the combined entity should have
consistent discount rate accounting policies and methods for applying those
policies for similar products. Unum's former methodology used the same
investment strategy for assets backing both liabilities and surplus.
Provident's methodology, which allows for different investment strategies for
assets backing surplus than those backing product liabilities, was determined
by management to be the more appropriate approach for the Company. Accordingly,
at June 30, 1999 the Company adopted Provident's method of calculating the
discount rate for claim reserves.
The unpaid claim reserves for these disability lines as of June 30, 1999
were $5,318.3 million using the former method for determining reserve discount
rates and $5,559.0 million using the current method. The impact on 1999
earnings related to the change in method of calculating the discount rate for
claim reserves was $240.7 million before tax and $156.5 million after tax
during the second quarter.
Subsequent to the merger date, the Company began to integrate the valuation
procedures of the two organizations to provide for a more effective linking of
pricing and reserving assumptions and to facilitate a more efficient process
for adjusting liabilities to emerging trends. Included in this integration
activity were a review and an update of assumptions that underlie policy and
contract benefit liabilities. The purpose of the study was to confirm or update
the assumptions which were viewed as likely to affect the ultimate liability
for contract benefits. Accordingly, as a result of the merger, the Company
accelerated the performance of its normal reviews of the assumptions underlying
reserves to determine the assumptions that the newly merged Company will use in
the future for pricing, performance management, and reserving.
The review resulted in an increase in the benefits and reserves for future
benefits for the Company's domestic and Canadian group long-term disability
unpaid claim liabilities. As a result of the review, the Company increased its
policy and contract benefit liabilities $359.2 million, which reduced 1999
earnings $359.2 million before tax and $233.5 million after tax. The increase
in policy and contract benefit liabilities primarily resulted from revisions to
assumptions in the following three key components: claim termination rates,
incurred but not reported factors, and discount rates. See Note 2 of the "Notes
to Consolidated Financial Statements" for further discussion of these reserve
changes.
During the fourth quarter of 1998, the Company recorded a $153.0 million
increase in the reserve for individual and group disability claims incurred as
of December 31, 1998. Incurred claims include claims known as of that date and
an estimate of those claims that have been incurred but not yet reported.
Claims that have been incurred but not yet reported are considered liabilities
of the Company. These claims are expected to be reported during 1999 and will
be affected by the claims operations integration activities. The $153.0 million
claim reserve increase represents the estimated value of cash payments to be
made to these claimants over the life of the claims as a result of the claims
operations integration activities.
11
Management believes the reserve adjustment was required based upon the
integration plans it had in place and to which it had committed and based upon
its ability to develop a reasonable estimate of the financial impact of the
expected disruption to the claims management process. Claims management is an
integral part of the disability operations. Disruptions in that process can
create material, short-term increases in claim costs. The merger has had a
near-term adverse impact on the efficiency and effectiveness of the Company's
claims management function resulting in some delay in claim resolutions and
additional claim payments to policyholders. Claims personnel have been
distracted from normal claims management activities as a result of planning and
implementing the integration of the two companies' claims organizations. In
addition, employee turnover and additional training have reduced resources and
productivity. An important part of the claims management process is assisting
disabled policyholders with rehabilitation efforts. This complex activity is
important to the policyholders because it can assist them in returning to
productive work and lifestyles more quickly, and it is important to the Company
because it shortens the duration of claim payments and thereby reduces the
ultimate cost of settling claims.
The reserving process begins with the assumptions indicated by past
experience and modifies these assumptions for current trends and other known
factors. The Company anticipated the merger-related developments discussed
above would generate a significant change in claims department productivity,
reducing claim resolution rates, a key assumption when establishing reserves.
Management developed actions to mitigate the impact of the merger on claims
department productivity, and where feasible, management also planned to obtain
additional claims management resources through outsourcing. All such costs are
expensed in the period incurred and are not material in relation to results of
operations. Management reviewed its integration plans and the actions intended
to mitigate the impact of the integration with claims managers to determine the
extent of disruption in normal activities. The effect of integration activities
on new claim resolution rates is not expected to be material after December 31,
1999. See Note 7 of the "Notes to Consolidated Financial Statements" for a
complete discussion of the claim disruption reserve.
Competition
There is intense competition among insurance companies for the individual
and group insurance products of the types sold by the Company. At the end of
1999, there were over 2,000 legal reserve life insurance companies in the
United States, many offering one or more insurance products similar to those
marketed by the Company. In the individual and group disability markets, the
Company competes in the United States and Canada with a limited number of major
companies and regionally with other companies offering specialty products. The
Company's principal competitors in the voluntary benefits market and in the
employee benefits market for group life and long-term care products include the
largest insurance companies in the United States. In addition, in the
individual life market, the Company competes with banks, investment advisers,
mutual funds, and other financial entities for investment of savings and
retirement funds in general.
All areas of the employee benefits markets are highly competitive due to the
yearly renewable term nature of the products and the large number of insurance
companies offering products in this market. The Company competes with other
companies in attracting and retaining independent agents and brokers to
actively market its products. The principal competitive factors affecting the
Company's business are price and quality of service.
Regulation
The Company'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 forms; prescribing the type and amount of
investments permitted; and, in general, the conduct of all insurance
activities. The Company's insurance subsidiaries must meet the standards and
tests for investments promulgated by insurance laws and regulations of the
jurisdictions in which they are domiciled. Insurance subsidiaries operate under
12
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. The Company'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. See Note 18 of the "Notes to
Consolidated Financial Statements" for a discussion of permitted statutory
accounting practices.
The laws of the states of Maine, Tennessee, Massachusetts, South Carolina,
New York, and Delaware require the registration of and periodic reporting by
insurance companies domiciled within their jurisdiction which control or are
controlled by other corporations or persons so as to constitute a holding
company system. The Company is registered as a holding company system in Maine,
Tennessee, South Carolina, Massachusetts, New York, and Delaware. The holding
company statutes require periodic disclosure concerning stock ownership and
prior approval of certain intercompany transactions within the holding company
system. The Company may from time to time be subject to regulation under the
insurance and insurance holding company statutes of one or more additional
states.
The risk-based capital (RBC) standards for life insurance companies, as
prescribed by the National Association of Insurance Commissioners (NAIC),
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 the Company's insurance subsidiaries, measured
at December 31, 1999, were above the ranges that would require regulatory
action. See further discussion under "Risk Factors--Capital Adequacy."
Risk Factors
Any one or more of the following factors may cause the Company's actual
results for various financial reporting periods to differ materially from those
expressed in any forward looking statements made by or on behalf of the
Company. See "Cautionary Statement Regarding Forward-Looking Statements"
contained herein on page 1.
Reserves
The Company maintains reserves for future policy benefits and unpaid claims
expenses which include policy reserves and claim reserves established for its
individual disability insurance, group insurance, and individual life insurance
products. Policy reserves represent the portion of premiums received which are
reserved to provide for future claims. Claim reserves are established for
future payments not yet due on claims already incurred, primarily relating to
individual disability and group disability insurance products. Reserves,
whether calculated under GAAP or statutory accounting practices, do not
represent an exact calculation of future benefit liabilities but are instead
estimates made by the Company using actuarial and statistical procedures. There
can be no assurance that any such reserves would be sufficient to fund future
liabilities of the Company in all circumstances. Future loss development could
require reserves to be increased, which would adversely affect earnings in
current and future periods. Adjustments to reserve amounts may be required in
the event of changes from the assumptions regarding future morbidity (the
incidence of claims and the rate of recovery, including the effects thereon of
inflation and other societal and economic factors), persistency, mortality, and
interest rates used in calculating the reserve amounts.
Capital Adequacy
The capacity for an insurance company's growth in premiums is in part a
function of its statutory surplus. Maintaining appropriate levels of statutory
surplus, as measured by state insurance regulators, is considered important by
state insurance regulatory authorities and the private agencies that rate
insurers' claims-paying abilities and financial strength. Failure to maintain
certain levels of statutory surplus could result in increased regulatory
scrutiny, action by state regulatory authorities, or a downgrade by the private
rating agencies.
13
Effective in 1993, the NAIC adopted an RBC formula, which prescribes a
system for assessing the adequacy of statutory capital and surplus for all life
and health insurers. The basis of the system is a risk-based formula that
applies prescribed factors to the various risk elements in a life and health
insurer's business to report a minimum capital requirement proportional to the
amount of risk assumed by the insurer. The life and health RBC formula is
designed to measure annually (i) the risk of loss from asset defaults and asset
value fluctuation, (ii) the risk of loss from adverse mortality and morbidity
experience, (iii) the risk of loss from mismatching of asset and liability cash
flow due to changing interest rates, and (iv) business risks. The formula is to
be used as an early warning tool to identify companies that are potentially
inadequately capitalized. The formula is intended to be used as a regulatory
tool only and is not intended as a means to rank insurers generally.
Disability Insurance
Disability insurance may be affected by a number of social, economic,
governmental, competitive, and other factors. Changes in societal attitudes,
work ethics, motivation, stability, and mores can significantly affect the
demand for and underwriting results from disability products. Economic
conditions affect not only the market for disability products, but also
significantly affect the claims rates and length of claims. The climate and the
nature of competition in disability insurance have also been markedly affected
by the growth of social security, workers' compensation, and other governmental
programs in the workplace. The nature of that portion of the Company's
outstanding insurance business that consists of noncancelable disability
policies, whereby the policy is guaranteed to be renewable through the life of
the policy at a fixed premium, does not permit the Company to adjust its
premiums on business in-force on account of changes resulting from such
factors. Disability insurance products are important products for the Company.
To the extent that disability products are adversely affected in the future as
to sales or claims, the business or results of operations of the Company could
be materially adversely affected.
Industry Factors
All of the Company's businesses are highly regulated and competitive. The
Company's profitability is affected by a number of factors, including rate
competition, frequency and severity of claims, lapse rates, government
regulation, interest rates, and general business considerations. There are many
insurance companies which actively compete with the Company in its lines of
business, some of which are larger and have greater financial resources than
the Company, and there is no assurance that the Company will be able to compete
effectively against such companies in the future.
The modernization of the financial services industry as a result of the
Gramm-Leach-Bliley Act of 1999 is also likely to affect the future prospects of
the Company. This legislation eliminates many federal and state barriers to
affiliation among banks and securities firms, insurers, and their financial
service providers. At the same time, the legislation increases the separation
between financial service providers and other non-financial companies. The major
impacts, other than the potential for increased competition, include new federal
privacy rules, a requirement that states enact uniform laws and regulations
governing the licensure of individuals and entities authorized to solicit the
purchase of insurance within and outside a state, and authority given to
promulgate regulations granted to numerous federal agencies.
Selected Data of Segments
For information regarding the operations of segments, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained herein in Item 7.
Employees
At December 31, 1999, the Company had approximately 11,900 full-time
employees. Some employees in Argentina, comprising less than 1 percent of the
Company's total workforce, are members of a union.
ITEM 2. PROPERTIES
The Company occupies over 3,000,000 square feet of space at four principal
operating centers in Chattanooga, Tennessee, Portland, Maine, Worcester,
Massachusetts, and Columbia, South Carolina. The Company occupies two connected
buildings totaling 840,000 square feet in Chattanooga, Tennessee. The office
building and substantially all of the surrounding 25 acres of land used for
employee parking are owned by the Company in fee along with a 27-unit apartment
building for corporate use.
14
The Company occupies facilities in Portland, Maine, which are comprised of
eight owned facilities totaling 1,037,000 square feet of office space and 40
acres of associated land used primarily for parking. In addition, approximately
111,000 square feet of office space is leased and occupied in two buildings
with rents totaling $1.3 million per year.
The Company occupies facilities totaling 438,000 square feet in Worcester,
Massachusetts, with approximately 5.6 acres of surrounding property used
primarily for parking. In addition, the Company leases 15,000 square feet in
Springfield, Massachusetts, and 13,000 square feet in Auburn, Massachusetts.
The Company occupies approximately 547,000 square feet of office space in
Columbia, South Carolina. The buildings are located on approximately 47 acres
with a portion developed for employee parking.
The Company also owns office buildings in the United Kingdom and Argentina,
which serve as the home offices of Unum Limited and Boston Compania Argentina
de Seguros SA, respectively.
Additionally, the Company leases office space, for periods principally from
five to ten years, for use by its affiliates and sales forces.
ITEM 3. LEGAL PROCEEDINGS
Refer to Item 8 Note 17 of the "Notes to Consolidated Financial Statements"
for information on legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Common stock of UnumProvident Corporation is traded on the New York Stock
Exchange. The stock symbol is UNM. Dividends in the following table have been
restated to reflect the merger of Unum Corporation and Provident Companies,
Inc. as if it had been completed at the beginning of the earliest period
presented.
Market Price
------------------
High Low Dividend
-------- --------- --------
1999
1st Quarter.................................. $62 1/2 $43 13/16 $0.1428
2nd Quarter.................................. 59 1/2 42 7/16 0.1428
3rd Quarter.................................. 56 7/8 28 3/8 0.1475
4th Quarter.................................. 36 3/16 26 0.1475
1998
1st Quarter $55 9/16 $48 $0.1402
2nd Quarter.................................. 59 5/8 51 1/2 0.1428
3rd Quarter.................................. 59 3/8 44 0.1428
4th Quarter.................................. 60 1/16 42 0.1428
As of March 1, 2000 there were 23,403 registered holders of common stock.
The Company's dividend reinvestment plan offers shareholders of Company common
stock a convenient way to purchase additional shares of common stock without
paying brokerage fees, commissions, or other bank service fees. More
information and an authorization form may be obtained by writing or calling the
Company's transfer agent, First Chicago Trust Company of New York. The toll-
free customer service number is 1-800-446-2617.
For information on restrictions relating to the Company's insurance
subsidiaries' ability to pay dividends to the Company see "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained herein in Item 7 and Item 8 Note 18 of the "Notes to Consolidated
Financial Statements."
16
ITEM 6. SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(in millions, except share data)
Statement of
Operations Data
Premium Income.......... $ 6,843.2 $ 6,129.0 $ 5,293.1 $ 4,288.8 $ 4,147.6
Net Investment Income... 2,059.7 2,035.4 2,015.7 1,893.4 2,027.6
Net Realized Investment
Gains (Losses)......... 87.1 55.0 11.5 (5.2) 193.4
Other Income............ 339.6 299.9 357.0 148.2 187.1
---------- ---------- ---------- ---------- ----------
Total Revenue........... 9,329.6 8,519.3 7,677.3 6,325.2 6,555.7
Benefits and Expenses... 9,495.1 7,599.1 6,760.6 5,757.4 5,997.8
---------- ---------- ---------- ---------- ----------
Income (Loss) Before
Federal Income Taxes... (165.5) 920.2 916.7 567.8 557.9
Federal Income Taxes.... 17.4 302.8 299.1 184.2 161.2
---------- ---------- ---------- ---------- ----------
Net Income (Loss)....... $ (182.9) $ 617.4 $ 617.6 $ 383.6 $ 396.7
========== ========== ========== ========== ==========
Per Common Share
Information
Net Income (Loss)--
Basic.................. $ (0.77) $ 2.60 $ 2.62 $ 1.75 $ 1.81
Net Income (Loss)--
Assuming Dilution...... $ (0.77) $ 2.54 $ 2.57 $ 1.72 $ 1.80
Common Stockholders'
Equity at End of Year.. $ 20.73 $ 25.89 $ 23.46 $ 18.29 $ 17.89
Cash Dividends.......... $ 0.58 $ 0.57 $ 0.55 $ 0.53 $ 0.51
Weighted Average Common
Shares
Outstanding (000s)
--Basic............... 239,080.6 236,975.2 230,741.2 212,401.5 211,610.8
--Assuming Dilution... 239,080.6 242,348.9 235,818.2 215,301.1 212,988.8
Financial Position (at
End of Year)
Assets.................. $ 38,447.5 $ 38,602.2 $ 37,040.1 $ 30,813.8 $ 31,472.6
Long-term Debt,
Subordinated Debt
Securities, and
Preferred Stock........ $ 1,466.5 $ 1,525.2 $ 1,396.2 $ 927.0 $ 975.3
Stockholders' Equity.... $ 4,982.2 $ 6,146.2 $ 5,714.1 $ 4,001.7 $ 3,955.2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
On June 30, 1999, Unum Corporation (Unum) merged with and into Provident
Companies, Inc. (Provident) under the name UnumProvident Corporation. The
merger was accounted for as a pooling of interests. The historical financial
results discussed herein give effect to the merger as if it had been completed
at the beginning of the earliest period presented. See Notes 1 and 2 of the
"Notes to Consolidated Financial Statements" for further discussion.
The following should be read in conjunction with the consolidated financial
statements and notes thereto contained herein in Item 8.
This discussion of consolidated operating results and operating results by
segment excludes net realized investment gains and losses from revenue and
income (loss) before taxes. The Company's investment focus has been on
investment income to support its insurance liabilities as opposed to the
generation of realized investment gains. Due to the nature of the Company's
business, a long-term focus is necessary to maintain profitability over the
life of the business. The realization of investment gains and losses will
impact future earnings levels as the underlying business is long-term in nature
and requires that the Company be able to sustain the assumed interest rates in
its liabilities. However, income excluding realized investment gains and losses
does not replace net income as a measure of the Company's profitability.
17
Management believes that the trends in new annualized sales in the Employee
Benefits, Individual, and Voluntary Benefits segments are important for
investors to assess in their analysis of the Company's results of operations.
The trends in new sales are indicators of the Company's potential for growth in
its respective markets and the level of market acceptance of price changes and
new products. The Company has closely linked its various incentive compensation
programs to the achievement of its goals for new sales and renewals of existing
business. The Company's long-term financial objectives, which balance growth
and profitability, are to achieve sales growth of 10 to 12 percent per year,
earnings per share growth of 12 to 14 percent per year, and a return on equity
of 14 to 16 percent per year.
Accounting Policy Changes, Financial Statement Reclassifications, and Merger
Expenses
As a result of the merger, certain accounting policy changes and
reclassification adjustments were made during 1999. The following summarizes
these changes and reclassifications as well as the expenses related to the
merger and the early retirement offer to employees.
The Company values its available-for-sale fixed maturity and equity
securities at fair value, with unrealized holding gains and losses reported as
a component of comprehensive income. Companies are required to also adjust
deferred acquisition costs and/or certain policyholder liabilities to reflect
the changes that would have been necessary if the unrealized investment gains
and losses related to the available-for-sale securities had been realized.
Prior to the merger, Unum adjusted policyholder liabilities and Provident
adjusted deferred policy acquisition costs (DPAC) and value of business
acquired (VOBA) for those products where these assets existed. To present
financial information in a common reporting format, management has determined
that the combined entity will adjust policyholder liabilities rather than DPAC
and VOBA. Prior period financial statements have been restated to reflect this
reclassification. The reclassification did not change other comprehensive
income, accumulated other comprehensive income, or fixed maturity and equity
securities. The reclassification reflected in the December 31, 1998,
consolidated statement of financial condition resulted in an increase of $329.7
million in DPAC, $1.5 million in VOBA, and $331.2 million in reserves for
future policy and contract benefits.
Generally, because of the effort and time involved, reviews and updates of
assumptions related to benefit liabilities are periodically undertaken over
time and are reflected in the calculation of benefit liabilities as completed.
Many factors influence assumptions underlying reserves, and considerable
judgment is required to interpret current and historical experience underlying
all of the assumptions and to assess the future factors that are likely to
influence the ultimate cost of settling existing claims.
Prior to the June 30, 1999 merger, Unum's process and assumptions used to
calculate the discount rate for claim reserves of certain disability businesses
differed from that used by Provident. While Unum's and Provident's methods for
calculating the discount rate for disability claim reserves were both in
accordance with generally accepted accounting principles, management believed
that the combined entity should have consistent discount rate accounting
policies and methods for applying these policies for similar products. The
previous Unum methodology used the same investment strategy for assets backing
both liabilities and surplus. Provident's methodology, which allows for
different investment strategies for assets backing surplus than those backing
product liabilities, was determined by management to be the more appropriate
approach for the combined entity. Accordingly, at June 30, 1999, the Company
adopted Provident's method of calculating the discount rate for claim reserves.
The impact on 1999 earnings related to the change in method of calculating the
discount rate for claim reserves was $240.7 million before tax and $156.5
million after tax. The charge was reflected in the Employee Benefits,
Individual, and Other segments as an increase in benefits to policyholders of
$191.7 million, $38.9 million, and $10.1 million, respectively.
Subsequent to the merger date, the Company began to integrate the valuation
procedures of the two organizations to provide for a more effective linking of
pricing and reserving assumptions and to facilitate a more efficient process
for adjusting liabilities to emerging trends. Included in this integration
activity were a review and an update of assumptions that underlie policy and
contract benefit liabilities. The purpose of the
18
study was to confirm or update the assumptions which were viewed as likely to
affect the ultimate liability for contract benefits. Accordingly, as a result
of the merger, the Company accelerated the performance of its normal reviews of
the assumptions underlying reserves to determine the assumptions that the newly
merged Company will use in the future for pricing, performance management, and
reserving.
The review resulted in an increase in the benefits and reserves for future
benefits for the Company's domestic group long-term disability unpaid claim
liabilities. As a result of the review, the Company increased its policy and
contract benefit liabilities $359.2 million in the third quarter of 1999, which
reduced 1999 results $359.2 million before tax and $233.5 million after tax.
See Note 2 of the "Notes to Consolidated Financial Statements" for further
discussion of these charges and "Liquidity and Capital Resources" for a
discussion of capital and financing needs.
Subsequent to the merger, the Company also completed a review of the
methodology and assumptions used for the capitalization and amortization of the
costs of acquiring new business. The result of the review was immaterial and
was reflected in 1999 operating earnings, which were increased approximately
$8.0 million during 1999 to reflect the application of the revised estimate.
The change in estimate was applied to amounts capitalized in 1999 and will be
applied to future years to reflect the combined entity's practices and pricing
assumptions. There was not a need to adjust amounts capitalized in years prior
to 1999, as those amounts are believed to be recoverable from the related
policies. A key element in the ability to recover amounts capitalized in prior
periods is the persistency of the business. The Company monitors persistency
and reflects adverse changes in persistency in the current year's amortization
of deferred acquisition costs. Actual persistency experienced during the fourth
quarter of 1999 for group disability and group life compared unfavorably to the
persistency expected, resulting in additional amortization of $5.2 million
during 1999. It is expected that persistency in 2000 will continue to be lower
than historical levels for group disability as well as group life, which will
unfavorably impact the level of amortization during 2000.
During 1999, the Company recorded before-tax expenses related to the merger
of approximately $184.7 million ($139.6 million after tax) for severance and
related costs, exit costs for duplicate facilities and asset abandonments, and
investment banking, legal, and accounting fees. The Company also recorded in
1999 a before-tax expense of approximately $125.9 million ($81.8 million after
tax) related to the early retirement offer to the Company's employees. These
expenses are reported in the Corporate segment as other operating expenses and
are further discussed in the section "Corporate Segment Operating Results."
Additionally, in 1999 the Company expensed $24.7 million ($16.1 million after
tax) of incremental costs associated with the merger. These incremental costs
consist primarily of compensation, training, integration, and licensing costs.
Consolidated Operating Results
Year Ended December 31
----------------------------------------------
1999 % Change 1998 % Change 1997
-------- -------- -------- -------- --------
(in millions of dollars)
Premium Income................... $6,843.2 11.7% $6,129.0 15.8 % $5,293.1
Net Investment Income............ 2,059.7 1.2 2,035.4 1.0 2,015.7
Other Income..................... 339.6 13.2 299.9 (16.0) 357.0
-------- -------- --------
Total Revenue.................... 9,242.5 9.2 8,464.3 10.4 7,665.8
Benefits and Expenses............ 9,495.1 25.0 7,599.1 12.4 6,760.6
-------- -------- --------
Income (Loss) Before Federal
Income Taxes and Net Realized
Investment Gains................ (252.6) N.M. 865.2 (4.4) 905.2
Federal Income Taxes (Credit).... (12.9) N.M. 283.9 (3.8) 295.2
-------- -------- --------
Income (Loss) Before Net Realized
Investment Gains................ (239.7) N.M. 581.3 (4.7) 610.0
Net Realized Investment Gains.... 56.8 57.3 36.1 N.M. 7.6
-------- -------- --------
Net Income (Loss)................ $ (182.9) N.M. $ 617.4 N.M. $ 617.6
======== ======== ========
- --------
N.M. = not a meaningful percentage
19
The Company acquired The Paul Revere Corporation (Paul Revere) on March 27,
1997. The financial information contained herein includes the accounts and
operating results of Paul Revere from the date of acquisition.
In addition to the increases in benefit liabilities of $599.9 million and
the merger-related and early retirement offer expenses of $310.6 million
discussed in the previous section, during 1999 the Company recognized $327.8
million of before-tax charges related to its reinsurance operations. These
charges are as follows (in millions):
North American Reinsurance Operations:
Loss on Sale of A&H and LTC Reinsurance Management Operations
(includes write-off of $6.0 million of goodwill)................ $ 12.9
Loss on Reinsurance of A&H and LTC Risk Participations........... 12.7
Provision for Losses on Retained Business........................ 42.1
International Reinsurance Operations:
Provision for Losses on Lloyd's of London Syndicate
Participations.................................................. 186.5
Provision for Losses on Reinsurance Pool Participations Other
than Lloyd's.................................................... 21.9
Goodwill Impairment Excluding Amount Recognized on Sale.......... 51.7
------
Total Before-tax Charge........................................ $327.8
======
See "Other Segment Operating Results" and Note 13 of the "Notes to
Consolidated Financial Statements" for further discussion of the Company's
reinsurance operations.
A portion of the losses recognized in 1999 relating to the Company's
reinsurance operations does not receive a tax benefit, which unfavorably
impacted the effective tax rate. Additionally, a portion of the 1999 expenses
related to the merger was non-deductible for federal income tax purposes,
resulting in a tax rate that was less than the U.S. federal statutory tax rate
of 35 percent.
In 1999, the Company recorded refunds from the Internal Revenue Service
relating to the final settlement of remaining issues for the 1986 through 1992
tax years. The refund of taxes was $30.4 million, and interest on the refunds
was $35.4 million. Overall, including interest and the tax provision thereon,
1999 results increased $36.8 million due to settlements of prior year tax
issues.
20
In the following discussion of operating results by segment, "revenue"
includes premium income, net investment income, and other income. "Income" or
"loss" excludes net realized investment gains and losses and federal income
taxes.
Employee Benefits Segment Operating Results
Year Ended December 31
----------------------------------------------
1999 % Change 1998 % Change 1997
-------- -------- -------- -------- --------
(in millions of dollars)
Premium Income
Group Long-term Disability................ $2,034.7 13.0% $1,800.7 17.3% $1,535.4
Group Short-term Disability............... 473.7 28.9 367.4 35.1 271.9
Group Life................................ 1,158.2 17.8 983.5 21.1 812.4
Accidental Death & Dismemberment.......... 190.7 3.6 184.1 8.9 169.0
Group Long-term Care...................... 42.9 49.5 28.7 34.1 21.4
-------- -------- --------
Total Premium Income....................... 3,900.2 15.9 3,364.4 19.7 2,810.1
Net Investment Income...................... 604.9 11.6 541.8 6.8 507.2
Other Income............................... 140.2 17.6 119.2 28.7 92.6
-------- -------- --------
Total Revenue.............................. 4,645.3 15.4 4,025.4 18.1 3,409.9
-------- -------- --------
Benefits and Change in Reserve............. 3,663.9 38.6 2,642.6 21.5 2,174.5
Deferral of Policy Acquisition Costs....... (249.2) 17.2 (212.6) 36.5 (155.8)
Amortization of Deferred Policy Acquisition
Costs..................................... 106.6 29.1 82.6 23.8 66.7
Other Operating Expenses................... 1,104.6 13.1 976.5 14.2 855.0
-------- -------- --------
Total Benefits and Expenses................ 4,625.9 32.6 3,489.1 18.7 2,940.4
-------- -------- --------
Income Before Federal Income Taxes and
Net Realized Investment Gains and Losses.. $ 19.4 N.M. $ 536.3 14.2 $ 469.5
======== ======== ========
The Employee Benefits segment includes group long-term and short-term
disability insurance, group life insurance, accidental death and dismemberment
coverages, group long-term care, and the results of managed disability.
The increases in premium income result from strong sales trends over the
past several quarters as well as an emphasis on renewal of existing business.
However, the rate of growth for group disability and group life sales decreased
during 1999. Several factors contributed to the decrease in sales, including
rate increases, turnover in the field sales force, and merger-related
activities (training, office relocation, and new processes and systems). The
Company has a number of initiatives underway to help restore sales momentum,
including targeted incentive plans, organizational changes to create a greater
focus on the customer, and enhanced communication with producers. The Company
expects that these actions will favorably impact future sales growth, but
management intends to maintain pricing discipline to balance sales growth and
profitability which will likely lead to lower long-term sales growth than
historically experienced by the Company. Employee Benefits new annualized sales
decreased 2.9 percent to $952.5 million in 1999 from $981.1 million 1998. New
annualized sales were $804.2 million in 1997.
Premium persistency for group long-term and short-term disability in the
fourth quarter of 1999 was lower than historical levels due to several large
case terminations, the aggressive renewal program, and the disruption in the
field sales force. For both products, the terminated block was less profitable
than the total block. It is expected that persistency in 2000 will continue to
be lower than historical levels for group disability as well as group life.
Revenue from the managed disability line of business, which includes GENEX
Services, Inc. and Options and Choices, Inc., totaled $107.8 million in 1999
compared to $96.2 million in 1998 and $72.8 million in 1997. Both of these
companies were acquired during 1997.
21
Group Disability
Group disability revenue increased to $3,029.0 million in 1999 compared to
$2,632.1 million in 1998. Premium income growth was driven primarily by prior
period sales. As previously discussed, the rate of growth in new sales declined
during 1999. New annualized sales for group long-term disability were $385.2
million in 1999 compared to $441.7 million in 1998. New annualized sales for
group short-term disability were $172.0 million in 1999 as compared to $176.2
million in 1998. A critical part of the Company's strategy for group disability
during 2000 involves executing an aggressive renewal program and managing
persistency, both of which management expects will have a positive impact on
future premium growth and profitability. However, the lower than historical
premium persistency experienced during the fourth quarter of 1999 will have a
negative impact on future premium income. The Company is implementing pricing
changes in the group disability line. Prices will increase or decrease by
market segment, as appropriate, to respond to current claim experience and
various other factors and assumptions.
Net investment income is expected to continue to increase due to the
increase in the level of invested assets allocated to this line of business and
also due to the portfolio restructuring, as discussed in "Investments."
Group disability reported a loss of $225.7 million for 1999, as compared
with $334.4 million of income for 1998. The loss was the result of the $191.7
million second quarter 1999 charge resulting from lowering the discount rate
used to calculate certain of Unum's disability claim reserves to conform with
Provident's process and assumptions and the $359.2 million third quarter 1999
charge resulting from the revision in the underlying assumptions used to
estimate the ultimate cost of unpaid group long-term disability claims, as
discussed in the preceding "Accounting Policy Changes, Financial Statement
Reclassifications, and Merger Expenses." Excluding the effect of these two
charges, this line reported an 83.5 percent benefit ratio for 1999. The benefit
ratio for 1998 was 79.4 percent, excluding the effect of the fourth quarter of
1998 claims disruption charge discussed in the following paragraphs. The
incidence rates for new claims submitted for long-term disability increased
during 1999 over the level experienced in 1998, but new claim incidence rates
in the third and fourth quarters of 1999 improved relative to levels
experienced in the first half of 1999 and the last half of 1998. Small case
business continues to perform well, and large case and mid-size business showed
improvement in 1999. The health services sector continues to experience higher
incidence levels than average, but improved in the last half of 1999. Incidence
levels for the manufacturing sector also improved, declining to the levels
experienced prior to the third quarter of 1998. The incidence rates for new
claims submitted for short-term disability improved during 1999 as compared to
1998. The level of claim incidence for long-term and short-term disability is
being taken into account in the pricing of new business and the renewal of
existing cases.
As explained in more detail below, the actual increase in claims durations
during 1999 was greater than the increase assumed in the fourth quarter of 1998
claims disruption charge, resulting in a negative impact on the 1999 benefit
ratio. Additionally, the 1998 benefit ratio was positively impacted by the
updated factors used in calculating social security offset amounts.
The amortization of deferred policy acquisition costs for 1999 includes $4.2
million of additional amortization due to the higher than expected level of
terminations for long-term and short-term disability experienced during the
fourth quarter of 1999. Also included in 1999 is $3.3 million of amortization
related to the write-off of the unamortized balance of deferred costs related
to certain discontinued products in the foreign operations.
Group disability revenue increased to $2,632.1 million in 1998 compared to
$2,245.1 million in 1997 primarily due to the increase in premium income.
Premium growth during 1998 for group long-term disability was driven by
favorable persistency, prior period sales, and strong new annualized sales,
which were $441.7 million in 1998 compared to $374.7 million in 1997. New
annualized sales for group short-term disability increased 30.4 percent to
$176.2 million in 1998 as compared to $135.1 million in 1997. This growth
reflected management's continuing efforts to cross-sell group short-term
disability products with other employee benefits products, as well as
increasing large case sales.
22
Group disability reported income of $334.4 million in 1998 as compared with
$326.2 million in 1997. Long-term disability 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. Positively impacting the benefit ratio in 1998
were updated factors used in calculating social security offset amounts. Short-
term disability also experienced increased claims incidence levels and larger
size cases in 1998 as compared with 1997.
In the fourth quarter of 1998, the Company recorded a $50.3 million charge
for the group long-term disability line of business in the Employee Benefits
segment for the expected increase in claims durations due to management's
expectation that productivity in the claims organization would be impacted as a
result of planning, consolidation, and integration efforts related to the
merger. Management expects the claims integration efforts to have some
benefits, primarily related to claims incurred in future periods, as well as
the potential for improved customer satisfaction and lower ultimate claim costs
as best practices in return-to-work and claims management are implemented. As
benefits related to the integration become known, reserve assumptions will be
revised, if appropriate. Insurance policies that are impacted by the temporary
change in claim resolution rates will not perform as anticipated when priced.
However, since the cause of the additional claim cost is of a temporary nature,
it is not anticipated to have an effect on future policy pricing. The
$50.3 million reserve increase was not considered material from a capital
adequacy position.
During 1999, the claim operations integration activities progressed as
assumed. At December 31, 1998, management assumed the revised group disability
claim resolution rates for the first, second, third, and fourth quarters of
1999 to be 90, 90, 81, and 86 percent of assumptions, respectively, before
adjusting for the impact of the claim operations integration activities. The
actual experience was 89 percent for the first quarter of 1999, 90 percent for
the second quarter, 67 percent for the third quarter, and 81 percent for the
fourth quarter. If the impact of merger-related claim operations integration
activities on claim durations had not been anticipated at December 31, 1998,
the 1999 loss for the group long-term disability line of business would have
been negatively impacted by $50.3 million. However, the shortfall of the actual
1999 experience below that assumed resulted in a negative effect on 1999
results of $18.1 million. As discussed in Note 2 of the "Notes to Consolidated
Financial Statements," claim resolution assumptions underlying existing claim
reserves were revised in the third quarter of 1999, resulting in an increase in
benefit liabilities of $194.8 million. In selecting the revised claim
resolution assumptions, consideration was given to claims operations
integration activities referenced here as well as other factors expected to
impact the future effectiveness of the claims operations. See Notes 2 and 7 of
the "Notes to Consolidated Financial Statements" for further discussion.
As discussed under "Cautionary Statement Regarding Forward-Looking
Statements," certain risks and uncertainties are inherent in the Company'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 1999 and 1998. Therefore, management
continues to monitor claims experience in group disability and responds to
changes by periodically adjusting prices, refining underwriting guidelines,
changing product features, and strengthening risk management policies and
procedures. The Company expects to price new business and re-price existing
business, at contract renewal dates, in an attempt to mitigate the effect of
these and other factors, including interest rates, on new claim liabilities.
However, given the competitive market conditions for the Company's disability
products, it is uncertain whether pricing actions can mitigate the entire
effect.
Group Life, Accidental Death and Dismemberment, and Long-term Care
Group life, accidental death and dismemberment, and long-term care reported
income of $239.5 million in 1999 compared to $197.5 million in 1998. The
increase resulted from the growth in premium income, which was driven by strong
prior period sales, and a lower operating expense ratio. The results also
benefited from higher net investment income and a higher volume of business.
There was a slight increase in the benefit ratio, from 72.7 percent in 1998 to
73.3 percent in 1999, primarily due to an increase in the average claim size in
the group life line of business.
23
New annualized sales increased to $395.3 million in 1999 compared to $363.2
million in 1998. Premium persistency for group life in the latter part of 1999
was lower than historical levels, and it is expected that persistency in 2000
will continue to be lower than historical levels. The amortization of deferred
policy acquisition costs for 1999 includes $1.0 million of additional
amortization due to the higher than expected level of terminations.
Group life, accidental death and dismemberment, and long-term care reported
income of $197.5 million in 1998 compared to $141.4 million in 1997. The
increase in 1998 income resulted from the growth in premium income, which was
driven by strong sales, and a favorable benefit ratio in the group life and
accidental death and dismemberment lines. New annualized sales were $363.2
million in 1998 and $294.4 million in 1997.
Individual Segment Operating Results
Year Ended December 31
-----------------------------------------------
1999 % Change 1998 % Change 1997
-------- -------- -------- -------- --------
(in millions of dollars)
Premium Income
Individual Disability..................... $1,553.5 1.6 % $1,528.7 13.1 % $1,351.8
Individual Life........................... 85.1 (0.5) 85.5 3.3 82.8
Individual Long-term Care................. 92.0 50.3 61.2 33.9 45.7
-------- -------- --------
Total Premium Income....................... 1,730.6 3.3 1,675.4 13.2 1,480.3
Net Investment Income...................... 873.1 5.5 827.8 19.5 692.7
Other Income............................... 68.2 1.2 67.4 (15.3) 79.6
-------- -------- --------
Total Revenue.............................. 2,671.9 3.9 2,570.6 14.1 2,252.6
-------- -------- --------
Benefits and Change in Reserve............. 1,719.9 2.2 1,682.1 17.9 1,426.7
Deferral of Policy Acquisition Costs....... (209.1) 14.3 (182.9) 28.8 (142.0)
Amortization of Deferred Policy Acquisition
Costs..................................... 89.5 20.0 74.6 8.4 68.8
Other Operating Expenses................... 781.7 1.0 774.2 17.5 659.0
-------- -------- --------
Total Benefits and Expenses................ 2,382.0 1.4 2,348.0 16.7 2,012.5
-------- -------- --------
Income Before Federal Income Taxes and
Net Realized Investment Gains and Losses.. $ 289.9 30.2 $ 222.6 (7.3) $ 240.1
======== ======== ========
The Individual segment includes results from the individual disability,
individual life, and individual long-term care lines of business.
Individual Disability
New annualized sales in the individual disability income line of business
were $124.1 million in 1999 and $136.6 million in 1998. As discussed in the
"Employee Benefits Segment Operating Results," several factors contributed to
the decrease in sales, including rate increases, turnover in the sales force,
and merger-related activities. However, the persistency of existing individual
disability income business continued to be favorable during 1999. Management
expects that premium income in the individual disability income line will grow
on a year-over-year basis as the product transition produces increasing levels
of new sales of individual disability products and as a result of the sales
initiatives discussed under "Employee Benefits Segment Operating Results."
Income in the individual disability income line of business increased to
$256.7 million in 1999 from $190.0 million in 1998. As discussed in the
preceding "Accounting Policy Changes, Financial Statement Reclassifications,
and Merger Expenses," in the second quarter of 1999 the Company lowered the
discount rate used to calculate certain of Unum's disability claim reserves to
conform with Provident's process and assumptions, which decreased individual
disability income by $38.9 million in 1999.
24
This line reported an increase in the benefit ratio in 1999 compared to
1998. The 1999 claim resolution rate compares unfavorably with 1998, but has
shown improvement throughout 1999. New claims for 1999 were fairly level with
1998. This line benefited from higher net investment income and a favorable
operating expense ratio for 1999 as compared to 1998.
Revenue for individual disability was $2,299.8 million in 1998 and $2,018.8
million in 1997. The growth in revenue in 1998 was driven primarily by the
growth in premium income as well as net investment income. New annualized sales
in the individual disability line of business were up 8.6 percent in 1998,
rising to $136.6 million from $125.8 million in 1997.
Income in the individual disability line of business decreased to $190.0
million in 1998 from $207.5 million in 1997. As noted in the "Employee Benefits
Segment Operating Results," claim resolution rates were revised downward in the
fourth quarter of 1998 for claim operations integration activities related to
the merger. The Company recorded a $100.3 million charge in the fourth quarter
of 1998 in the Individual segment related to the revised claim resolution rates
for individual disability. At December 31, 1998, management assumed the revised
individual disability claim resolution rates for the first, second, third, and
fourth quarters of 1999 to be 90, 90, 85, and 90 percent of assumptions, before
adjusting for the impact of the claim operations integration activities. The
actual experience for the Company was 89 percent in the first quarter, 90
percent in the second quarter, 93 percent in the third quarter, and 95 percent
in the fourth quarter of 1999. If the impact of merger-related claim operations
integration activities on claim durations had not been anticipated at
December 31, 1998, income for the individual disability line of business would
have been negatively impacted by $100.3 million in 1999. In addition, the
excess of the actual 1999 experience over that assumed resulted in a positive
effect on income of $25.6 million. The $100.3 million reserve increase in the
Individual segment was not considered material from a capital adequacy
position. See Note 7 of the "Notes to Consolidated Financial Statements" for
further discussion.
Individual Life and Long-term Care
The individual long-term care line of business reported increased premium
income for both 1999 and 1998 as compared to the previous year, primarily due
to new sales growth. New annualized sales were $40.0 million for 1999, an
increase of 70.2 percent over the $23.5 million reported in 1998. New
annualized sales were $14.8 million in 1997. The Company expects the strong
sales momentum in individual long-term care to continue.
Income in the individual life and long-term care lines of business increased
slightly to $33.2 million in 1999 from $32.6 million in 1998. The benefit ratio
and operating expense ratio for individual life improved in 1999 as compared to
1998. The 1999 operating expense ratio for long-term care also compares
favorably with 1998. Income in the individual life and long-term care lines of
business was $32.6 million in 1997. The increase in premium income for 1998 was
offset by a less favorable benefit ratio.
25
Voluntary Benefits Segment Operating Results
Year Ended December 31
--------------------------------------------
1999 % Change 1998 % Change 1997
------- -------- ------- -------- -------
(in millions of dollars)
Premium Income.................... $ 691.6 3.7 % $ 666.7 6.4 % $ 626.6
Net Investment Income............. 106.6 12.4 94.8 12.2 84.5
Other Income...................... 6.3 (29.2) 8.9 (5.3) 9.4
------- ------- -------
Total Revenue..................... 804.5 4.4 770.4 6.9 720.5
------- ------- -------
Benefits and Change in Reserve.... 392.7 6.3 369.4 4.3 354.2
Deferral of Policy Acquisition
Costs............................ (147.8) 1.4 (145.7) 14.5 (127.2)
Amortization of Deferred Policy
Acquisition Costs................ 113.0 13.7 99.4 13.2 87.8
Other Operating Expenses.......... 309.6 (2.1) 316.2 7.0 295.6
------- ------- -------
Total Benefits and Expenses....... 667.5 4.4 639.3 4.7 610.4
------- ------- -------
Income Before Federal Income Taxes
and Net Realized Investment Gains
and Losses....................... $ 137.0 4.5 $ 131.1 19.1 $ 110.1
======= ======= =======
The Voluntary Benefits segment includes the results of products sold to
employees through payroll deduction at the work site. These products include
life insurance and health products, primarily disability, accident and
sickness, and cancer.
Revenue in the Voluntary Benefits segment increased to $804.5 million in
1999 from $770.4 million 1998. Sales growth and favorable persistency were the
primary factors contributing to the increase in premium income. New annualized
sales in this segment were $245.3 million in 1999, $233.8 million in 1998, and
$253.5 million in 1997. Management continues its efforts to increase sales
through the realignment of the sales organization and the enhancement of
collaborative sales. However, these sales are not necessarily indicative of the
levels that may be attained in the future.
Income in the Voluntary Benefits segment in 1999 was $137.0 million versus
$131.1 million in 1998. The increase in income for 1999 was primarily due to
the increase in premium income in all of the product lines and an increase in
investment income, partially offset by a slightly higher benefit ratio in the
life and the accident, sickness, and disability product lines.
Income for this segment increased for 1998 as compared with 1997, primarily
due 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 work site marketed universal life insurance under reinsurance
agreements entered into during 1998 and 1997. During 1998, management continued
to implement organizational changes to focus on specific distribution channels
to market Voluntary Benefits products.
Other Segment Operating Results
Year Ended December 31
-----------------------------------------------
1999 % Change 1998 % Change 1997
-------- -------- -------- -------- --------
(in millions of dollars)
Premium Income............................... $ 520.8 23.3 % $ 422.5 12.3 % $ 376.1
Net Investment Income........................ 447.5 (17.1) 540.0 (23.3) 704.0
Other Income................................. 84.8 (18.2) 103.7 (40.1) 173.1
-------- -------- --------
Total Revenue................................ 1,053.1 (1.2) 1,066.2 (14.9) 1,253.2
Benefits and Expenses........................ 1,267.4 31.3 965.5 (11.9) 1,096.0
-------- -------- --------
Income (Loss) Before Federal Income Taxes and
Net Realized Investment Gains and Losses.... $ (214.3) N.M. $ 100.7 (35.9) $ 157.2
======== ======== ========
26
The Other operating segment includes results from reinsurance pools and
management and other products no longer actively marketed, including corporate-
owned life insurance, group pension products, and individual annuities. It is
expected that revenue and income in this segment will decline over time as
these business lines wind down. Management expects to reinvest the capital
supporting these lines of business in the future growth of the Employee
Benefits, Individual, and Voluntary Benefits segments. The closed blocks of
business have been segregated for reporting and monitoring purposes. During
1999, the Company recognized a charge of $270.1 million in the Other segment
related to its decision to exit the reinsurance operations.
Reinsurance Pools and Management
Premium income increased to $423.9 million in 1999 compared to $311.8
million in 1998 due primarily to increased participation in the Lloyd's of
London syndicates. The reinsurance pools and management reported a loss of
$279.7 million in 1999 compared to income of $10.0 million in 1998. Income in
the reinsurance pools and management line decreased $270.1 million in 1999 due
to the charges discussed below.
During the first quarter of 1999, the Company began a comprehensive
strategic review of its reinsurance operations to determine the appropriateness
of their fit within the context of the merged entity. These operations include
the reinsurance management operations of Duncanson & Holt, Inc. (D&H) and the
risk assumption, which includes reinsurance pool participation; direct
reinsurance which includes accident and health (A&H), long-term care (LTC), and
long-term disability coverages; and Lloyd's of London (Lloyd's) syndicate
participations. In April 1999, the strategic review was completed, and the
Company concluded that these operations were not solidly aligned with the
Company's strength in the disability insurance market. The Company decided to
exit these operations through a combination of a sale, reinsurance, and/or
placing certain components in run-off and recorded a first quarter charge of
$74.1 million in the Other segment. During the first and second quarters of
1999, the Company recorded $27.0 million and $2.0 million, respectively, in the
Corporate segment related to the write-off of goodwill.
During the third quarter of 1999, the Company continued its efforts to sell
its reinsurance management operations. No potential buyers expressed interest
in acquiring the entire domestic and international reinsurance management
operations. However, in October 1999, the Company entered into an agreement to
sell the reinsurance management operations of its A&H and LTC reinsurance
facilities and to reinsure the Company's risk participation in these
facilities.
Because of the limited interest expressed by potential buyers in the
reinsurance management operations, the Company reevaluated its strategy to exit
the reinsurance operations. The Company decided to continue to operate its
North America long-term disability reinsurance operation and to refocus it with
the objective of improving profitability. With respect to Lloyd's, the Company
decided to implement a strategy which limits participation in year 2000
underwriting risks, ceases participation in Lloyd's underwriting risks after
year 2000, and manages the run-off of its risk participation in open years of
account of Lloyd's reinsurance syndicates. The Company also decided to
discontinue its accident reinsurance business in London beginning in year 2000.
During the third quarter of 1999, the Company recognized a charge of $193.3
million in the Other segment and $28.7 million in the Corporate segment related
to the write-off of goodwill. An additional loss of $2.7 million was realized
in the fourth quarter of 1999 upon completion of the transaction to reinsure
the A&H and LTC risk participations. See Note 13 of the "Notes to Consolidated
Financial Statements" for further discussion of the 1999 charges related to the
reinsurance businesses.
As discussed in the preceding "Accounting Policy Changes, Financial
Statement Reclassifications, and Merger Expenses," the Company lowered the
discount rate used to calculate certain of Unum's disability claim reserves to
conform with Provident's process and assumptions, which decreased group long-
term disability reinsurance income by $10.1 million in 1999.
In the fourth quarter of 1998, the Company recorded a $2.4 million charge
related to the revised claim resolution rates for group long-term disability
reinsurance. If the impact of merger-related claim operations
27
integration activities on claim duration had not been anticipated at December
31, 1998, 1999 income for the reinsurance pools and management line of business
would have been negatively impacted by $2.4 million. See Note 7 of the "Notes
to Consolidated Financial Statements" for further discussion.
During the fourth quarter of 1997, certain reinsurance pools managed by the
Company's reinsurance management operations 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 strengthened claim reserves. The impact to the Company
from these pool claim reserve increases was an $11.7 million reduction in other
income and a $6.7 million increase in benefits to policyholders, reducing 1997
before-tax income by $18.4 million. The $11.7 million reduction in other income
reflected lower profit commission levels in certain older pool years after the
pool claim reserve strengthening. The $6.7 million increase in benefits to
policyholders represented the amount of additional claim reserves the Company
recognized as a result of its participation in the pools that strengthened
claim reserves.
Corporate-Owned Life
Income from this line of business was $29.8 million in 1999, $27.9 million
in 1998, and $19.4 million in 1997. The 1999 results reflect slightly higher
premium income and wider spreads between interest earned and credited rates.
The increase in 1998 was due to wider spreads between interest earned and
credited rates and a decrease in commissions and operating expenses.
Group Pension
Income in the group pension line of business was $26.6 million in 1999,
$23.2 million in 1998, and $111.6 million in 1997. In the fourth quarter of
1996, the Company closed the sale of certain of Unum's group tax-sheltered
annuity businesses to affiliates of Lincoln National Corporation. The sale
resulted in a deferred before-tax gain of which $72.6 million was recognized in
income during 1997. Also contributing to the decrease in 1998 income was an
$8.0 million reserve strengthening for group single premium annuities and a
$1.9 million charge for guaranty fund assessments. The run-off of the group
pension line results in a decline in assets under management and, in turn, a
continued decline in the net investment income produced by the assets.
Individual Annuities
In 1998, the Company closed the sale of Provident's in-force individual and
tax-sheltered annuity business to affiliates of American General Corporation
(American General). The sale was effected by reinsurance in the form of 100
percent coinsurance agreements. The in-force business sold consisted primarily
of individual fixed annuities and tax-sheltered annuities. In addition,
American General acquired a number of miscellaneous group pension lines of
business sold in the 1970s and 1980s which were no longer actively marketed.
The sale did not include Provident's block of guaranteed investment contracts
or group single premium annuities, which will continue in a run-off mode. In
consideration for the transfer of the approximately $2.4 billion of statutory
reserves, American General paid the Company a ceding commission of
approximately $58.0 million. The before-tax gain included in other income for
1998 was $12.2 million.
Other
Effective January 1, 1998, the Company entered into an agreement with
Connecticut General Life Insurance Company (Connecticut General) for
Connecticut General to reinsure, on a 100 percent coinsurance basis, its in-
force medical stop-loss insurance coverages sold to clients of CIGNA Healthcare
and its affiliates (CIGNA). This reinsured block constitutes substantially all
of the Company's medical stop-loss insurance business. The small portion
remaining consists of medical stop-loss coverages sold to clients other than
those of CIGNA. The medical stop-loss business produced revenue of $14.1
million in 1998.
In 1997, the Company transferred its dental business to another insurer. The
dental block produced $39.2 million in premium income in 1997.
28
Corporate Segment Operating Results
The Corporate segment includes investment income on corporate assets not
specifically allocated to a line of business, corporate interest expense,
amortization of goodwill, and certain corporate expenses not allocated to a
line of business.
Revenue in the Corporate segment was $67.7 million in 1999, $31.7 million in
1998, and $29.6 million in 1997. As previously discussed under "Consolidated
Operating Results," during 1999 the Company recorded refunds from the Internal
Revenue Service relating to the final settlement of remaining issues for the
1986 through 1992 tax years. The interest on the refunds was $35.4 million and
is included in 1999 revenue.
The Corporate segment reported losses of $484.6 million in 1999, $125.5
million in 1998, and $71.7 million in 1997. Interest and debt expense was
$137.8 million in 1999, $112.0 million in 1998, and $82.3 million in 1997. The
amortization of goodwill was $82.6 million in 1999, $28.0 million in 1998, and
$18.2 million in 1997. The Company recorded write-downs of goodwill of $57.7
million during 1999 related to its reinsurance operations. See previous
discussions under "Consolidated Operating Results" and "Other Segment Operating
Results" and Note 13 of the "Notes to Consolidated Financial Statements."
As discussed in "Accounting Policy Changes, Financial Statement
Reclassifications, and Merger Expenses," during 1999 the Company recognized
$310.6 million of before-tax expenses related to the merger and the early
retirement offer to employees. These expenses are as follows (in millions):
Employee related expense......................................... $ 77.7
Exit activities related to duplicate facilities/asset
abandonments.................................................... 67.4
Investment banking, legal, and accounting fees................... 39.6
------
Subtotal......................................................... 184.7
Expense related to the early retirement offer to employees....... 125.9
------
Subtotal......................................................... 310.6
Income tax benefit............................................... 89.2
------
Total............................................................ $221.4
======
Employee related expense consists of employee severance costs, change in
control costs, restricted stock costs which fully vested upon stockholder
adoption of the merger agreement or upon completion of the merger, and
outplacement costs to assist employees who are involuntarily terminated.
Severance benefits and change in control costs are $60.2 million, and costs
associated with the vesting of restricted stock are $17.5 million. The Company
estimates that in total approximately 1,615 positions will be eliminated over a
twelve month period beginning June 30, 1999, 215 positions higher than the
original estimate of 1,400. Approximately 1,000 of these positions will be
eliminated through the early retirement offer. As of December 31, 1999,
approximately 800 and 580 positions had been eliminated as a result of the
early retirement offer and involuntary terminations, respectively, and $26.5
million of the estimated $60.2 million had been paid for severance benefits and
change in control costs.
Exit activities related to duplicate facilities/asset abandonments consist
of closing of duplicate offices and write-off of redundant computer hardware
and software. The Company currently expects to close approximately 90 duplicate
field offices over a period of one year after June 30, 1999. The cost
associated with these office closures is approximately $25.6 million, which
represents the cost of future minimum lease payments less any estimated amounts
recovered under subleases. As of December 31, 1999, $3.7 million of this
estimated liability had been paid. Also, certain physical assets, primarily
computer equipment, redundant systems, and systems incapable of supporting the
combined entity, have been abandoned as a result of the merger. This
abandonment resulted in a write-down of the assets' book values by
approximately $41.8 million during 1999.
29
Approximately $27.7 million of assets were abandoned and removed from service
on the date the merger was consummated. Of the remaining $14.1 million of
identified abandonments, $13.2 million were abandoned and removed from service
during the last half of 1999.
Of the $39.6 million of investment banking, legal, and accounting fees,
$39.1 million was paid in 1999.
These expenses are $77.6 million higher on a before-tax basis than the
estimated expenses disclosed in the Joint Proxy Statement/Prospectus of Unum
and Provident dated June 2, 1999. This increase results from approximately 350
more employees than estimated accepting the early retirement offer,
approximately 215 additional positions which will be eliminated during the
twelve month post-merger period, additional change in control costs of $27.4
million, and the identification of additional software redundancies.
In addition to the expenses described above, in 1999, the Company expensed
$24.7 million of other incremental costs associated with the merger, $21.8
million of which are included in the Corporate segment. These expenses consist
primarily of compensation, training, integration, and licensing costs.
The financial statements do not reflect any benefit expected from revenue
enhancements or derived from potential cost savings related to the merger.
Although management anticipates revenue enhancements and costs savings will
result from the merger, there can be no assurance that these items will be
achieved. Economies of scale, the elimination of duplicative expenditures, and
the consistent use of the best practices of Provident and Unum are expected to
enable the Company to achieve annual cost savings of approximately $130
million in 2000. During 1999, the Company realized approximately $55 million
of cost savings.
Investments
Investment activities are an integral part of the Company's business, and
profitability is significantly affected by investment results. Invested assets
are segmented into portfolios, which support the various product lines.
Generally, the investment strategy for the portfolios is to match the
effective asset durations with related expected liability durations and to
maximize investment returns, subject to constraints of quality, liquidity,
diversification, and regulatory considerations. See Note 4 of the "Notes to
Consolidated Financial Statements" for further discussion of the Company's
investments.
During 1999, the Company actively pursued its strategy of extending the
duration of its investments and shifting the mix of assets for approximately
$2.1 billion of its investments. This program was approximately 81 percent
complete as of December 31, 1999, with total completion expected in the first
half of 2000. Management believes this strategy will reduce its vulnerability
to interest rate risk in the future and anticipates that, as a result,
investment income may increase on an annualized basis approximately $40
million.
The following table provides the distribution of invested assets for the
years indicated.
December 31
------------
1999 1998
----- -----
Investment-Grade Fixed Maturity Securities.................. 76.1% 79.5%
Below-Investment-Grade Fixed Maturity Securities............ 8.1 5.3
Equity Securities........................................... 0.2 0.1
Mortgage Loans.............................................. 4.8 4.9
Real Estate................................................. 0.8 1.1
Policy Loans................................................ 8.7 8.2
Other Invested Assets....................................... 1.3 0.9
----- -----
Total..................................................... 100.0% 100.0%
===== =====
30
Fixed Maturity Securities
The Company's investment in mortgage-backed securities was approximately
$3.1 billion and $2.1 billion on an amortized cost basis at December 31, 1999
and 1998, respectively. At December 31, 1999, the mortgage-backed securities
had an average life of 11.1 years and effective duration of 10.1 years. The
mortgage-backed securities are valued on a monthly basis using valuations
supplied by the brokerage firms that are dealers in these securities. The
primary risk involved in investing in mortgage-backed securities is the
uncertainty of the timing of cash flows from the underlying loans due to
prepayment of principal. The Company uses models which incorporate economic
variables and possible future interest rate scenarios to predict future
prepayment rates. The Company has not invested in mortgage-backed derivatives,
such as interest-only, principal-only or residuals, where market values can be
highly volatile relative to changes in interest rates.
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. Also, the secondary market for certain below-
investment-grade issues can be highly illiquid. Management does not anticipate
any liquidity problem caused by the investments in below-investment-grade
securities, nor does it expect these investments to adversely affect its
ability to hold its other investments to maturity.
The Company's exposure to below-investment-grade fixed maturity securities
at December 31, 1999, was $2,147.4 million, representing 8.1 percent of
invested assets, below the Company's internal limit of 10.0 percent of invested
assets for this type of investment. The Company's exposure to below-investment-
grade fixed maturities totaled $1,452.6 million at December 31, 1998,
representing 5.3 percent of invested assets.
Mortgage Loans and Real Estate
The Company's mortgage loan portfolio was $1,278.1 million and $1,321.2
million at December 31, 1999, and 1998, respectively. The Company 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. The Company establishes allowances for probable mortgage loan
losses based on a review of individual loans and the overall loan portfolio,
considering the value of the underlying collateral.
The mortgage loan portfolio is well diversified geographically and among
property types. The incidence of new problem mortgage loans and foreclosure
activity remained low in 1999 and 1998, reflecting improvements in overall
economic activity and improving real estate markets in the geographic areas
where the Company has mortgage loans. Management expects the level of
delinquencies and problem loans to remain low in the future.
At December 31, 1999 and 1998, impaired loans totaled $18.1 million and
$20.7 million, respectively. Included in the impaired loans at December 31,
1999 were $6.6 million of loans which had a related, specific allowance for
probable losses of $2.4 million and $11.5 million of loans which had no
related, specific allowance for probable losses. Impaired mortgage loans are
not expected to have a material impact on the Company's liquidity, financial
position, or results of operations.
Restructured mortgage loans totaled $8.7 million at December 31, 1999,
compared to $14.5 million at December 31, 1998, and represent loans that have
been refinanced with terms more favorable to the borrower. Interest lost on
restructured loans was immaterial for the years ended December 31, 1999, 1998,
and 1997.
Real estate was $211.2 million and $309.8 million at December 31, 1999 and
1998, respectively. 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 the Company'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 to
real estate held for sale when it no longer meets the Company's investment
criteria. Real estate held for sale, which is valued net of a valuation
allowance that reduces the carrying value to the lower of cost or fair value
less estimated cost to sell, amounted to $79.4 million and $15.6 million at
December 31, 1999 and 1998, respectively.
31
Allowances for probable losses on mortgage loans and real estate held for
sale 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 value is considered to be other than temporary or
if the asset is deemed permanently impaired, the investment is reduced to
estimated net realizable value, and the reduction is recorded as a realized
investment loss. The allowance for probable losses on mortgage loans and real
estate was $32.9 million and $37.8 million, respectively, at December 31, 1999.
Management monitors the risk associated with the invested asset portfolio and
regularly reviews and adjusts the allowance for probable losses.
Other
The Company's exposure to non-current investments totaled $20.6 million at
December 31, 1999, or 0.1 percent of invested assets. These non-current
investments are foreclosed real estate held for sale and fixed income
securities and mortgage loans that became more than thirty days past due in
principal and interest payments.
The Company utilizes interest rate futures contracts, forward interest rate
swaps, interest rate forward contracts, and options on forward interest rate
swaps, forward treasuries, or specific fixed income securities to manage
duration and increase yield on cash flows expected from current holdings. All
transactions are hedging in nature and not speculative. Almost all transactions
are associated with the individual and group disability product portfolios. All
other product portfolios are periodically reviewed to determine if hedging
strategies would be appropriate for risk management purposes. See Note 5 of the
"Notes to Consolidated Financial Statements" for further discussion of the
Company's derivative financial instruments.
Liquidity and Capital Resources
The Company's liquidity requirements are met primarily by cash flows
provided from operations, principally in its insurance subsidiaries. Premium
and investment income, as well as maturities and sales of invested assets,
provide the primary sources of cash. Cash is applied to the payment of policy
benefits, costs of acquiring new business (principally commissions) and
operating expenses as well as purchases of new investments. The Company has
established an investment strategy that management believes will provide for
adequate cash flows from operations. Cash flows from operations were $1,566.7
million for the year ended December 31, 1999, as compared to $1,719.3 million
and $1,332.9 million for the comparable periods of 1998 and 1997, respectively.
The Company believes the cash flows from its operations will be sufficient
to meet its operating and financial cash flow requirements, excluding the
strain placed on capital as a result of the charges recorded in connection with
the merger. As a result of the effect on capital during 1999 of the merger
related charges, the Company raised approximately $500 million through the debt
markets during the fourth quarter of 1999 by securing $200 million of one-year
bank debt and by issuing commercial paper. The Company is exploring alternative
financing sources to further increase its financial flexibility. The Company
intends to file a shelf registration during the first half of 2000 in order to
provide funding flexibility through the issuance of debt and equity securities.
Any funding will be used to refinance short-term debt on a long-term basis and
to fund internal expansion, acquisitions, investment opportunities, and the
retirement of the Company's debt and equity. For all of 1999, the Company
raised approximately $700 million of capital in the debt markets.
The Company is dependent upon payments from its subsidiaries to pay
dividends to its stockholders and to pay its expenses. These payments by the
Company's insurance and non-insurance subsidiaries may take the form of
interest payments on amounts loaned to such subsidiaries by the Company,
operating and investment management fees, and/or dividends. At December 31,
1999, the Company had outstanding from its insurance subsidiaries a $150.0
million surplus debenture due in 2006 with a weighted average interest rate
during 1999 of 8.10 percent and a $100.0 million surplus debenture due in 2027
with a weighted average interest rate during 1999 of 8.25 percent. Semi-annual
interest payments are conditional upon the approval by the insurance department
of the state of domicile.
32
Restrictions under applicable insurance laws limit the amount of dividends
that can be paid to the Company from its insurance subsidiaries without prior
approval by regulatory authorities. For life insurance subsidiaries domiciled
or commercially domiciled in the United States, generally prior approval is
necessary for any amount that exceeds the greater of: (i) ten percent of an
insurer's statutory surplus with respect to policyholders as of the preceding
year end; or (ii) the statutory net gain from operations, excluding realized
investment gains and losses, of the preceding year.
The payment of dividends to the Company from its insurance subsidiaries is
further limited to the amount of statutory unassigned surplus. The Company 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
law in the United Kingdom, which requires a minimum solvency margin. Based on
these restrictions under current law:
. in 1999, $303.3 million was available for the payment of dividends to
the Company from its domestic insurance subsidiaries, and approximately
$20.0 million was available for the payment of dividends from Unum
Limited, and
. in 2000, $267.6 million will be available for the payment of dividends
to the Company from its domestic insurance subsidiaries, and
approximately $24.9 million will be available for the payment of
dividends from Unum Limited.
The ability of the Company to continue to receive dividends from its
insurance subsidiaries without regulatory approval will be dependent upon the
level of earnings of its insurance subsidiaries as calculated under law. In
addition to regulatory restrictions, the amount of dividends that will be paid
by insurance subsidiaries will depend on additional factors, such as risk-based
capital ratios, funding growth objectives at an affiliate level, and
maintaining appropriate capital adequacy ratios to support the ratings desired
by the Company. Regulatory restrictions do not limit the amount of dividends
available for distribution to the Company from its non-insurance subsidiaries.
In March 1997, the Company consummated the acquisition of Paul Revere, which
was financed through common equity issuance to Zurich Insurance Company, a
Swiss insurer, and its affiliates, common equity issuance and cash to Paul
Revere stockholders, debt, and internally generated funds. The debt financing
was provided through an $800.0 million revolving bank credit facility with
various domestic and international banks. The revolving bank credit facility
was established in 1996 to provide partial financing for the purchase of Paul
Revere and GENEX Services, Inc., to refinance the existing bank term notes of
$200.0 million, and for general corporate uses. At December 31, 1997,
outstanding borrowings under the revolving bank credit facility were $725.0
million. The revolving bank credit facility was repaid on February 24, 1998.
The Company also redeemed its outstanding 8.10% cumulative preferred stock,
which had an aggregate value of $156.2 million, on February 24, 1998. The debt
repayment and preferred stock redemption were funded through short-term
borrowing.
On March 16, 1998, the Company completed a public offering of $200.0 million
of 7.25% senior notes due March 15, 2028. On March 16, 1998, Provident
Financing Trust I, a wholly-owned subsidiary trust of the Company, issued
$300.0 million of 7.405% capital securities in a public offering. These capital
securities, which mature on March 15, 2038, are fully and unconditionally
guaranteed by the Company, have a liquidation value of $1,000 per capital
security, and have a mandatory redemption feature under certain circumstances.
The Company issued $300.0 million of 7.405% junior subordinated deferrable
interest debentures, which mature on March 15, 2038, to the subsidiary trust in
connection with the capital securities offering. The sole assets of the
subsidiary trust are the junior subordinated debt securities.
In July 1998, the Company completed a public offering of $200.0 million of
6.375% senior notes due July 15, 2005, and $200.0 million of 7.0% senior notes
due July 15, 2018.
The proceeds from these offerings funded the repayment of the short-term
borrowing used for the February 1998 debt repayment and preferred stock
redemption.
33
Cash flow requirements are also supported by a $500.0 million revolving
credit facility which expires October 31, 2000 and a $500.0 million revolving
credit facility which expires October 1, 2001. The Company's commercial paper
program, which was increased to $1.0 billion during 1999, is supported by the
revolving credit facilities and is available for general liquidity needs,
capital expansion, and acquisitions. The revolving credit facilities contain
certain covenants that, among other provisions, require maintenance of certain
levels of stockholders' equity and limits on debt levels.
In April 1998, the Company entered into a $150.0 million five-year revolving
credit facility and a $150.0 million 364-day revolving credit facility with
various domestic and international banks. The purpose of these two facilities
was for general corporate uses. These two facilities terminated in June 1999
with the close of the merger.
On December 15, 1998, the Company issued $250.0 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. The Company
used the proceeds to repay short-term debt and for general corporate purposes.
The shelf registration relates to $500.0 million of securities (including debt
securities, preferred stock, common stock, and other securities). On August 15,
1996, the Company established a $250.0 million medium-term note program under
the shelf registration.
In 1997, the Company borrowed $168.3 million through a private placement.
Under the terms of the agreement, the investor exercised the right to redeem
the private placement at par value during the second quarter of 1999. The
Company refinanced this debt by issuing $200.0 million of variable rate medium-
term notes in June 1999, due in June 2000. The notes had an interest rate of
6.12 percent at December 31, 1999.
At December 31, 1999, the Company had short-term and long-term debt totaling
$1,075.0 million and $1,166.5 million, respectively. At December 31, 1999,
approximately $396.0 million was available for additional financing under the
existing revolving credit facilities. Contingent upon market conditions and
corporate needs, management may refinance short-term notes payable for longer-
term securities.
In the fourth quarter of 1998, the Company rescinded its stock repurchase
program as a result of the pending merger. During 1998 and 1997, the Company
acquired approximately 1.4 million and 7.1 million shares, respectively, of its
common stock in the open market at an aggregate cost of $72.7 million and
$286.7 million, respectively.
Ratings
Standard & Poor's Corporation (S&P), Moody's Investors Service (Moody's),
Duff & Phelps Credit Rating Company (Duff & Phelps), and A.M. Best Company (AM
Best) are among the third parties that provide the Company assessments of its
overall financial position. Ratings from these agencies for financial strength
are available for the individual U.S. 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 the Company are based primarily on consolidated financial information
prepared using generally accepted accounting principles. Both financial
strength ratings and debt ratings incorporate qualitative analyses by rating
agencies on an ongoing basis.
The rating agencies reviewed and, in some instances, revised their ratings
to reflect the completion of the merger. During the fourth quarter of 1999,
Moody's placed the ratings on review for possible downgrade and subsequently
lowered the ratings by one notch, S&P placed its ratings on CreditWatch with
negative
34
implications, and AM Best placed a negative rating outlook on its current
ratings. Duff & Phelps removed all ratings of the Company from its previous
Rating Watch-Up status and reaffirmed the ratings at their current levels.
On February 1, 2000, S&P removed the CreditWatch, reaffirmed the financial
strength ratings, and lowered the debt ratings by one notch. Should additional
downgrades occur, the Company does not expect that sales will be materially
impacted. The table below reflects the most recent debt ratings for the Company
and the financial strength ratings for the U.S. domiciled insurance company
subsidiaries.
S&P Moody's Duff & Phelps AM Best
--- ------- ------------- -------
- -----------------------------------------------------------------------------------------------
UnumProvident Corporation
- -----------------------------------------------------------------------------------------------
Senior Debt A- (Strong) A3 (Upper A- Not Rated
Medium Grade) (Investment Grade)
- -----------------------------------------------------------------------------------------------
Junior Subordinated Debt BBB (Good) Baa1 BBB+ Not Rated
(Medium Grade) (Investment Grade)
- -----------------------------------------------------------------------------------------------
Commercial Paper A-2 (Good) Prime-2 Not Rated Not Rated
(Strong Ability)
- -----------------------------------------------------------------------------------------------
U.S. Insurance Subsidiaries
- -----------------------------------------------------------------------------------------------
Provident Life & Accident AA- A1 (Good AA-(Secure/ A+
(Very Strong) Financial Security) Investment Grade) (Superior)
- -----------------------------------------------------------------------------------------------
Provident Life & Casualty Not Rated Not Rated Not Rated A+
(Superior)
- -----------------------------------------------------------------------------------------------
Provident National Assurance Not Rated A1 (Good AA-(Secure/ A+
Financial Security) Investment Grade) (Superior)
- -----------------------------------------------------------------------------------------------
Unum Life of America AA- A1 (Good Not Rated A+
(Very Strong) Financial Security) (Superior)
- -----------------------------------------------------------------------------------------------
First Unum Life AA- A1 (Good Not Rated A+
(Very Strong) Financial Security) (Superior)
- -----------------------------------------------------------------------------------------------
Colonial Life & Accident AA- A1 (Good Not Rated A+
(Very Strong) Financial Security) (Superior)
- -----------------------------------------------------------------------------------------------
Paul Revere Life AA- A1 (Good AA-(Secure/ A+
(Very Strong) Financial Security) Investment Grade) (Superior)
- -----------------------------------------------------------------------------------------------
Paul Revere Variable AA- A1 (Good Not Rated A+
(Very Strong) Financial Security) (Superior)
- -----------------------------------------------------------------------------------------------
Paul Revere Protective AA- A1 (Good Not Rated A+
(Very Strong) Financial Security) (Superior)
Year 2000 Date Conversion
As are many other businesses in this country and abroad, the Company is
affected in numerous ways, both by its own computer information systems and by
third parties with which it has business relationships, in the processing of
date data relating to the year 2000 and beyond. Failure to have adequately
addressed and substantially resolved year 2000 issues could have had, and as to
mission critical systems in certain circumstances would have had, a material
adverse effect on the Company's business, results of operations, or financial
condition. While there can be no assurance as to its long-term success, the
Company completed a project which was intended and designed to avoid and/or
mitigate any such material adverse effect from year 2000 issues. The Company's
program for the year 2000 was organized into a number of phases for rectifying
its internal computer systems, including assessment, code remediation, testing,
and deployment. The program continues to monitor systems for year 2000 issues,
including the ability to properly handle the dates of
35
February 29, March 31, June 30, October 10, and December 31, 2000 and February
28 and December 31, 2001. To date, no material issues have been identified.
There are numerous instances in which third parties having a relationship
with the Company had and may continue to have year 2000 issues to address and
resolve. These include, among others, vendors of hardware and software, holders
of group insurance policies, issuers of investment securities, financial
institutions, governmental agencies, and suppliers. An aspect of the Company's
year 2000 program was to assess its critical external dependencies and, as part
of its due diligence efforts, to contact certain third parties seeking written
assurance as to their expectancy to be year 2000 compliant. The nature of the
Company's follow up to its written requests to third parties depended upon its
assessment of the response and of the materiality of the effect of non-
compliance by the third party on the Company. In some instances the Company
performed site visits to certain third party businesses and tested their
systems for compliance. In addition, the Company tested external electronic
interfaces with certain critical business partners. The Company implemented
contingency plans to alleviate the potential business impact of third parties
not being year 2000 compliant. 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 continue to be year 2000
trouble free. As a result, the Company will continue to monitor these
dependencies for year 2000 problems.
The effort of internal business and systems personnel devoted to the project
has been considerable. Temporary personnel and subject matter consultants were
utilized, when appropriate, to assist full time personnel in some phases or
aspects of the project. The Company utilized compensation programs to retain
project personnel in order to keep the project on schedule. While the project
required systems management to more closely scrutinize the prioritization of
information technology projects, it is not believed that any deferral of
information technology projects has had a material impact on the Company. The
Company also had occasional contact with certain peer companies comparing
approaches to year 2000 issues. Monitoring for and responding to year 2000
issues is now an integral part of the regular assignments of systems personnel.
Although there was a broad range of possibilities that could have occurred
in connection with non-compliance with year 2000 that might have affected the
Company, particularly as a consequence of third parties, the Company
experienced no material problems before, on, or after January 2, 2000.
Consequently, the Company has not experienced any material adverse impact on
its business, results of operations, or financial condition from year 2000
issues. With regard to any subsequent non-compliance resulting from the
Company's systems, which the Company believes to be less likely than that
resulting from third parties, the Company will provide adequate financial and
personnel resources to remediate the problem as soon as possible. With regard
to non-compliance resulting from third party failure, the Company has
appropriate contingency arrangements that will minimize such impact; however,
given the range of possibilities, no assurance can be given that the Company's
efforts will be successful. In addition, the Company developed detailed plans
for activities for managing the year-end rollover period. This included plans
for appropriate backup of data, year-end processing schedules, limiting
installations of new code, and the availability of special response teams
tasked with identifying and resolving any issues which might occur during the
rollover period. These teams included both information technology and business
professionals. The rollover was conducted with no material issues arising.
The foregoing discussion of the year 2000 issue contains forward-looking
statements relating to such matters as financial performance and the business
of the Company. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. In order for the Company to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience relating to compliance
with year 2000 to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements concerning
year 2000 issues, which involve certain risks and uncertainties. These factors
include (i) the unanticipated material impact of a system fault of the Company
relating to year 2000, (ii) the failure to successfully remediate, in spite of
testing, material systems of the Company, (iii) the time it may take to
successfully remediate a failure once it occurs, as well as the resulting costs
and loss of revenues, and (iv) the failure of third parties to properly
remediate material year 2000 problems.
36
Since inception of the project, the Company has expensed approximately $32.2
million through December 31, 1999, in connection with incremental cost of the
year 2000 project and estimates an additional $1.0 million of expense during
2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is subject to various market risk exposures including interest
rate risk and foreign exchange rate risk. The following discussion regarding
the Company's risk management activities includes forward-looking statements
that involve risk and uncertainties. Estimates of future performance and
economic conditions are reflected assuming certain changes in market rates and
prices were to occur (sensitivity analysis). Caution should be used in
evaluating the Company's overall market risk from the information presented
below, as actual results may differ. The Company employs various derivative
programs to manage these material market risks. See Notes 4 and 5 of the "Notes
to Consolidated Financial Statements" for further discussions of the
qualitative aspects of market risk, including derivative financial instrument
activity.
Interest Rate Risk
The operations of the Company are subject to risk resulting from interest
rate fluctuations, primarily long-term U.S. interest rates. Changes in interest
rates and individuals' behavior affect the amount and timing of asset and
liability cash flows. Management continually models and tests asset and
liability portfolios to improve interest rate risk management and net yields.
Testing the asset and liability portfolios under various interest rate and
economic scenarios allows management to choose the most appropriate investment
strategy, as well as to prepare for disadvantageous outcomes. This analysis is
the precursor to the Company's activities in derivative financial instruments.
The Company uses interest rate swaps, interest rate forward contracts,
exchange-traded interest rate futures contracts, and options to hedge interest
rate risks and to match asset durations and cash flows with corresponding
liabilities.
Assuming an immediate increase of 100 basis points in interest rates from
year end levels, the net hypothetical decrease in stockholders' equity related
to financial and derivative instruments was estimated to be $0.7 billion and
$0.6 billion at December 31, 1999 and 1998, respectively. The fair values of
those assets currently reported in the consolidated statements of financial
condition at amortized cost or at the unpaid balance, namely mortgage loans,
held-to-maturity securities, and policy loans, would decrease by approximately
$80 million, $40 million, and $200 million, respectively, at December 31, 1999
and by approximately $70 million, $40 million, and $180 million, respectively,
at December 31, 1998. Assuming a 100 basis point decrease in long-term interest
rates from year end levels, the fair values of the Company's long-term debt and
company-obligated mandatorily redeemable preferred securities would increase
approximately $100 million and $30 million, respectively, at December 31, 1999
and approximately $140 million and $50 million, respectively, at December 31,
1998.
The effect of a change in interest rates on asset prices was determined
using a matrix pricing system whereby all securities are priced with the
resulting market rates and spreads assuming a change of 100 basis points. These
hypothetical prices were compared to the actual prices for the period to
compute the overall change in market value. The changes in the fair values of
long-term debt and company-obligated mandatorily redeemable preferred
securities were determined using discounted cash flows analyses. Because the
Company actively manages its investments and liabilities, actual changes could
be less than those estimated above.
Foreign Currency Risk
The Company is also subject to foreign exchange risk arising from its
foreign operations and certain investment securities dominated in those local
currencies. Foreign operations represented 8.9 percent and 8.3 percent of total
assets at December 31, 1999 and 1998, respectively, and 9.4 percent and 8.6
percent of total revenue for 1999 and 1998, respectively. Assuming foreign
exchange rates decreased 10 percent from the December 31, 1999 level, year end
1999 stockholders' equity would not be materially affected.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
UnumProvident Corporation and Subsidiaries
We have audited the accompanying consolidated statements of financial
condition of UnumProvident Corporation and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. The consolidated financial statements give retroactive effect to the
merger of Unum Corporation and Provident Companies, Inc. on June 30, 1999,
which has been accounted for using the pooling of interests method as described
in the notes to the consolidated financial statements. Our audits also included
the financial statement schedules listed in the index at Item 14(a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits. We did not audit the financial
statements and schedules of the former Unum Corporation which statements
reflect total assets constituting 39% in 1998, and total revenues constituting
54% in 1998 and 1997 of the related consolidated totals. Those statements and
schedules were audited by other auditors whose report has been furnished to us,
and our opinion, in so far as it relates to data included for the former Unum
Corporation, is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of UnumProvident
Corporation and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 after giving retroactive
effect to the merger of Unum Corporation, as described in the notes to the
consolidated financial statements, in conformity with accounting principles
generally accepted in the United States. Also in our opinion, based on our
audits and the report of other auditors, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
Chattanooga, Tennessee
February 9, 2000, except for Note 17,
for which the date is March 7, 2000
38
REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
UnumProvident Corporation and Subsidiaries
In our opinion, the consolidated balance sheets and the related consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of the former
Unum Corporation and its subsidiaries at December 31, 1998, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Corporation's management; our responsibility is to express an opinion on these
financial statements 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
39
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31
-------------------
1999 1998
--------- ---------
(in millions of
dollars)
Assets
Investments
Fixed Maturity Securities
Available-for-Sale--at fair value (amortized cost:
$22,142.4; $20,581.6).................................... $22,033.2 $22,732.2
Held-to-Maturity--at amortized cost (fair value: $318.8;
$352.5).................................................. 323.5 307.0
Equity Securities--at fair value (cost: $15.9; $24.0)...... 38.4 33.1
Mortgage Loans............................................. 1,278.1 1,321.2
Real Estate................................................ 211.2 309.8
Policy Loans............................................... 2,316.9 2,227.2
Other Long-term Investments................................ 26.5 10.4
Short-term Investments..................................... 321.5 245.1
--------- ---------
Total Investments........................................... 26,549.3 27,186.0
Other Assets
Cash and Bank Deposits..................................... 292.4 111.2
Premiums Receivable........................................ 764.7 570.1
Reinsurance Receivable..................................... 4,741.2 4,871.0
Deposit Assets............................................. 616.6 729.7
Accrued Investment Income.................................. 543.6 502.5
Deferred Policy Acquisition Costs.......................... 2,391.2 2,060.5
Value of Business Acquired................................. 534.1 570.5
Goodwill................................................... 706.4 814.7
Property and Equipment--at cost less accumulated
depreciation.............................................. 399.7 367.8
Miscellaneous.............................................. 449.2 405.2
Separate Account Assets.................................... 459.1 413.0
--------- ---------
Total Assets................................................ $38,447.5 $38,602.2
========= =========
See notes to consolidated financial statements.
40
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(Continued)
December 31
--------------------
1999 1998
--------- ---------
(in millions of
dollars)
Liabilities and Stockholders' Equity
Liabilities
Policy and Contract Benefits............................ $ 1,722.1 $ 1,384.9
Reserves for Future Policy and Contract Benefits........ 23,339.1 22,130.3
Unearned Premiums....................................... 380.6 360.4
Other Policyholders' Funds.............................. 3,521.8 4,102.7
Federal Income Tax
Current................................................ 33.3 105.8
Deferred............................................... 238.3 864.0
Short-term Debt......................................... 1,075.0 323.7
Long-term Debt.......................................... 1,166.5 1,225.2
Other Liabilities....................................... 1,229.5 1,246.0
Separate Account Liabilities............................ 459.1 413.0
--------- ---------
Total Liabilities........................................ 33,165.3 32,156.0
--------- ---------
Commitments and Contingent Liabilities--Note 17
Company-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debt Securities of the Company............. 300.0 300.0
--------- ---------
Stockholders' Equity--Note 11
Common Stock, $0.10 par
Authorized: 725,000,000 shares
Issued: 240,515,180 and 237,802,647 shares............. 24.1 23.8
Additional Paid-in Capital.............................. 1,028.6 959.2
Accumulated Other Comprehensive Income (Loss)
Net Unrealized Gains on Securities..................... 19.8 969.4
Foreign Currency Translation Adjustment................ (38.7) (54.7)
Retained Earnings....................................... 3,957.6 4,279.2
Treasury Stock--at cost: 176,295 shares................. (9.2) (9.2)
Deferred Compensation................................... -- (21.5)
--------- ---------
Total Stockholders' Equity............................... 4,982.2 6,146.2
--------- ---------
Total Liabilities and Stockholders' Equity............... $38,447.5 $38,602.2
========= =========
See notes to consolidated financial statements.
41
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
----------------------------
1999 1998 1997
-------- -------- --------
(in millions of dollars,
except share data)
Revenue
Premium Income.................................. $6,843.2 $6,129.0 $5,293.1
Net Investment Income........................... 2,059.7 2,035.4 2,015.7
Net Realized Investment Gains................... 87.1 55.0 11.5
Other Income.................................... 339.6 299.9 357.0
-------- -------- --------
Total Revenue.................................... 9,329.6 8,519.3 7,677.3
-------- -------- --------
Benefits and Expenses
Policyholder Benefits........................... 6,787.6 5,449.7 4,856.1
Commissions..................................... 913.6 826.5 716.2
Interest and Debt Expense....................... 137.8 119.9 84.9
Deferral of Policy Acquisition Costs............ (809.3) (703.3) (537.3)
Amortization of Deferred Policy Acquisition
Costs.......................................... 474.8 377.5 301.3
Amortization of Value of Business Acquired and
Goodwill....................................... 120.9 66.6 52.7
Other Operating Expenses........................ 1,869.7 1,462.2 1,286.7
-------- -------- --------
Total Benefits and Expenses...................... 9,495.1 7,599.1 6,760.6
-------- -------- --------
Income (Loss) Before Federal Income Taxes........ (165.5) 920.2 916.7
Federal Income Taxes (Credit)
Current......................................... 141.2 128.3 192.3
Deferred........................................ (123.8) 174.5 106.8
-------- -------- --------
Total Federal Income Taxes....................... 17.4 302.8 299.1
-------- -------- --------
Net Income (Loss)................................ $ (182.9) $ 617.4 $ 617.6
======== ======== ========
Net Income (Loss) Per Common Share
Basic........................................... $ (0.77) $ 2.60 $ 2.62
Assuming Dilution............................... $ (0.77) $ 2.54 $ 2.57
See notes to consolidated financial statements.
42
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Additional Other
Preferred Common Paid-in Comprehensive Retained Treasury Deferred
Stock Stock Capital Income (Loss) Earnings Stock Compensation Total
--------- ------ ---------- ------------- -------- -------- ------------ ---------
(in millions of dollars)
Balance at December 31,
1996................... $156.2 $10.5 $ 367.7 $166.8 $3,311.1 $ -- $(10.6) $ 4,001.7
Comprehensive Income
Net Income............. 617.6 617.6
Change in Net
Unrealized Gains on
Securities (net of tax
expense of $351.0).... 662.5 662.5
Change in Foreign
Currency Translation
Adjustment (net of tax
credit of $7.8)....... (30.3) (30.3)
---------
Total Comprehensive
Income................. 1,249.8
---------
Shares Issued for the
Acquisition of
Business............... 1.5 736.0 737.5
Two-for-One Stock
Split.................. 11.9 (11.9) --
Common Stock Activity... (0.2) (137.0) (5.2) (142.4)
Treasury Stock
Acquired............... (1.5) (1.5)
Dividends to
Stockholders........... (131.0) (131.0)
------ ----- -------- ------ -------- ----- ------ ---------
Balance at December 31,
1997................... 156.2 23.7 954.8 799.0 3,797.7 (1.5) (15.8) 5,714.1
Comprehensive Income
Net Income............. 617.4 617.4
Change in Net
Unrealized Gains on
Securities (net of tax
expense of $67.2)..... 133.7 133.7
Change in Foreign
Currency Translation
Adjustment (net of tax
credit of $7.8)....... (18.0) (18.0)
---------
Total Comprehensive
Income................. 733.1
---------
Preferred Stock
Redeemed............... (156.2) (156.2)
Common Stock Activity... 0.1 4.4 (5.7) (1.2)
Treasury Stock
Acquired............... (7.7) (7.7)
Dividends to
Stockholders........... (135.9) (135.9)
------ ----- -------- ------ -------- ----- ------ ---------
Balance at December 31,
1998................... -- 23.8 959.2 914.7 4,279.2 (9.2) (21.5) 6,146.2
Comprehensive Loss
Net Loss............... (182.9) (182.9)
Change in Net
Unrealized Gains on
Securities (net of tax
credit of $519.5)..... (949.6) (949.6)
Change in Foreign
Currency Translation
Adjustment (net of tax
expense of $11.6)..... 16.0 16.0
---------
Total Comprehensive
Loss................... (1,116.5)
---------
Common Stock Activity... 0.3 69.4 21.5 91.2
Dividends to
Stockholders........... (138.7) (138.7)
------ ----- -------- ------ -------- ----- ------ ---------
Balance at December 31,
1999................... $ -- $24.1 $1,028.6 $(18.9) $3,957.6 $(9.2) $ -- $ 4,982.2
====== ===== ======== ====== ======== ===== ====== =========
See notes to consolidated financial statements.
43
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
-------------------------------
1999 1998 1997
--------- --------- ---------
(in millions of dollars)
Cash Flows from Operating Activities
Net Income (Loss)............................ $ (182.9) $ 617.4 $ 617.6
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided by Operating Activities
Policy Acquisition Costs Capitalized........ (809.3) (703.3) (537.3)
Amortization of Policy Acquisition Costs.... 474.8 377.5 301.3
Amortization of Value of Business Acquired
and Goodwill............................... 120.9 66.6 52.7
Depreciation................................ 58.0 47.9 45.3
Net Realized Investment Gains............... (87.1) (55.0) (11.5)
Reinsurance Receivable...................... 130.1 (48.9) (233.1)
Insurance Reserves and Liabilities.......... 2,391.1 1,475.4 1,322.4
Federal Income Taxes........................ (189.9) 211.5 76.3
Other....................................... (339.0) (269.8) (300.8)
--------- --------- ---------
Net Cash Provided by Operating Activities..... 1,566.7 1,719.3 1,332.9
--------- --------- ---------
Cash Flows from Investing Activities
Proceeds from Sales of Investments
Available-for-Sale Securities............... 3,773.9 2,117.3 2,524.7
Proceeds from Maturities of Investments
Available-for-Sale Securities............... 1,023.8 1,513.1 1,628.2
Held-to-Maturity Securities................. 0.3 0.5 1.1
Proceeds from Sales and Maturities of Other
Investments................................. 268.3 217.7 623.7
Purchase of Investments
Available-for-Sale Securities............... (6,237.5) (3,849.2) (4,264.9)
Held-to-Maturity Securities................. (22.2) (1.9) (23.4)
Other Investments........................... (209.1) (532.7) (410.7)
Net (Purchases) Sales of Short-term
Investments................................. (76.8) (67.9) 403.8
Acquisition of Business...................... -- -- (860.3)
Disposition of Business...................... -- 58.0 --
Other........................................ (75.3) (73.3) (45.3)
--------- --------- ---------
Net Cash Used by Investing Activities......... (1,554.6) (618.4) (423.1)
--------- --------- ---------
See notes to consolidated financial statements.
44
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Year Ended December 31
-----------------------------
1999 1998 1997
------- --------- ---------
(in millions of dollars)
Cash Flows from Financing Activities
Deposits to Policyholder Accounts.............. 175.1 184.3 813.8
Maturities and Benefit Payments from
Policyholder Accounts......................... (613.0) (1,250.7) (2,409.1)
Net Short-term Debt Borrowings (Repayments).... 692.6 (74.5) 140.1
Issuance of Long-term Debt..................... -- 900.0 893.3
Long-term Debt Repayments...................... -- (793.1) (347.6)
Issuance of Company-Obligated Mandatorily
Redeemable Preferred Securities............... -- 300.0 --
Redemption of Preferred Stock.................. -- (156.2) --
Issuance of Common Stock....................... 69.7 11.9 389.8
Dividends Paid to Stockholders................. (138.9) (139.1) (139.2)
Repurchase of Common Stock..................... -- (72.7) (286.7)
Other.......................................... (18.6) 4.6 34.8
------- --------- ---------
Net Cash Provided (Used) by Financing
Activities..................................... 166.9 (1,085.5) (910.8)
------- --------- ---------
Effect of Foreign Exchange Rate Changes on
Cash........................................... 2.2 1.3 (1.7)
------- --------- ---------
Net Increase (Decrease) in Cash and Bank
Deposits....................................... 181.2 16.7 (2.7)
Cash and Bank Deposits at Beginning of Year..... 111.2 94.5 97.2
------- --------- ---------
Cash and Bank Deposits at End of Year........... $ 292.4 $ 111.2 $ 94.5
======= ========= =========
See notes to consolidated financial statements.
45
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Significant Accounting Policies
Basis of Presentation: On June 30, 1999, Unum Corporation (Unum) merged
with and into Provident Companies, Inc. (Provident) under the name
UnumProvident Corporation (the Company). The merger was accounted for as a
pooling of interests. The historical financial results presented herein give
effect to the merger as if it had been completed at the beginning of the
earliest period presented.
The Company values its available-for-sale fixed maturity and equity
securities at fair value, with unrealized holding gains and losses reported as
a component of comprehensive income (loss). Companies are required to also
adjust deferred acquisition costs and/or certain policyholder liabilities to
reflect the changes that would have been necessary if the unrealized
investment gains and losses related to the available-for-sale securities had
been realized. Prior to the merger, Unum adjusted policyholder liabilities and
Provident adjusted deferred policy acquisition costs (DPAC) and value of
business acquired (VOBA) for those products where these assets existed. To
present financial information in a common reporting format, management has
determined that the combined entity will adjust policyholder liabilities
rather than DPAC and VOBA. Prior period financial statements have been
restated to reflect this reclassification. The reclassification did not change
other comprehensive income (loss), accumulated other comprehensive income
(loss), or fixed maturity and equity securities. The reclassification
reflected in the December 31, 1998 consolidated statement of financial
condition resulted in an increase of $329.7 million in DPAC, $1.5 million in
VOBA, and, $331.2 million in reserves for future policy and contract benefits.
Certain additional reclassification adjustments have been made to conform the
companies' presentations in the consolidated financial statements.
The accompanying consolidated financial statements have been prepared on
the basis of accounting principles generally accepted in the United States
(GAAP). Such accounting principles differ from statutory accounting practices
prescribed or permitted by state regulatory authorities (see Note 18). The
consolidated financial statements include the accounts of UnumProvident
Corporation and its subsidiaries. Material intercompany transactions have been
eliminated.
Operations: The Company does business primarily in North America and
operates principally in the life and health insurance business. The Employee
Benefits segment includes group long-term and short-term disability insurance,
group life insurance, accidental death and dismemberment coverages, group
long-term care, and the results of managed disability. The Individual segment
includes results from the individual disability, individual life, and
individual long-term care lines of business. The Voluntary Benefits segment
includes the results of products sold to employees through payroll deduction
at the work site. These products include life insurance and health products,
primarily disability, accident and sickness, and cancer. The Other operating
segment includes results from products no longer actively marketed, including
corporate-owned life insurance, group pension, health insurance, individual
annuities, and reinsurance pools and management. The Corporate segment
includes investment earnings on corporate assets not specifically allocated to
a line of business, corporate interest expense, amortization of goodwill, and
certain corporate expenses not allocated to a line of business. See Note 14
for further information on the operating segments.
Use of Estimates: The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect
amounts reported in the financial statements and accompanying notes. Such
estimates and assumptions could change in the future as more information
becomes known, which could impact the amounts reported and disclosed herein.
Investments: Investments are reported in the consolidated statements of
financial condition as follows:
Available-for-Sale Fixed Maturity Securities are reported at fair value.
46
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Held-to-Maturity Fixed Maturity Securities are generally reported at
amortized cost.
Equity Securities are reported at fair value.
Mortgage Loans are generally carried at amortized cost less an allowance for
probable losses.
Real Estate classified as 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. 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 to real estate held
for sale when it no longer meets the Company's investment criteria. Real estate
held for sale is valued net of a valuation allowance that reduces the carrying
value to the lower of cost less accumulated depreciation or fair value less
estimated cost to sell. Accumulated depreciation on real estate was $42.8
million and $48.5 million as of December 31, 1999 and 1998, respectively.
Policy Loans are presented at unpaid balances.
Other Long-term Investments are carried at cost plus the Company's equity in
undistributed net earnings since acquisition.
Short-term Investments are carried at cost.
Fixed maturity securities include bonds and redeemable preferred stocks.
Equity securities include common stocks and nonredeemable preferred stocks.
Fixed maturity and equity securities not bought and held for the purpose of
selling in the near term but for which the Company does not have the positive
intent and ability to hold to maturity are classified as available-for-sale.
Fixed maturity securities that the Company has the positive intent and ability
to hold to maturity are classified as held-to-maturity. The Company determines
the appropriate classification of fixed maturity securities at the time of
purchase.
Changes in the fair value of available-for-sale fixed maturity securities
and equity securities are reported as other comprehensive income (loss). These
amounts are net of deferred federal income taxes and valuation adjustments to
reserves for future policy and contract benefits which would have been recorded
had the related unrealized gains or losses on these securities been realized.
Realized investment gains and losses, which are reported as a component of
revenue in the consolidated statements of operations, are based upon specific
identification of the investments sold and do not include amounts allocable to
separate accounts. At the time a decline in the value of an investment is
determined to be other than temporary, a loss is recorded which is included in
realized investment gains and losses.
The Company discontinues the accrual of investment income on invested assets
when it is determined that collectability is doubtful. The Company recognizes
investment income on impaired loans when the income is received.
Derivative Financial Instruments: Interest Rate Swap Agreements are
agreements in which two parties agree to exchange, at specified intervals,
interest payment streams calculated on an agreed-upon notional principal
amount. The underlying notional principal is not exchanged between the parties
for agreements other than foreign currency swaps. The Company has certain
forward interest rate swap agreements where the exchange of interest payments
does not begin until a specified future date. The Company intends to settle the
forward interest rate swap agreements prior to the commencement of the exchange
of interest payment streams.
47
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair values of interest rate swap agreements which hedge available-for-
sale securities are reported in the consolidated statements of financial
condition as a component of fixed maturity securities. The fair values of
interest rate swap agreements which hedge liabilities are not reported in the
consolidated statements of financial condition. Amounts to be paid or received
pursuant to interest rate swap agreements are accrued and recognized in the
consolidated statements of operations as an adjustment to net investment income
for asset hedges or as an adjustment to policyholder benefits for liability
hedges.
The Company accounts for all of its interest rate swap agreements as hedges.
Accordingly, for anticipated transaction hedges, any gains or losses realized
on closed or terminated interest rate swap agreements are deferred and
amortized to net investment income for asset hedges or policyholder benefits
for liability hedges over the expected remaining life of the hedged item. The
Company also uses interest rate swap agreements to hedge existing assets. The
income payment streams generated by these swaps are recorded in the same manner
as the hedged asset income payment streams.
If the hedged item matures or terminates earlier than anticipated, the
remaining unamortized gain or loss is amortized to net investment income or
policyholder benefits in the current period. If the hedged asset is disposed,
the remaining unamortized gain or loss is recognized as an adjustment to net
realized investment gains and losses. Gains or losses realized on interest rate
swap agreements which are terminated when the hedged assets are sold or which
are terminated because the hedged anticipated transaction is no longer likely
to occur are reported in the consolidated statements of operations as a
component of net realized investment gains and losses.
The Company regularly monitors the effectiveness of its hedging programs. In
the event a hedge becomes ineffective, it is marked-to-market, resulting in a
charge or credit to net investment income or policyholder benefits.
Futures and Forwards Contracts are commitments to either purchase or sell a
financial instrument at a specific future date for a specified price. Changes
in the market value of contracts are generally settled on a daily basis. The
notional amounts of futures and forwards contracts represent the extent of the
Company's involvement but not the future cash requirements, as the Company
intends to close out open positions prior to settlement. All of the Company's
futures and forwards contracts are accounted for as hedges.
The fair values of futures and forwards which hedge available-for-sale
securities are reported in the consolidated statements of financial condition
as a component of fixed maturity securities. The fair values of open futures
and forwards which hedge liabilities are reported in the consolidated
statements of financial condition as a component of other liabilities. Gains or
losses realized on the termination of futures and forwards contracts are
accounted for in the same manner as interest rate swap agreements.
Option Contracts give the owner the right, but not the obligation, to buy or
sell a financial instrument at an agreed-upon price on or before a specific
date. The purchasing counterparty pays a premium to the selling counterparty
for this right. The notional amounts of contracts represent the Company's
involvement but not the future cash requirements, as the Company intends to
close out contracts prior to the expiration date when the market price of the
underlying financial instrument exceeds the option price or allow contracts to
expire if the option price exceeds the market price. All of the Company's
options contracts are accounted for as hedges. The book and fair values of
options contracts are reported in the consolidated statements of financial
condition in a manner similar to the underlying hedged item. Gains or losses on
the termination of options contracts are accounted for in the same manner as
interest rate swap agreements.
48
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred Policy Acquisition Costs: Certain costs of acquiring new business
which vary with and are primarily related to the production of new business
have been deferred. Such costs include commissions, other agency compensation,
certain selection and policy issue expenses, and certain field expenses.
Deferred policy acquisition costs are subject to recoverability testing at the
time of policy issue and loss recognition testing subsequent to the year of
issue.
Deferred policy acquisition costs related to traditional policies are
amortized over the premium paying period of the related policies in proportion
to the ratio of the present value of annual expected premium income to the
present value of total expected premium income. Adjustments are made each year
to recognize actual persistency experience as compared to assumed experience.
Deferred policy acquisition costs related to interest-sensitive policies are
amortized over the lives of the policies in relation to the present value of
estimated gross profits from surrender charges and mortality, investment, and
expense margins. Adjustments are made each year to reflect actual experience
for assumptions which deviate significantly compared to assumed experience.
Deferred policy acquisition costs for the Lloyd's of London (Lloyd's)
business are amortized proportionately over the period the premium is earned.
Adjustments are made periodically to reflect actual experience for assumptions
which deviate significantly compared to assumed experience.
Loss recognition is performed when, in the judgment of management, adverse
deviations from original assumptions have occurred and may be likely to
continue such that recoverability of deferred policy acquisition costs on a
line of business is questionable. Insurance contracts are grouped on a basis
consistent with the Company's manner of acquiring, servicing, and measuring
profitability of the contracts. If loss recognition testing indicates that
deferred policy acquisition costs are not recoverable, the deficiency is
charged to expense. Once a loss recognition adjustment is required, loss
recognition testing is generally performed on an annual basis using then
current assumptions until the line of business becomes immaterial or results
improve significantly. The assumptions used in loss recognition testing
represent management's best estimates of future experience.
Value of Business Acquired: Value of business acquired represents the
present value of future profits recorded in connection with the acquisition of
a block of insurance policies. The asset is amortized based upon expected
future premium income for traditional insurance policies and estimated future
gross profits for interest-sensitive insurance policies, with the accrual of
interest added to the unamortized balance at interest rates principally ranging
from 5.55 percent to 7.60 percent. The accumulated amortization for value of
business acquired was $133.2 million and $94.9 million as of December 31, 1999
and 1998, respectively. The Company periodically reviews the carrying amount of
value of business acquired using the same methods used to evaluate deferred
policy acquisition costs.
Goodwill: Goodwill is the excess of the amount paid to acquire a business
over the fair value of the net assets acquired. Goodwill is amortized on a
straight-line basis over a period not to exceed 40 years. The accumulated
amortization for goodwill was $64.1 million and $63.8 million as of December
31, 1999 and 1998, respectively. The carrying amount of goodwill is reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount might not be recoverable. If estimated future undiscounted net
cash flows expected to be generated from the operations to which the goodwill
relates are less than the carrying amount of the unamortized goodwill, the
carrying amount is reduced with a corresponding charge to expense.
49
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment: Property and equipment is depreciated on the
straight-line method over its estimated useful life. The accumulated
depreciation for property and equipment was $376.1 million and $319.5 million
as of December 31, 1999 and 1998, respectively.
Revenue Recognition: Traditional life and accident and health products are
long duration contracts, and premium income is recognized as revenue when due
from policyholders. If the contracts are experience rated, the estimated
ultimate premium is recognized as revenue over the period of the contract. The
estimated ultimate premium, which is revised to reflect current experience, is
based on estimated claim costs, expenses, and profit margins. For interest-
sensitive products, the amounts collected from policyholders are considered
deposits, and only the deductions during the period for cost of insurance,
policy administration, and surrenders are included in revenue. Policyholders'
funds represent funds deposited by contract holders and are not included in
revenue.
The Company follows the periodic method of accounting for its Lloyd's
business in which premiums are recognized as revenue over the policy term, and
claims, including an estimate of claims incurred but not reported, are
recognized as they occur. Premiums for the Lloyd's business are based on
participation in the individual syndicate underwriting years that generate
premiums over a three year period of time. The Company 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
actuarial 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 adjustments to the estimates are
reflected in the current results.
Policy and Contract Benefits: Policy and contract benefits, principally
related to accident and health insurance policies, are based on reported losses
and estimates of incurred but not reported losses for traditional life and
accident and health products. For interest-sensitive products, benefits are the
amounts paid and expected to be paid on insured claims in excess of the
policyholders' policy fund balances.
Policy and Contract Benefits Liabilities: Active life reserves for future
policy and contract benefits on traditional life and accident and health
products have been provided on the net level premium method. The reserves are
calculated based upon assumptions as to interest, withdrawal, morbidity, and
mortality that were appropriate at the date of issue. Withdrawal assumptions
are based on actual Company experience. Morbidity and mortality assumptions are
based upon industry standards adjusted as appropriate to reflect actual Company
experience. The assumptions vary by plan, year of issue, and policy duration
and include a provision for adverse deviation.
Disabled lives reserves for future policy and contract benefits on
disability policies are calculated based upon assumptions as to interest and
claim termination rates that are currently appropriate. Claim termination rate
assumptions are based upon industry standards adjusted as appropriate to
reflect actual Company experience. The assumptions vary by year of claim
incurral and may include a provision for adverse deviation. The interest rate
assumptions used for discounting claim reserves are based on projected
portfolio yield rates, after consideration for defaults and investment
expenses, for the assets supporting the liabilities for the various product
lines. The assets for each product line are selected according to the specific
investment strategy for that product line to produce asset cash flows that
follow similar timing and amount patterns to those of the anticipated liability
payments.
Reserves for future policy and contract benefits on group single premium
annuities have been provided on a net single premium method. The reserves are
calculated based upon assumptions as to interest, mortality, and
50
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
retirement that were appropriate at the date of issue. Mortality assumptions
are based upon industry standards adjusted as appropriate to reflect actual
Company experience. The assumptions vary by year of issue and include a
provision for adverse deviation.
The interest rate assumptions used to calculate reserves for future policy
and contract benefits are as follows:
December 31
-----------------------------
1999 1998
-------------- --------------
Active Life Reserves--Current Year Issues
Traditional Life.......................... 6.75% to 8.75% 6.75% to 8.75%
Individual Disability..................... 5.50% to 9.00% 6.00% to 9.00%
Disabled Lives Reserves--Current Year
Claims
Individual Disability..................... 6.65% to 8.00% 5.50% to 8.00%
Group Disability.......................... 7.35% to 7.60% 7.40% to 8.95%
Disabled Lives Reserves--Prior Year Claims
Individual Disability..................... 6.65% to 8.00% 5.50% to 8.00%
Group Disability.......................... 7.35% to 7.60% 7.40% to 7.60%
Interest assumptions for active life reserves are generally graded downward
over a period of years. Reserves for future policy and contract benefits on
interest-sensitive products are principally policyholder account values
determined on the retrospective deposit method.
Policyholders' Funds: Policyholders' funds represent customer deposits plus
interest credited at contract rates. The Company controls its interest rate
risk by investing in quality assets which have an aggregate duration that
closely matches the expected duration of the liabilities. For guaranteed
investment contracts (GICs), which are no longer marketed, the Company uses a
cash flow matching investment strategy.
Liabilities for Restructuring Activities: Liabilities for restructuring
activities are recorded when management, prior to the balance sheet date,
commits to execute an exit plan that will result in the incurral of costs that
have no future economic benefit or approves a plan of termination and
communicates sufficient detail of the plan to employees. Liabilities for
restructuring activities are included in other liabilities in the consolidated
statements of financial condition.
Federal Income Taxes: Deferred taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial statement purposes and the amounts used for income tax purposes.
Deferred taxes have been measured using enacted statutory income tax rates and
laws that are currently in effect. A valuation allowance is established for
deferred tax assets when it is more likely than not that an amount will not be
realized.
Separate Accounts: The separate account amounts shown in the accompanying
consolidated financial statements represent contributions by contract holders
to variable-benefits and fixed-benefits pension plans. The contract purchase
payments and the assets of the separate accounts are segregated from other
Company funds for both investment and administrative purposes. Contract
purchase payments received under variable annuity contracts are subject to
deductions for sales and administrative fees. Also, the sponsoring companies of
the separate accounts receive management fees which are based on the net asset
values of the separate accounts.
Translation of Foreign Currency: Revenues and expenses of the Company's
foreign operations, principally Canada and the United Kingdom, are translated
at average exchange rates. Assets and liabilities are
51
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
translated at the rate of exchange on the balance sheet date. The translation
gain or loss is generally reported in accumulated other comprehensive income
(loss), net of deferred tax.
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 in 1986 will
remain participating as long as they remain in force. A Participation Fund
Account (PFA) was established for the benefit of all of 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. The
experience of the PFA and its operations have been excluded from the
consolidated statements of operations. The PFA was $362.2 million and $371.1
million at December 31, 1999, and 1998, respectively, and represented
approximately 0.9 percent and 1.0 percent of consolidated assets and 1.1
percent and 1.2 percent of consolidated liabilities for December 31, 1999 and
1998, respectively.
Accounting for Stock-Based Compensation: The Company measures compensation
cost for stock-based compensation under the expense recognition provisions of
Accounting Principles Board Opinion No. 25 (Opinion 25), Accounting for Stock
Issued to Employees. Under this method, compensation cost is the excess, if
any, of the quoted market price at grant date or other measurement date over
the amount an employee must pay to acquire the stock.
Changes in Accounting Principles: Effective January 1, 1999, the Company
adopted the provisions of Statement of Position 97-3 (SOP 97-3), Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments. SOP 97-3
provides guidance for determining when an entity should recognize a liability
or an asset for insurance-related assessments and how to measure these items.
The Company fully adopted the provisions of Statement of Position 98-1 (SOP 98-
1), Accounting for the Costs of Computer Software Developed for or Obtained for
Internal Use, effective January 1, 1999. SOP 98-1 requires the capitalization
of certain costs incurred in connection with developing or obtaining software
for internal use. The effect of the adoptions of SOP 97-3 and SOP 98-1 on the
Company's financial position and results of operations was immaterial.
Accounting Pronouncements Outstanding:
Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for
Derivative Instruments and Hedging Activities
In 1998, the FASB issued SFAS 133 which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial condition and
measure those instruments at fair value. SFAS 133 specifies a special method of
accounting for certain hedging transactions, prescribes the type of items and
transactions that may be hedged, and provides the criteria which must be met in
order to qualify for hedge accounting.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation as follows:
Fair value hedge. Changes in the fair value of both the derivative and the
hedged item attributable to the risk being hedged are recognized in
operating earnings.
52
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash flow hedge. To the extent it is effective, changes in the fair value
of the derivative are recognized as a component of accumulated other
comprehensive income in stockholders' equity until the hedged item affects
earnings. Any ineffective portion must be recognized in operating earnings
at the same time the change in fair value is recognized on the statement of
financial condition.
Foreign currency exposures hedge. In a hedge of foreign currency exposures
in a net investment in a foreign operation, to the extent the hedge is
effective, the change in the fair value of the derivative is treated as a
translation gain or loss and recognized in accumulated other comprehensive
income offsetting other translation gains and losses arising in
consolidation. Any ineffective portion must be recognized in operating
earnings at the same time the change in fair value of the derivative is
recognized on the statement of financial condition.
For a derivative not designated as a hedging instrument, the gain or loss is
recognized in operating earnings in the period of change.
Statement of Financial Accounting Standards No. 137 (SFAS 137), Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB Statement No. 133 was issued in June 1999. SFAS 137 defers for one
year the effective date of SFAS 133. The Company plans to adopt the provisions
of SFAS 133 effective January 1, 2001. At this time the Company has not
determined the effects that adoption of SFAS 133 will have on its financial
statements.
Statement of Position 98-7 (SOP 98-7), Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk
In 1998, the American Institute of Certified Public Accountants (AICPA)
issued SOP 98-7, which provides guidance on applying the deposit method of
accounting to insurance and reinsurance contracts that do not transfer
insurance risk. The Company is required to adopt SOP 98-7 effective January 1,
2000. The adoption of SOP 98-7 is not expected to have a material impact on the
Company's results of operations, liquidity, or financial position.
Note 2--Merger
On June 30, 1999, prior to the completion of the merger, each outstanding
share of Provident common stock was reclassified and converted into 0.73 of a
share of Provident common stock. Immediately after this reclassification, the
merger was completed, and each share of Unum common stock issued and
outstanding immediately prior to the merger was converted into one share of the
Company's common stock, and the par value was reduced from $1.00 to $0.10 per
share. In the merger, the shares of Provident common stock were not further
affected, but thereafter became shares of the Company's common stock. Unum
common stock held in treasury was retired. Stockholders' equity and per share
amounts have been adjusted to reflect these items.
53
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the second and third quarter of 1999, the Company recognized expenses
related to the merger and the early retirement offer to employees as follows
(in millions):
Employee related expense......................................... $ 77.7
Exit activities related to duplicate facilities/asset
abandonments.................................................... 67.4
Investment banking, legal, and accounting fees................... 39.6
------
Subtotal......................................................... 184.7
Expense related to the early retirement offer to employees....... 125.9
------
Subtotal......................................................... 310.6
Income tax benefit............................................... 89.2
------
Total............................................................ $221.4
======
Employee related expense consists of employee severance costs, change in
control costs, restricted stock costs which fully vested upon stockholder
adoption of the merger agreement or upon completion of the merger, and
outplacement costs to assist employees who have been involuntarily terminated.
Severance benefits and change in control costs are $60.2 million, and costs
associated with the vesting of restricted stock are $17.5 million. The Company
estimates that in total approximately 1,615 positions will be eliminated over a
twelve month period beginning June 30, 1999. Approximately 1,000 of these
positions will be eliminated through the early retirement offer. As of December
31, 1999, approximately 800 and 580 positions have been eliminated as a result
of the early retirement offer and involuntary terminations, respectively, and
$26.5 million of the estimated $60.2 million has been paid for severance
benefits and change in control costs.
Exit activities related to duplicate facilities/asset abandonments consist
of closing of duplicate offices and write-off of redundant computer hardware
and software. The Company currently expects to close approximately 90 duplicate
field offices over a period of one year after June 30, 1999. The cost
associated with these office closures is approximately $25.6 million, which
represents the cost of future minimum lease payments less any estimated amounts
recovered under subleases. As of December 31, 1999, $3.7 million of this
estimated liability has been paid. Also, certain physical assets, primarily
computer equipment, redundant systems, and systems incapable of supporting the
combined entity, have been abandoned as a result of this merger. This
abandonment resulted in a write-down of the assets' book values by
approximately $41.8 million during 1999. Approximately $40.9 million of the
$41.8 million of assets have been removed from service as of December 31, 1999.
Of the $39.6 million of investment banking, legal, and accounting fees, $39.1
million has been paid in 1999.
The expenses related to the merger reduced 1999 earnings $184.7 million
before tax and $139.6 million after tax. The expense related to the early
retirement offer reduced earnings $125.9 million before tax and $81.8 million
after tax.
Additionally during 1999, 0.5 million shares of outstanding restricted stock
became unrestricted and stock options on 5.3 million shares became immediately
exercisable effective with the merger, in accordance with Unum's and
Provident's restricted stock and stock option plan provisions concerning a
change in control. The expense related to restricted stock vesting has been
included in merger related expenses. The Company applies Opinion 25 and related
interpretations in accounting for the stock option plans. Accordingly, no
compensation cost was recognized for stock option vesting.
Generally, because of the effort and time involved, reviews and updates of
assumptions related to benefit liabilities are periodically undertaken over
time and are reflected in the calculation of benefit liabilities as
54
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
completed. Many factors influence assumptions underlying reserves, and
considerable judgment is required to interpret current and historical
experience underlying all of the assumptions and to assess the future factors
that are likely to influence the ultimate cost of settling existing claims.
Prior to the merger, Unum's process and assumptions used to calculate the
discount rate for claim reserves of certain disability businesses differed from
that used by Provident. While Unum's and Provident's methods were both in
accordance with GAAP, management believed that the combined entity should have
consistent discount rate accounting policies and methods for applying those
policies for similar products. Unum's former methodology used the same
investment strategy for assets backing both liabilities and surplus.
Provident's methodology, which allows for different investment strategies for
assets backing surplus than those backing product liabilities, was determined
by management to be the more appropriate approach for the Company. Accordingly,
at June 30, 1999 the Company adopted Provident's method of calculating the
discount rate for claim reserves.
The discount rates affected by this change in Unum's methodology were as
follows:
June 30, 1999
--------------
Current Former
Rates Rates
------- ------
Group Long-term Disability (North America)............... 6.75% 7.74%
Group Long-term Disability and Individual Disability
(United Kingdom)........................................ 7.45% 8.80%
Individual Disability (North America).................... 6.88% 7.37%
The unpaid claim reserves for these disability lines as of June 30, 1999
were $5,318.3 million using the former method for determining reserve discount
rates and $5,559.0 million using the current method. The impact on 1999
earnings related to the change in method of calculating the discount rate for
claim reserves was $240.7 million before tax and $156.5 million after tax
during the second quarter.
Subsequent to the merger date, the Company began to integrate the valuation
procedures of the two organizations to provide for a more effective linking of
pricing and reserving assumptions and to facilitate a more efficient process
for adjusting liabilities to emerging trends. Included in this integration
activity were a review and an update of assumptions that underlie policy and
contract benefit liabilities. The purpose of the study was to confirm or update
the assumptions which were viewed as likely to affect the ultimate liability
for contract benefits. Accordingly, as a result of the merger, the Company
accelerated the performance of its normal reviews of the assumptions underlying
reserves to determine the assumptions that the newly merged Company will use in
the future for pricing, performance management, and reserving.
The review resulted in an increase in the benefits and reserves for future
benefits for the Company's domestic and Canadian group long-term disability
unpaid claim liabilities. As a result of the review, the Company increased its
policy and contract benefit liabilities $359.2 million, which reduced 1999
earnings $359.2 million before tax and $233.5 million after tax during the
third quarter.
The increase in policy and contract benefit liabilities primarily resulted
from revisions to assumptions in the following three key components: claim
termination rates, incurred but not reported (IBNR) factors, and discount
rates. These components and their effect on the reserve increase are summarized
and discussed below (in millions).
Claim termination rates........................................... $372.6
Incurred but not reported factors................................. 101.4
Discount rates.................................................... (114.8)
------
Net change........................................................ $359.2
======
55
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The assumptions concerning claim termination rates relate to changes in the
estimated average length of time a claim is open (duration) and the ultimate
cost of settling claims. Recent trends indicate the duration of a disability
claim is increasing. Claim termination rates are based on industry experience
adjusted for Company historical and anticipated experience, which considers
emerging trends and Company actions that would have a material effect on claim
termination rates.
The increase in policy and contract benefit liabilities that results from
the revised claim termination rates is attributable to two elements. The first
element is the claim resolution assumption, which is the portion of claim
terminations related to the disabled returning to work or the expiration of the
benefit period. The second element is the mortality assumption, which is the
portion of claim terminations that result from death of the disabled. The
effect of these two elements on the increase in policy and contract benefit
liabilities is discussed below.
Claim resolution assumptions have been determined considering both external
trends and the Company's current and planned actions which would have a
material effect on claim resolution rates. Due to the high variability in claim
resolution rates, considerable judgment is required in setting claim resolution
assumptions. Revised claim resolution assumptions have been determined after
consideration of the merger integration plans, including the short-term
disruption of the claims management process from integration activities. Other
factors considered included emerging external trends, such as the developing
trend for some claimants to remain on claim longer, current and historical
claim resolution experience, industry claim resolution experience, and changes
in planned actions, as well as the anticipated future effectiveness of the
claims operations in settling existing claims. The revised assumptions for
claim resolution rates resulted in an increase in benefit liabilities of
approximately $194.8 million. These estimates rely on the Company's ability to
complete integration and claims processing changes as planned and those changes
having the anticipated impact on claim recovery rates.
The review also examined assumptions for mortality. Revision of mortality
assumptions resulted in an increase in benefit liabilities of approximately
$177.8 million. Mortality is a critical factor influencing the length of time a
claimant receives monthly disability benefits. Mortality has been improving for
the general population, and this improvement is now considered permanent. Life
expectancy has been extended dramatically for individuals suffering from
acquired immune deficiency syndrome (AIDS). Early observations of this trend
and related medical literature raised questions concerning the long-term
sustainability of the mortality improvements. The Company also assumed that, if
the trend did continue, many of the individuals responding positively to
treatment could be returned to productive employment.
The previous review of mortality performed by the Company did not indicate a
need to change mortality assumptions. However, recent analysis indicates that
the improved mortality trend is sustainable and that rehabilitation of
afflicted individuals to return to work has been minimally successful to date.
AIDS related disabilities are approximately 2 percent of the Company's total
disability claims. In addition to the AIDS mortality trend, the recent review
demonstrates that survival from other frequently fatal diseases such as cancer
and heart disease has improved over recent periods and is now judged to be more
permanent due to advances in medical sciences and treatments. While the
treatment advances have lengthened life expectancies, they do not always result
in the claimant being able to return to work; thus, the ultimate level of
payments to be made on a disability claim increases. Of the total increase in
benefit liabilities for revised mortality assumptions, $85.4 million is related
to AIDS related disabilities and $92.4 million to cancer and other
disabilities.
The second component of the increase in benefit liabilities is the provision
for claims incurred but not yet reported, which resulted in an increase in
benefit liabilities of $101.4 million. This provision is an estimate of the
outstanding liability related to claims that have been incurred by individual
insureds as of the valuation date, but the claims have not yet been reported to
the Company. This liability is affected by the estimate of the
56
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
number of outstanding claims. Because of the long elimination periods,
generally 90 to 180 days or longer, the development of the factors must cover a
period of sufficient length to mitigate the effects of random fluctuations and
to establish the presence of trends. Recent trends indicate an increase in new
claim rates which results in an increase in the estimate of outstanding claims.
Another item affecting this liability is the estimate of the average cost of
each outstanding claim. The lengthening of time a claimant receives monthly
benefits resulting from the factors noted above also results in an increase in
the estimate of the average cost of each claim.
The third component of the change in benefit liabilities is the change in
the rate used to discount claim reserves, including IBNR reserves, which
resulted in a decrease of $114.8 million in benefit liabilities. Subsequent to
the merger, the Company significantly restructured the investment portfolio
backing these liabilities with the objective of improving asset and liability
management and improving yield. As part of this strategy, during the third
quarter of 1999, the Company sold $426.1 million of assets with a book yield of
5.98 percent and purchased $546.6 million of assets with a yield of 8.87
percent, improving the overall yield on the assets backing liabilities. As a
result of this investment restructuring and consistent with its policy, the
Company increased the rate used to discount claim reserves to 7.35 percent,
resulting in a decrease of $114.8 million in benefit liabilities.
The updated assumptions will be reflected in new and renewal pricing
actions, and a higher benefit ratio is expected over the next several quarters
until the effect of pricing actions is reflected in premium income. Actual
experience could fluctuate from these assumptions, and such fluctuations may
have a material positive or negative effect on earnings.
The results of operations for the separate companies and the combined
amounts for the periods prior to the merger were as follows:
Year Ended December 31
Six Months Ended ----------------------
June 30, 1999 1998 1997
---------------- ----------- -----------
(in millions of dollars)
Revenue
Unum................................. $2,557.8 $4,581.3 $4,124.1
Provident............................ 1,988.9 3,938.0 3,553.2
-------- -------- --------
Combined Revenue..................... $4,546.7 $8,519.3 $7,677.3
======== ======== ========
Net Income (Loss)
Unum................................. $ (189.7) $ 363.4 $ 370.3
Provident............................ 87.8 254.0 247.3
-------- -------- --------
Combined Net Income (Loss)........... $ (101.9) $ 617.4 $ 617.6
======== ======== ========
Included in Unum's net loss for the six months ended June 30, 1999, is
$131.8 million after tax for expenses related to the merger and the early
retirement offer to employees and $156.5 million after tax for the reserve
discount rate change. Unum's net loss for the six months ended June 30, 1999
also includes an after-tax first quarter charge of $88.0 million related to its
reinsurance businesses. Included in Provident's net income for the six months
ended June 30, 1999, is $62.0 million after tax for expenses related to the
merger and the early retirement offer to employees.
57
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Fair Values of Financial Instruments
The carrying amounts and fair values of the Company's financial instruments
are as follows:
December 31
------------------------------------------
1999 1998
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
(in millions of dollars)
Assets
Fixed Maturity Securities:
Available-for-Sale............... $22,035.7 $22,035.7 $22,538.2 $22,538.2
Derivatives Hedging Available-
for-Sale........................ (2.5) (2.5) 194.0 194.0
Held-to-Maturity................. 323.5 318.8 307.0 352.5
Equity Securities................. 38.4 38.4 33.1 33.1
Mortgage Loans.................... 1,278.1 1,281.2 1,321.2 1,443.0
Policy Loans...................... 2,316.9 2,211.1 2,227.2 2,371.6
Short-term Investments............ 321.5 321.5 245.1 245.1
Cash and Bank Deposits............ 292.4 292.4 111.2 111.2
Deposit Assets.................... 616.6 616.6 729.7 729.7
Liabilities
Policyholders' Funds:
Deferred Annuity Products........ 2,014.6 2,014.6 2,487.2 2,487.2
Other............................ 538.7 551.3 833.0 862.5
Short-term Debt................... 1,075.0 1,075.0 323.7 323.7
Long-term Debt.................... 1,166.5 1,061.6 1,225.2 1,304.9
Company-Obligated Mandatorily
Redeemable Preferred Securities.. 300.0 268.5 300.0 312.4
Derivatives Hedging Liabilities... (5.9) (5.9) (4.2) (4.2)
The following methods and assumptions were used by the Company in estimating
the fair values of its financial instruments:
Fixed Maturity Securities: Fair values for fixed maturity securities are
based on quoted market prices, where available. For fixed maturity securities
not actively traded, 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. See
Note 4 for the amortized cost and fair values of securities by security type
and by maturity date.
Equity Securities: Fair values for equity securities are based on quoted
market prices.
Mortgage Loans: Fair values for mortgage loans are estimated using
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: Fair values for policy loans are estimated using discounted
cash flow analyses, using interest rates currently being offered.
Short-term Investments, Cash and Bank Deposits, and Deposit Assets: Carrying
amounts for short-term investments, cash and bank deposits, and deposit assets
approximate fair value.
58
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Policyholders' Funds: The carrying amount for deferred annuity products
approximate fair value. Other policyholders funds include GICs and
supplementary contracts without life contingencies. Fair values for GICs are
estimated using discounted cash flow calculations, based on current market
interest rates available for similar contracts with maturities consistent with
those remaining for the contracts being valued. The carrying amount for
supplementary contracts without life contingencies approximates fair value.
Fair values for insurance contracts other than investment contracts are not
required to be disclosed. However, the fair values of liabilities under all
insurance contracts are taken into consideration in the Company'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.
Short-term Debt: The carrying amounts for short-term debt approximate fair
value.
Long-term Debt and Company-Obligated Mandatorily Redeemable Preferred
Securities: Fair values for long-term debt and company-obligated mandatorily
redeemable preferred securities were obtained from independent pricing services
or discounted cash flow analyses based on current incremental borrowing rates
for similar types of borrowing arrangements.
Derivatives: Fair values of derivative financial instruments are based on
market quotes or pricing models and represent the net amount of cash the
Company would have received or paid if the contracts had been settled or closed
on December 31.
Note 4--Investments
Securities
The amortized cost and fair values of securities by security type are as
follows:
December 31, 1999
-----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in millions of dollars)
Available-for-Sale Securities
United States Government and
Government Agencies and
Authorities........................ $ 73.8 $ 2.8 $ 1.0 $ 75.6
States, Municipalities, and
Political Subdivisions............. 418.0 4.6 5.3 417.3
Foreign Governments................. 833.6 95.7 1.0 928.3
Public Utilities.................... 3,593.0 107.2 80.8 3,619.4
Mortgage-backed Securities.......... 2,831.4 30.3 97.0 2,764.7
All Other Corporate Bonds........... 14,265.3 411.2 607.6 14,068.9
Redeemable Preferred Stocks......... 127.3 47.8 16.1 159.0
--------- ------ ------ ---------
Total Fixed Maturity Securities.... 22,142.4 699.6 808.8 22,033.2
Equity Securities................... 15.9 23.4 0.9 38.4
--------- ------ ------ ---------
$22,158.3 $723.0 $809.7 $22,071.6
========= ====== ====== =========
Held-to-Maturity Securities
United States Government and
Government Agencies and
Authorities........................ $ 7.2 $ 0.6 $ -- $ 7.8
States, Municipalities, and
Political Subdivisions............. 2.1 0.1 -- 2.2
Mortgage-backed Securities.......... 298.0 2.7 7.5 293.2
All Other Corporate Bonds........... 16.2 -- 0.6 15.6
--------- ------ ------ ---------
$ 323.5 $ 3.4 $ 8.1 $ 318.8
========= ====== ====== =========
59
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
-----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in millions of dollars)
Available-for-Sale Securities
United States Government and
Government Agencies and
Authorities........................ $ 248.2 $ 75.3 $ -- $ 323.5
States, Municipalities, and
Political Subdivisions............. 1,204.2 57.4 -- 1,261.6
Foreign Governments................. 868.3 203.4 0.1 1,071.6
Public Utilities.................... 3,814.5 447.1 19.4 4,242.2
Mortgage-backed Securities.......... 1,782.2 144.1 0.4 1,925.9
All Other Corporate Bonds........... 12,517.8 1,361.7 135.3 13,744.2
Redeemable Preferred Stocks......... 146.4 27.6 10.8 163.2
--------- -------- ------ ---------
Total Fixed Maturity Securities.... 20,581.6 2,316.6 166.0 22,732.2
Equity Securities................... 24.0 10.6 1.5 33.1
--------- -------- ------ ---------
$20,605.6 $2,327.2 $167.5 $22,765.3
========= ======== ====== =========
Held-to-Maturity Securities
United States Government and
Government Agencies and
Authorities........................ $ 13.5 $ 3.9 $ -- $ 17.4
States, Municipalities, and
Political Subdivisions............. 2.4 0.2 -- 2.6
Mortgage-backed Securities.......... 276.1 35.4 -- 311.5
All Other Corporate Bonds........... 15.0 6.0 -- 21.0
--------- -------- ------ ---------
$ 307.0 $ 45.5 $ -- $ 352.5
========= ======== ====== =========
60
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amortized cost and fair values of fixed maturity securities by maturity
date are shown below. The maturity dates have not been adjusted for possible
calls or prepayments.
December 31, 1999
------------------------
Fair
Amortized Cost Value
-------------- ---------
(in millions of dollars)
Available-for-Sale Securities
1 year or less....................................... $ 251.3 $ 253.4
Over 1 year through 5 years.......................... 2,503.5 2,556.6
Over 5 years through 10 years........................ 5,687.3 5,650.7
Over 10 years........................................ 10,868.9 10,807.8
--------- ---------
19,311.0 19,268.5
Mortgage-backed Securities........................... 2,831.4 2,764.7
--------- ---------
$22,142.4 $22,033.2
========= =========
Held-to-Maturity Securities
1 year or less....................................... $ 0.9 $ 0.9
Over 1 year through 5 years.......................... 1.3 1.3
Over 5 years through 10 years........................ -- --
Over 10 years........................................ 23.3 23.4
--------- ---------
25.5 25.6
Mortgage-backed Securities........................... 298.0 293.2
--------- ---------
$ 323.5 $ 318.8
========= =========
At December 31, 1999, the total investment in below-investment-grade fixed
maturity securities (securities rated below Baa3 by Moody's Investors Service
or an equivalent internal rating) was $2,147.4 million or 8.1 percent of
invested assets. The amortized cost of these securities was $2,205.3 million.
Deposit assets in the form of marketable securities held in trust are
reported in other assets in the consolidated statements of financial condition.
Unrealized gains (losses) on these securities were $(25.9) million and $211.6
million, respectively, at December 31, 1999 and 1998.
Adjustments to reserves for future policy and contract benefits that would
have been necessary if the unrealized investment gains and losses related to
the available-for-sale securities had been realized as of December 31, 1999 and
1998, were $(123.1) million and $891.7 million, respectively.
The components of the change in net unrealized gains on securities included
in other comprehensive income (loss) are as follows:
Year Ended December 31
---------------------------
1999 1998 1997
--------- ------ --------
(in millions of dollars)
Change in Net Unrealized Gains Before
Reclassification Adjustment..................... $(2,159.3) $244.6 $1,194.6
Reclassification Adjustment for Net Realized
Investment Gains................................ (87.1) (55.0) (11.5)
Change in Unrealized Gains on Deposit Assets..... (237.5) 83.9 127.8
Change in the Adjustment to Reserves for Future
Policy and Contract Benefits.................... 1,014.8 (72.6) (297.4)
Change in Deferred Tax........................... 519.5 (67.2) (351.0)
--------- ------ --------
Change in Net Unrealized Gains................. $ (949.6) $133.7 $ 662.5
========= ====== ========
61
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mortgage Loans
Mortgage loans are impaired when, based on current information and events,
it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. The recorded
investment in mortgage loans considered to be impaired was $18.1 million and
$20.7 million, respectively, at December 31, 1999 and 1998. Included in the
December 31, 1999 amount of $18.1 million were loans of $6.6 million which had
a related allowance for losses of $2.4 million and loans of $11.5 million which
had no related allowance for losses. Included in the December 31, 1998 amount
of $20.7 million were loans of $9.0 million which had a related allowance for
losses of $2.4 million and loans of $11.7 million which had no related
allowance for losses.
Investment Valuation Allowances
Additions to the investment valuation allowances represent realized
investment losses, and deductions represent the allowance released upon
disposal or restructuring of the related asset. Changes are as follows:
Balance at Balance
Beginning at End
of Year Additions Deductions of Year
---------- --------- ---------- -------
(in millions of dollars)
Year Ended December 31, 1997
Mortgage Loans......................... $38.7 $ 3.3 $ 7.1 $34.9
Real Estate............................ 36.3 10.6 6.2 40.7
----- ----- ----- -----
Total................................. $75.0 $13.9 $13.3 $75.6
===== ===== ===== =====
Year Ended December 31, 1998
Mortgage Loans......................... $34.9 $ 2.3 $ 4.4 $32.8
Real Estate............................ 40.7 10.5 -- 51.2
----- ----- ----- -----
Total................................. $75.6 $12.8 $ 4.4 $84.0
===== ===== ===== =====
Year Ended December 31, 1999
Mortgage Loans......................... $32.8 $ 0.1 $ -- $32.9
Real Estate............................ 51.2 -- 13.4 37.8
----- ----- ----- -----
Total................................. $84.0 $ 0.1 $13.4 $70.7
===== ===== ===== =====
62
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net Investment Income
Sources for net investment income are as follows:
Year Ended December 31
----------------------------
1999 1998 1997
-------- -------- --------
(in millions of dollars)
Fixed Maturity Securities....................... $1,712.7 $1,708.4 $1,659.8
Equity Securities............................... 0.1 0.4 0.4
Mortgage Loans.................................. 111.2 106.4 121.1
Real Estate..................................... 37.0 32.5 40.5
Policy Loans.................................... 222.3 206.5 198.7
Other Long-term Investments..................... 6.8 9.8 27.3
Short-term Investments.......................... 56.0 59.8 31.2
-------- -------- --------
Gross Investment Income........................ 2,146.1 2,123.8 2,079.0
Less Investment Expenses........................ 63.0 64.3 38.9
Less Investment Income on PFA Assets............ 23.4 24.1 24.4
-------- -------- --------
Net Investment Income.......................... $2,059.7 $2,035.4 $2,015.7
======== ======== ========
Realized Investment Gains and Losses
Realized investment gains (losses) are as follows:
Year Ended December 31
----------------------------
1999 1998 1997
-------- -------- --------
(in millions of dollars)
Fixed Maturity Securities
Gross Gains.................................... $ 82.6 $ 69.6 $ 80.8
Gross Losses................................... (99.9) (16.1) (60.2)
Equity Securities............................... 25.8 4.2 0.6
Mortgage Loans, Real Estate, and Other Invested
Assets......................................... 17.1 (4.5) (6.5)
Deposit Assets.................................. 61.4 1.4 --
Derivatives..................................... 0.1 0.4 (3.2)
-------- -------- --------
$ 87.1 $ 55.0 $ 11.5
======== ======== ========
Note 5--Derivative Financial Instruments
The Company uses swaps, forwards, futures, and options to hedge interest
rate and currency risks and to match assets with its insurance liabilities.
Derivative Risks
The basic types of risks associated with derivatives are market risk (that
the value of the derivative will be adversely impacted by changes in the
market, primarily the change in interest and exchange rates) and credit risk
(that the counterparty will not perform according to the terms of the
contract). The market risk of the derivatives should generally offset the
market risk associated with the hedged financial instrument or liability.
To help limit the credit exposure of the derivatives, the Company has
entered into master netting agreements with its counterparties whereby
contracts in a gain position can be offset against contracts in a loss
63
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
position. The Company also typically enters into bilateral, cross-
collateralization agreements with its counterparties to help limit the credit
exposure of the derivatives. These agreements require the counterparty in a
loss position to submit acceptable collateral with the other counterparty in
the event the net loss position meets or exceeds an agreed upon amount. The
Company's current credit exposure on derivatives, which is limited to the value
of those contracts in a net gain position, was $12.5 million at December 31,
1999.
Hedging Activity
The table below summarizes by notional amounts the activity for each
category of derivatives.
Swaps
--------------------------------
Receive Receive Receive
Variable/Pay Fixed/Pay Fixed/Pay
Fixed Fixed Variable Forwards Futures Options Total
------------ --------- --------- -------- -------- -------- --------
(in millions of dollars)
Balance at December 31,
1996................... $300.0 $ -- $ 797.6 $ -- $ 188.2 $ -- $1,285.8
Acquisition of
Business--Note 15..... -- -- 9.4 390.0 -- -- 399.4
Additions.............. -- 168.3 420.0 -- 1,399.8 2,034.5 4,022.6
Terminations........... 300.0 -- 114.6 250.0 1,144.5 1,625.0 3,434.1
------ ------ -------- ------ -------- -------- --------
Balance at December 31,
1997................... -- 168.3 1,112.4 140.0 443.5 409.5 2,273.7
Additions.............. -- -- 90.0 -- 356.0 207.8 653.8
Terminations........... -- -- 122.4 140.0 688.5 405.0 1,355.9
------ ------ -------- ------ -------- -------- --------
Balance at December 31,
1998................... -- 168.3 1,080.0 -- 111.0 212.3 1,571.6
Additions.............. 8.2 12.3 406.0 82.9 325.0 459.0 1,293.4
Terminations........... -- 168.3 320.0 -- 436.0 370.0 1,294.3
------ ------ -------- ------ -------- -------- --------
Balance at December 31,
1999................... $ 8.2 $ 12.3 $1,166.0 $ 82.9 $ -- $ 301.3 $1,570.7
====== ====== ======== ====== ======== ======== ========
Additions and terminations reported above for futures and options include
roll activity, which is the closing out of an old contract and initiation of a
new one when a contract is about to mature but the need for it still exists.
The following table summarizes the timing of anticipated settlements of
interest rate swaps outstanding at December 31, 1999, whereby the Company
receives a fixed rate and pays a variable rate. The weighted average interest
rates assume current market conditions.
2000 2001 2002 2003 2007 Total
------ ------ ------ ----- ------ --------
(in millions of dollars)
Receive Fixed/Pay Variable:
Notional Value............... $530.0 $400.0 $150.0 $26.0 $ 60.0 $1,166.0
Weighted Average Receive
Rate........................ 7.33% 7.58% 7.54% 7.45% 13.37% 7.76%
Weighted Average Pay Rate.... 6.00% 6.00% 6.00% 6.00% 11.84% 6.30%
Hedging programs for derivative activity are as follows:
Program 1
The Company has executed a series of cash flow hedges in the group
disability, individual disability, and the group single premium annuities
portfolios using interest rate swaps, forwards, futures, and options. The
purpose of these hedges is to lock in the reinvestment rates on future cash
flows and protect the Company from the potential adverse impact of declining
interest rates on the associated policy reserves. The Company uses
64
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
futures contracts to partially offset hedges on fixed maturity securities
purchased prior to the termination date of interest rate swaps and forwards.
The Company also uses futures contracts to replace terminated forwards and
interest rate swaps in order to maintain hedges until the fixed maturity
securities are purchased. The notional amount outstanding for these cash flow
hedges was $1,482.9 million, $1,285.0 million, and $1,528.5 million at December
31, 1999, 1998, and 1997, respectively. The deferred gain on these contracts
was $94.0 million, $63.7 million, and $37.6 million, at December 31, 1999,
1998, and 1997, respectively.
In 1999, 1998, and 1997, the Company amortized into net investment income
$3.1 million, $1.9 million, and $0.6 million, respectively, of the deferred
gains from this program. Realized investment gains and losses from this program
during 1999, 1998 and 1997 were immaterial.
At December 31, 1999 and 1998, the Company had an unrealized gain of $0.3
million and $194.0 million, respectively, on the open interest rate swaps,
forwards, and futures. These derivatives are scheduled to be terminated in the
years 2000 through 2003 as assets are purchased with the future anticipated
cash flows.
Future contracts to hedge anticipated cash flows have also been utilized for
other product portfolios. At December 31, 1999, the Company had no open
contracts for other product portfolios.
Program 2
In 1998 and 1997, the Company sold indexed annuity products whereby a
portion of the crediting rate on the annuity was based on the performance of
the S&P 500 stock index. In order to hedge this fluctuating credit rate, the
Company purchased options with the S&P 500 stock index as the underlying item.
These options will be settled with a net cash payment to the Company at the
expiration date if the S&P 500 index moves above the option contract's strike
price; otherwise, no cash payment will take place at expiration. At December
31, 1999, the outstanding notional amount of these options was $7.3 million,
and the fair value and carrying amount were $5.9 million.
Program 3
In 1999, the Company entered into a foreign currency interest rate swap to
hedge its currency risk in Japan. The notional amount of this swap is $8.2
million and is scheduled for termination in 2000. The unrealized loss on this
swap at December 31, 1999 was immaterial. Additionally, the Company entered
into a foreign currency interest rate swap to hedge the currency risk of
certain foreign currency denominated fixed income securities purchased in 1999.
The notional amount outstanding for this currency hedge was $12.3 million, and
the hedge is scheduled for termination in 2006. The unrealized gain on this
swap at December 31, 1999 was immaterial.
In 1997, the Company borrowed $168.3 million through a private placement
with an investor in the United Kingdom. Upon issuance of the borrowing, the
Company entered into foreign 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 private placement issue was settled in 1999, and the hedging arrangement
was terminated.
Program 4
In 1999, the Company entered into an interest rate swap to convert a
variable rate security into a fixed rate security. The notional amount for this
interest rate swap is $60.0 million and is scheduled for termination in 2007.
Income from settlements of payment streams on this interest rate swap agreement
as reported in the consolidated statements of operations was $0.8 million. At
December 31, 1999, the Company had an unrealized loss of $2.9 million on this
swap.
65
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Program 5
In 1998 and 1997, the Company opened interest rate futures contracts and
wrote options on interest rate futures in order to hedge the borrowing rate on
the anticipated refinancing of long-term debt. The Company realized a $10.3
million before-tax investment loss when these contracts were terminated. The
loss on these contracts was deferred and is being amortized as an adjustment to
interest and debt expense.
At December 31, 1999, the Company had no open contracts under this program.
Program 6
The Company routinely uses forwards and futures to protect margins by
reducing the risk of changes in interest rates between the time of asset
purchase and the associated sale of an asset or sale of new business.
Gains or losses on termination of these forwards and futures are deferred
and reported as an adjustment of the carrying amount of the hedged asset or
liability and amortized into earnings over the lives of the hedged items. The
net deferred gain associated with this activity was $26.7 million and $28.9
million at December 31, 1999 and 1998, respectively.
The deferred gain amortized into earnings in the consolidated statements of
operations was $1.3 million, $1.3 million, and $2.0 million for the years ended
December 31, 1999, 1998, and 1997, respectively.
At December 31, 1999, the Company had no open contracts under this program.
Program 7
In 1994, the Company announced that it would discontinue the sale of
traditional GICs. At that time, the Company decided to convert from a duration
matching investment approach to a cash flow matching investment approach for
its GIC business. The Company hedged the risk that a rise in interest rates
would reduce the price on future sales of assets which would be necessary to
fund maturing liabilities by entering into forward interest rate swaps (receive
variable/pay fixed).
During 1997, the Company terminated the remaining $300.0 million of these
forward swaps as scheduled, realizing a $4.1 million before-tax investment
loss. In addition, the Company used offsetting futures contracts to partially
remove the hedge as fixed maturity securities were sold prior to the
termination date of the interest rate swaps. The Company realized a $0.1
million before-tax investment gain on the termination of these futures
contracts. The Company sold $302.0 million of fixed maturity securities
associated with this hedge, realizing a $4.3 million before-tax investment
gain.
At December 31, 1999, the Company had no open contracts under this program.
Note 6--Value of Business Acquired
A reconciliation of value of business acquired is as follows:
1999 1998 1997
------ ------ ------
(in millions of
dollars)
Balance at January 1.................................... $570.5 $699.0 $ 63.0
Acquisition of Business................................ -- 5.0 675.0
Disposition of Business................................ -- (90.6) --
Interest Accrued....................................... 40.4 43.2 37.6
Amortization........................................... (78.7) (81.8) (72.1)
Change in Foreign Currency Translation Adjustment...... 1.9 (4.3) (4.5)
------ ------ ------
Balance at December 31.................................. $534.1 $570.5 $699.0
====== ====== ======
66
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The estimated net amortization of value of business acquired for each of the
next five years is $37.1 million in 2000, $36.2 million in 2001, $35.3 million
in 2002, $34.3 million in 2003, and $33.2 million in 2004.
Note 7--Liability for Unpaid Claims and Claim Adjustment Expenses
Changes in the liability for unpaid claims and claim adjustment expenses are
as follows:
1999 1998 1997
--------- --------- ---------
(in millions of dollars)
Balance at January 1............................. $13,159.1 $11,979.3 $ 8,212.1
Less Reinsurance Recoverables................... 1,614.8 1,494.3 753.4
--------- --------- ---------
Net Balance at January 1......................... 11,544.3 10,485.0 7,458.7
Acquisition of Business--Note 15................. -- -- 2,295.4
Incurred Related to:
Current Year.................................... 4,853.8 4,220.9 3,434.9
Prior Years
Interest....................................... 705.4 646.6 585.5
Incurred....................................... 757.5 40.8 42.1
--------- --------- ---------
Total Incurred................................... 6,316.7 4,908.3 4,062.5
--------- --------- ---------
Paid Related to:
Current Year.................................... 1,538.2 1,266.7 959.4
Prior Years..................................... 3,066.2 2,582.3 2,372.2
--------- --------- ---------
Total Paid....................................... 4,604.4 3,849.0 3,331.6
--------- --------- ---------
Net Balance at December 31....................... 13,256.6 11,544.3 10,485.0
Plus Reinsurance Recoverables................... 2,087.9 1,614.8 1,494.3
--------- --------- ---------
Balance at December 31........................... $15,344.5 $13,159.1 $11,979.3
========= ========= =========
The majority of the net balances are related to disabled lives claims with
long-tail payouts on which interest earned on assets backing liabilities is an
integral part of pricing and reserving. Interest accrued on prior year reserves
has been calculated on the opening reserve balance less one-half year's cash
payments at the average reserve discount rate used by the Company during 1999,
1998, and 1997. During 1999, unpaid claims incurred for prior years increased
primarily due to changes in reserves as disclosed in Notes 2 and 13.
It is the Company's policy to estimate the ultimate cost of settling claims
in each reporting period based upon the information available to management at
the time. Actual claim resolution results are monitored and compared to those
anticipated in claim reserve assumptions. Claim resolution rate assumptions are
based upon industry standards adjusted as appropriate to reflect actual Company
experience as well as Company actions which would have a material impact on
claim resolutions. Company actions for which plans have been established and
committed to by management are factors which would modify past experience in
establishing claim reserves. Adjustments to the reserve assumptions will be
made if expectations change. Given that insurance products contain inherent
risks and uncertainties, the ultimate liability may be more or less than such
estimates indicate.
During the fourth quarter of 1998, the Company recorded a $153.0 million
increase in the reserve for individual and group disability claims incurred as
of December 31, 1998. Incurred claims include claims known as of that date and
an estimate of those claims that have been incurred but not yet reported.
Claims that have
67
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
been incurred but not yet reported are considered liabilities of the Company.
These claims are expected to be reported during 1999 and will be affected by
the claims operations integration activities. The $153.0 million claim reserve
increase represents the estimated value of cash payments to be made to these
claimants over the life of the claims as a result of the claims operations
integration activities.
Management believes the reserve adjustment was required based upon the
integration plans it had in place and to which it had committed and based upon
its ability to develop a reasonable estimate of the financial impact of the
expected disruption to the claims management process. Claims management is an
integral part of the disability operations. Disruptions in that process can
create material, short-term increases in claim costs. The merger has had a
near-term adverse impact on the efficiency and effectiveness of the Company's
claims management function resulting in some delay in claim resolutions and
additional claim payments to policyholders. Claims personnel have been
distracted from normal claims management activities as a result of planning and
implementing the integration of the two companies' claims organizations. In
addition, employee turnover and additional training have reduced resources and
productivity. An important part of the claims management process is assisting
disabled policyholders with rehabilitation efforts. This complex activity is
important to the policyholders because it can assist them in returning to
productive work and lifestyles more quickly, and it is important to the Company
because it shortens the duration of claim payments and thereby reduces the
ultimate cost of settling claims.
Immediately following the announcement of the merger and continuing into
December of 1998, senior management of the Company worked to develop the
strategic direction of the Company's claims organization. As part of the
strategic direction, senior management committed claims management personnel to
be involved in developing the detailed integration plans and implementing the
plans during 1999. Knowing that those involved in the claims operations
integration activities would not be available full time to perform their normal
claims management functions, management deemed it necessary to anticipate this
effect on the claim reserves at December 31, 1998. Prior to the merger, during
the first six months of 1999 approximately 90 claims managers and benefit
specialists spent nearly 40 percent of their time developing the detailed
integration plans. Effective with the merger, virtually all claims personnel
have been involved in the process of implementing the new work processes and
required training. The implementation and training efforts were estimated to
require an average of one month of productive time from each of the claims
staff between June 30, 1999 and December 31, 1999. Management now believes that
implementation and related systems conversions will continue into the second
quarter of 2000. However, due to actions taken by management to mitigate
effects on resolution rates, the effect on new claim resolution rates is not
anticipated to be material after the end of 1999. Actions by management to
mitigate the effect on resolution rates include aggressive hiring of new claims
staff, restrictions on early retirement elections, selective use of personnel
for integration planning, and significant communications with staff members.
The reserving process begins with the assumptions indicated by past
experience and is modified for current trends and other known factors. The
Company anticipated the merger-related developments discussed above would
generate a significant change in claims department productivity, reducing claim
resolution rates, a key assumption when establishing reserves. Management
developed actions to mitigate the impact of the merger on claims department
productivity, including the hiring of additional claims staff and the
restriction of early retirement elections by claims personnel. Where feasible,
management also planned to obtain additional claims management resources
through outsourcing. All such costs are expensed in the period incurred and are
not material in relation to results of operations. Management reviewed its
integration plans and the actions intended to mitigate the impact of the
integration with claims managers to determine the extent of disruption in
normal activities. Considering all of the above, the revised claim resolution
rates, as a percentage of original assumptions (i.e., before adjusting for the
effect of the claims operations integration activities), were 90 percent
68
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the first and second quarters of 1999, 84 percent for the third quarter,
and 89 percent for the fourth quarter of 1999. The revised claim resolution
rates for the third quarter and fourth quarter were lower than the first and
second quarters because all claims personnel were expected to be involved in
the implementation and training efforts. The effect of integration activities
on new claim resolution rates is not expected to be material after December 31,
1999.
In order to validate these assumptions, the Company also examined the
historical level and pattern of claims management effectiveness as reflected in
claim resolution rates for the insurance subsidiaries of The Paul Revere
Corporation (Paul Revere) which was acquired in 1997. Subsequent to the Paul
Revere acquisition and integration, management has been able to develop
experience studies for the Paul Revere business. These studies are prepared for
pricing purposes and to identify trends or changes in the business.
These studies, which were not available for the Paul Revere business at the
time of the acquisition, allowed management to gain a greater understanding of
the impact of the claims integration activities on the claim resolution rates
of the Paul Revere business. These studies show that the Paul Revere business
experienced a decline in its claim resolution rates from a base in 1995 of 100
percent to 90.4 percent in 1996 and 80.3 percent in 1997. Changes in morbidity
and other factors were considered and reviewed to determine that a primary
cause of the reduced claim resolution rates was the disruption caused by the
change in the claims management process. Although the circumstances of the
merger are very different from the Paul Revere acquisition, the claims
integration activities are similar, and the Paul Revere experience is relevant.
The primary circumstances that created claims disruption for Paul Revere were
the initial lack of clarity of the organization, process, and structure, the
need to plan for a significant transition to new claims processes, and the
training and implementation related to those changes. All of those elements
have impacted the Company as a result of the merger. One primary difference is
that the duration of the potential disruption in the merger is not expected to
be as long as was the case with the Paul Revere acquisition. The Company's
revised claim resolution rates assumed for the first two quarters of 1999 were
compared to the Paul Revere experience in 1996, the period preceding the
acquisition. It was determined that the revised assumptions appeared to be
reasonable. During the third and fourth quarters of 1999, the claims
integration plans provide for increased activity due to training and
implementation of new processes. The Company's revised claim resolution rates
for the third and fourth quarters of 1999 were compared to the Paul Revere
experience in 1997 during the implementation and training phase of the Paul
Revere claims organization when claims resolution rates declined to 80.3
percent of prior levels. Management judged that it was reasonable to assume
that the impact to the Company would be less than it was to Paul Revere since
some of the Company's claims management practices will not change. The
historical experience of Paul Revere provides a statistical reference for the
expected experience for the Company when adjusted for the projected effects of
the claims integration plans.
In order to evaluate the financial effect of merger-related integration
activities, the Company projected the ultimate cost of settling all claims
incurred as of December 31, 1998, using the revised claim resolution rates.
This projection was compared to the projection excluding the adjustment to the
claim resolution rates to obtain the amount of the charge. The Company reviewed
its estimates of the financial impact of the claims operations integration
activities with its actuaries and independent auditors.
Claim reserves at December 31, 1998 include $153.0 million as the estimated
value of projected additional claim payments resulting from these claims
operations integration activities. This 1998 reserve increase was reflected as
a $142.6 million increase in benefits and reserves for future benefits, and a
$10.4 million reduction in other income. The adverse impact of the claims
operations integration activities on new claim resolution rates is not expected
to be material after the end of 1999. As part of the periodic review of claim
reserves, management will review the status and execution of the claims
operations integration plans with the claims
69
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
management on a quarterly basis. The review will consider claims operations
integration activities planned for future periods and evaluate whether the
future planned activities will result in claim resolution rates consistent with
those considered in the reserve established at December 31, 1998.
Quarterly information concerning the estimated and actual impact of the
claims operations integration activities is shown below. The $7.5 million
favorable variance from assumptions for the year was reflected in 1999
earnings.
1999
---------------------------
1st 2nd 3rd 4th
------ ----- ----- -----
(in millions of dollars)
Revised Claim Resolution Rates at December
31, 1998.................................. 90% 90% 84% 89%
Actual Claim Resolution Rates for the
Period.................................... 89% 90% 84% 90%
Estimated Effect of Lower Claim Resolution
Rates at December 31, 1998................ $ 36.2 $36.2 $47.6 $33.0
Actual Effect of Lower Claim Resolution
Rates for the Period...................... $ 39.2 $36.2 $43.0 $27.1
Liability Remaining for Claims Operation
Integration Activities at End of Period... $116.8 $80.6 $33.0 $ --
Management expects the remaining claims operations integration activities to
impact claim reserves as anticipated at December 31, 1998. The expected
disruption to the claims management process and the related increase to the
disability claim reserve was considered in the review and update of assumptions
underlying the group disability policy and contract benefit liabilities
completed in the third quarter of 1999. Management will continue to evaluate
the impact of the merger on disability claims experience and the assumptions
related to expected claim resolutions.
Note 8--Federal Income Taxes
A reconciliation of the income tax (benefit) attributable to continuing
operations computed at U.S. federal statutory tax rates to the income tax
expense (credit) as included in the consolidated statements of operations
follows:
Year Ended December 31
-------------------------------------------
1999 % 1998 % 1997 %
------ ----- ------ ---- ------ ----
(in millions of dollars)
Statutory Income Tax (Credit)...... $(57.9) 35.0 % $322.1 35.0 % $320.8 35.0
Tax-exempt Investment Income....... (22.0) 13.3 (28.9) (3.1) (22.5) (2.5)
Income Tax Settlements............. (14.2) 8.6 -- -- -- --
Business Restructuring Charges..... 17.2 (10.4) -- -- -- --
Change in Valuation Allowance...... 65.7 (39.7) 1.2 0.1 (3.0) (0.3)
Goodwill........................... 25.9 (15.7) 14.9 1.6 5.6 0.6
Other Items, Net................... 2.7 (1.6) (6.5) (0.7) (1.8) (0.2)
------ ----- ------ ---- ------ ----
Effective Tax...................... $ 17.4 (10.5)% $302.8 32.9 % $299.1 32.6%
====== ===== ====== ==== ====== ====
70
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income tax liabilities consist of the following:
December 31
---------------
1999 1998
------ --------
(in millions of
dollars)
Deferred Tax Liability
Deferred Policy Acquisition Costs............................. $433.4 $ 346.4
Bond Market Discount.......................................... 8.1 15.7
Net Unrealized Investment Gains............................... 0.9 520.4
Value of Business Acquired.................................... 184.6 200.1
Property and Equipment........................................ 22.0 28.3
Other......................................................... 20.9 16.1
------ --------
Gross Deferred Tax Liability.................................. 669.9 1,127.0
------ --------
Deferred Tax Asset
Net Operating Losses.......................................... 255.0 6.6
Alternative Minimum Tax Credits............................... 28.2 35.3
Accrued Liabilities........................................... 30.6 32.0
Reserves...................................................... -- 38.4
Realized Investment Gains and Losses.......................... 37.7 43.9
Postretirement Benefits....................................... 59.9 53.9
Other Employee Benefits....................................... 72.8 31.5
Other......................................................... 21.3 29.6
------ --------
Gross Deferred Tax Asset...................................... 505.5 271.2
Less Valuation Allowance...................................... 73.9 8.2
------ --------
Net Deferred Tax Asset........................................ 431.6 263.0
------ --------
Net Deferred Tax Liability.................................... $238.3 $ 864.0
====== ========
Under the Life Insurance Company Tax Act of 1959, life companies were
required to maintain a policyholders' surplus account containing the
accumulated portion of current income which had not been subjected to income
tax in the year earned. The Deficit Reduction Act of 1984 requires that no
future amounts be added after 1983 to the policyholders' surplus account.
Further, any future distributions from the account would become subject to
federal income taxes at the general corporate federal income tax rate then in
effect. The amount of the policyholders' surplus account at December 31, 1999,
is approximately $233.4 million. Future distributions from the policyholders'
surplus account are deemed to occur if a statutorily prescribed maximum for the
account is less than the value of the account or if dividend distributions
exceed the total amount accumulated as currently taxable income in the year
earned. If the entire policyholders' surplus account were deemed distributed in
2000, this would result in a tax of approximately $81.7 million. No current or
deferred federal income taxes have been provided on these amounts because
management considers the conditions under which such taxes would be paid to be
remote.
71
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's consolidated statements of operations include the following
amounts of income (loss) subject to foreign taxation and the related foreign
income tax expense (credit):
Year Ended December 31,
1999 1998 1997
------- ----- -----
(in millions of
dollars)
Income (Loss) Before Tax Subject to Foreign Taxation..... $(213.5) $76.5 $73.3
======= ===== =====
Foreign Income Tax Expense (Credit):
Current................................................ $ 38.0 $26.8 $26.5
Deferred............................................... (40.9) 0.3 (1.5)
------- ----- -----
Total................................................. $ (2.9) $27.1 $25.0
======= ===== =====
During 1999, the Company reached a settlement with the Internal Revenue
Service (IRS) relating to its federal income tax liability for the 1986 through
1992 tax years, and the IRS continued its examination of subsequent years. For
most of the Company's subsidiaries, tax years through 1992 are closed to
further assessment by the IRS. Management believes any future adjustments that
may result from IRS examinations of tax returns will not have a material impact
on the financial position, liquidity, or results of operations of the Company.
During 1999, results increased $36.8 million due to settlements of prior year
tax issues with the IRS.
The Company's subsidiaries had net operating loss carryforwards of
approximately $725.0 million, alternative minimum tax credit carryforwards of
approximately $28.0 million, and foreign tax credit carryforwards of $4.0
million as of December 31, 1999. The majority of the net operating loss
carryforwards will begin to expire, if not utilized, in 2015; the alternative
minimum tax credits do not expire; the foreign tax credits begin expiring in
2003.
Federal income taxes paid during 1999, 1998, and 1997 were $77.8 million,
$104.8 million, and $192.8 million, respectively.
Note 9--Debt and Company-Obligated Mandatorily Redeemable Preferred Securities
Debt
Short-term debt consists of the following at December 31 (in millions):
1999 1998
---------------------- ---------------------
Weighted Weighted
Average Average
Balance Interest Rate Balance Interest Rate
-------- ------------- ------- -------------
Commercial Paper................. $ 597.8 6.3% $ 85.7 5.5%
Current Portion of Medium-term
Notes Payable................... 260.0 6.6 21.4 7.0
Private Placements............... 200.0 7.0 168.3 5.8
Reverse Repurchase Agreements.... -- -- 39.4 5.8
Other Short-term Debt............ 17.2 2.9 8.9 1.1
-------- ------
Total.......................... $1,075.0 $323.7
======== ======
72
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term debt consists of the following:
December 31
-----------------
1999 1998
-------- --------
(in millions of
dollars)
Notes @ 6.75% due 2028, callable at or above par............ $ 250.0 $ 250.0
Notes @ 7.25% due 2028, callable at or above par............ 200.0 200.0
Notes @ 7.0% due 2018, non-callable......................... 200.0 200.0
Notes @ 6.375% due 2005, non-callable....................... 200.0 200.0
Monthly Income Debt Securities @ 8.8% due 2025, callable in
2000 at par................................................ 172.5 172.5
Medium-term Notes @ 5.9% to 7.5% due 2002 to 2028, non-
callable................................................... 144.0 202.7
-------- --------
Total..................................................... $1,166.5 $1,225.2
======== ========
Of the $1,166.5 million of long-term debt at December 31, 1999, $35.0
million will mature in 2002, $20.0 million will mature in 2003, and $1,111.5
million will mature in 2004 and thereafter.
The Company has a $500.0 million revolving credit facility which expires
October 31, 2000 and a $500.0 million revolving credit facility which expires
October 1, 2001. The Company's commercial paper program, which was increased to
$1.0 billion during 1999, is supported by the revolving credit facilities and
is available for general liquidity needs, capital expansion, and acquisitions.
The revolving credit facilities contain certain covenants that, among other
provisions, require maintenance of certain levels of stockholders' equity and
limits on debt levels. At December 31, 1999, approximately $396.0 million was
available for additional financing under the Company's existing revolving
credit facilities.
Interest paid on short-term and long-term debt during 1999, 1998, and 1997
was $115.2 million, $100.5 million, and $84.7 million, respectively.
Company-Obligated Mandatorily Redeemable Preferred Securities
In March 1998, Provident Financing Trust I, a wholly-owned subsidiary trust
of the Company, issued $300.0 million of 7.405% capital securities in a public
offering. These capital securities, which mature on March 15, 2038, are fully
and unconditionally guaranteed by the Company, have a liquidation value of
$1,000 per capital security, and have a mandatory redemption feature under
certain circumstances. The Company issued $300.0 million of 7.405% junior
subordinated deferrable interest debentures which mature on March 15, 2038, to
the subsidiary trust in connection with the capital securities offering. The
sole assets of the subsidiary trust are the junior subordinated debt
securities.
Interest costs related to these securities are reported in the consolidated
statements of operations as a component of interest and debt expense. Interest
paid on these securities during 1999 and 1998 was $22.2 million and $11.1
million, respectively.
73
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10--Pensions and Other Postretirement Benefits
The Company sponsors several defined benefit pension and postretirement
plans for its employees. The following tables provide the changes in the
benefit obligation and fair value of plan assets for the years ended December
31, 1999 and 1998, and statements of the funded status of the plans as of
December 31, 1999 and 1998.
Postretirement
Pension Benefits Benefits
------------------ ----------------
1999 1998 1999 1998
-------- -------- ------- -------
(in millions of dollars)
Change in Benefit Obligation
Balance at January 1.................... $ 600.7 $ 538.6 $ 152.1 $ 125.5
Service Cost........................... 21.2 23.3 5.7 5.5
Interest Cost.......................... 43.0 38.3 11.4 9.5
Plan Amendments........................ -- -- (13.2) 8.7
Actuarial (Gain) Loss.................. (110.7) 19.1 (6.2) 9.8
Early Retirement--Note 2............... 95.2 -- 30.7 --
Benefits Paid.......................... (42.3) (18.6) (15.0) (6.9)
-------- -------- ------- -------
Balance at December 31.................. 607.1 600.7 165.5 152.1
-------- -------- ------- -------
Change in Fair Value of Plan Assets
Balance at January 1.................... 809.4 705.0 10.0 9.5
Actual Return on Plan Assets........... 159.8 110.2 1.7 0.5
Company Contributions.................. 0.4 12.8 14.5 6.8
Benefits Paid.......................... (42.3) (18.6) (15.0) (6.9)
-------- -------- ------- -------
Balance at December 31.................. 927.3 809.4 11.2 9.9
-------- -------- ------- -------
Funded (Underfunded) Status of the Plans
at December 31......................... 320.2 208.7 (154.3) (142.2)
Unrecognized Net Actuarial Gains........ (355.1) (179.5) (7.0) (1.4)
Unrecognized Prior Service Cost......... (18.4) (20.6) (26.0) (13.7)
Unrecognized Net Transition Obligation.. 1.2 1.7 -- --
-------- -------- ------- -------
Prepaid (Accrued) Benefit Cost.......... $ (52.1) $ 10.3 $(187.3) $(157.3)
-------- -------- ------- -------
At December 31, 1999, the plan assets include 448,784 shares of the
Company's common stock with a fair value of $14.4 million. The amount of
dividends paid during 1999 was not material.
The weighted average assumptions used in the measurement of the Company's
benefit obligation as of December 31, 1999 and 1998 are as follows:
Pension Benefits Postretirement Benefits
--------------------------- -----------------------
1999 1998 1999 1998
------------- ------------ ----------- -----------
Discount Rate........... 7.75% 6.75% 7.75% 6.75%
Expected Return on Plan
Assets................. 8.50 to 10.00% 8.50 to 9.25% 8.50% 8.50%
Rate of Compensation
Increase............... 4.00% 4.00 to 4.25% -- --
For measurement purposes, the annual rate of increase in the per capita cost
of covered health care benefits assumed for 2000 was a range of 5.50 percent to
7.50 percent. The rate range was assumed to change gradually to a rate of 5.50
percent for 2006 and remain at that level thereafter.
74
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The assumed health care cost trend rate has a significant effect on the
amounts reported. A one percent change in the assumed health care cost trend
rate would have the following effects:
1% Increase 1% Decrease
----------- -----------
(in millions of
dollars)
Effect on the Service and Interest Cost Components of
Net Periodic Postretirement Health Care Benefit Cost.. $ 1.8 $ (1.7)
Effect on the Health Care Component of the Accumulated
Postretirement Benefit Obligation..................... $10.7 $(10.0)
The following table provides the components of the net periodic benefit cost
(credit) and early retirement cost for the plans during 1999, 1998, and 1997.
Pension Benefits Postretirement Benefits
---------------------- -------------------------
1999 1998 1997 1999 1998 1997
------ ------ ------ ------- ------- -------
(in millions of dollars)
Service Cost............... $ 21.2 $ 23.3 $ 22.0 $ 5.7 $ 5.5 $ 4.1
Interest Cost.............. 43.0 38.3 35.7 11.4 9.5 8.4
Expected Return on Plan
Assets.................... (79.9) (62.8) (50.6) (0.9) (0.8) (0.7)
Net Amortization and
Deferral.................. (13.4) (9.2) (7.1) 2.4 (4.0) (5.3)
Early Retirement--Note 2... 95.2 -- -- 30.7 -- --
------ ------ ------ ------- ------- -------
$ 66.1 $(10.4) $ -- $ 49.3 $ 10.2 $ 6.5
====== ====== ====== ======= ======= =======
Note 11--Stockholders' Equity and Earnings Per Share
Stockholders' Equity
In accordance with the restated certificate of incorporation, the Company
has 25,000,000 shares of preferred stock authorized with a par value of $0.10
per share. No preferred shares have been issued to date.
During February 1998, the Company redeemed its 8.10% cumulative preferred
stock outstanding of $156.2 million at $150 per share equivalent to $25 per
depositary share.
In March 1997 and July 1997, the Boards of Directors of Unum and Provident,
respectively, authorized two-for-one stock splits. These stock splits were
effected in the form of stock dividends distributed in 1997. As a result of
this action, $11.9 million was transferred from additional paid-in capital to
common stock. Historical share and per share amounts in the consolidated
financial statements and notes thereto reflect these stock splits.
75
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Common Share
The computations of earnings per common share and earnings per common share
assuming dilution are as follows:
Year Ended December 31
---------------------------------
1999 1998 1997
---------- ---------- ----------
(in millions, except share data)
Numerator
Net Income (Loss)........................... $ (182.9) $ 617.4 $ 617.6
Preferred Stock Dividends................... -- 1.9 12.7
---------- ---------- ----------
Available to Common Stockholders............ $ (182.9) $ 615.5 $ 604.9
========== ========== ==========
Denominator (000s)
Weighted Average Common Shares--Basic....... 239,080.6 236,975.2 230,741.2
Dilution for Assumed Exercise of Stock
Options.................................... -- 5,373.7 5,077.0
---------- ---------- ----------
Weighted Average Common Shares--Assuming
Dilution................................... 239,080.6 242,348.9 235,818.2
========== ========== ==========
Net Income (Loss) Per Common Share
Basic....................................... $ (0.77) $ 2.60 $ 2.62
Assuming Dilution........................... $ (0.77) $ 2.54 $ 2.57
In computing earnings per share assuming dilution, only potential common
shares that are dilutive (those that reduce earnings per share) are included.
Potential common shares are not used when computing earnings per share assuming
dilution if the results would be antidilutive, such as when a net loss is
reported or if options are out of the money. In-the-money options to purchase
approximately 3.1 million common shares for the year ended December 31, 1999,
were not considered dilutive due to net losses being reported for the period.
Approximately 3.7 million and 2.4 million options for the years ended December
31, 1999 and 1998, respectively, were not considered dilutive due to the
options being out of the money. Out-of-the-money options for the year ended
December 31, 1997 were immaterial.
Note 12--Incentive Compensation and Stock Purchase Plans
Annual Incentive Compensation
The Company has several annual incentive plans for certain employees and
executive officers that are designed to encourage achievement of certain goals.
Compensation cost recognized in the consolidated statements of operations for
annual incentive plans is $6.6 million, $38.1 million, and $43.6 million for
1999, 1998, and 1997, respectively.
Stock Plans
Under the Stock Plan of 1999 (Stock Plan), the Company has available up to
7,500,000 shares of common stock for awards to its employees, officers,
producers, and directors. Awards may be in the form of stock options, stock
appreciation rights, restricted stock awards, dividend equivalent awards, or
any other right or interest relating to stock. The number of shares available
to be issued as restricted stock or unrestricted stock awards is limited to
2,250,000 shares. The exercise price for stock options issued under the Stock
Plan shall not be less than the fair market value of the Company's stock as of
the grant date. The options have a maximum term of ten years after the date of
grant.
76
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Prior to the Stock Plan, the Company had various stock option and stock
award programs. For all stock option plans the exercise price of each option
was not less than the fair market value of the Company's stock at the date of
grant. In accordance with stock plan provisions, outstanding stock options and
restricted stock became immediately exercisable as a result of a change in
control (see Note 2).
Summaries of the Company's stock options issued under the various plans are
as follows:
1999 1998 1997
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000s) Price (000s) Price (000s) Price
------ -------- ------ -------- ------ --------
Outstanding at January
1....................... 15,023 $30.43 15,516 $26.01 13,833 $21.90
Granted................. 3,795 48.15 2,406 51.68 4,587 36.09
Exercised............... (3,460) 22.38 (2,402) 22.45 (2,028) 20.44
Forfeited or Expired.... (1,059) 44.43 (497) 34.89 (876) 27.92
------ ------ ------
Outstanding at December
31...................... 14,299 36.04 15,023 30.43 15,516 26.01
====== ====== ======
December 31, 1999
-------------------------------------------
Options
Options Outstanding Exercisable
--------------------------- ---------------
Weighted
Average
Remaining Weighted Weighted
Years Average Average
Range of Shares Contractual Exercise Shares Exercise
Exercise Prices (000s) Life Price (000s) Price
- --------------- ------ ----------- -------- ------ --------
$10 to 19........................... 1,792 3.1 $17.25 1,792 $17.25
20 to 29........................... 3,576 4.5 25.58 3,511 25.51
30 to 39........................... 3,923 6.2 35.18 3,916 35.18
40 to 49........................... 1,787 8.6 45.53 435 46.54
50 to 59........................... 3,221 7.8 53.87 2,250 53.31
------ ------
10 to 59........................... 14,299 6.1 36.04 11,904 33.47
====== ======
The Company granted 392; 145,180; and 419,639 shares of restricted stock to
certain employees during 1999, 1998, and 1997 with a weighted average grant
date fair value of $56.65, $52.05, and $38.11 per common share, respectively.
Employee Stock Purchase Plan (ESPP)
Substantially all of the Company's employees are eligible to participate in
an ESPP. Under the plan, up to 1,460,000 shares of the Company's common stock
are authorized for issuance. Stock may be purchased at the end of each
financial quarter at a purchase price of 85 percent of the lower of its
beginning or end of quarter market prices. The Company sold 86,497, 75,575 and
79,423 shares to employees with a weighted average exercise price of $31.71,
$39.00, and $33.74 per share in 1999, 1998, and 1997, respectively.
Compensation Cost Under the Fair Value Approach (SFAS 123)
The Company applies Opinion 25 and related interpretations in accounting for
the stock option plans and ESPP. Accordingly, no compensation cost has been
recognized for these plans. Compensation cost for the Company's stock option
plans and ESPP under the fair value approach was estimated as of the grant date
using Black-Scholes option pricing models.
77
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average assumptions used in estimating compensation cost for
the Company during 1999 and for the Provident plans in 1998 and 1997 are as
follows:
Year Ended December 31
-----------------------------
1999 1998 1997
--------- --------- ---------
Volatility...................................... 24.0% 17.9% 18.0%
Risk-free Rate of Return........................ 5.5% 5.6% 6.5%
Dividend Payout Rate Per Share.................. $ 0.59 $0.548 $0.493
Time of Exercise
Stock Option Plan.............................. 5.7 years 7.0 years 6.7 years
ESPP........................................... 3 months 3 months 3 months
Weighted Average Fair Value of Awards Granted
During the Year
Stock Option Plan.............................. $14.33 $14.59 $10.08
ESPP........................................... $10.77 $ 9.51 $ 7.70
Assumptions used in estimating compensation cost for Unum plans during 1998
and 1997 are as follows:
Year Ended December 31
-----------------------------
1998 1997
-------------- --------------
Volatility...................................... 23.8% to 26.4% 22.7% to 24.2%
Risk-free Rate of Return........................ 4.2% to 5.3% 5.7% to 6.8%
Dividend Payout Rate............................ 1.0% 1.0%
Time of Exercise................................ 4 to 8 years 4 to 8 years
Weighted Average Fair Value of Options Granted
During the Year................................ $12.88 $8.56
Had compensation cost for these plans been determined in accordance with
the provisions of SFAS 123, the Company's net income (loss) and net income
(loss) per common share would have been as follows:
Year Ended December
31
----------------------
1999 1998 1997
------- ------ ------
(in millions of
dollars, except share
data)
Net Income (Loss)....................................... $(223.6) $608.5 $603.0
Net Income (Loss) Per Common Share
Basic.................................................. (0.94) 2.56 2.56
Assuming Dilution...................................... (0.94) 2.51 2.51
Limited Stock Appreciation Rights (LSARs)
Between 1991 and 1994, certain officers of the Company were granted LSARs
in conjunction with their stock options for those years. An LSAR is meant to
compensate an officer if the associated option loses 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) the highest price paid per
share in connection with the change in control or (b) the highest fair market
value per share as reported at any time during the 60 day period preceding the
change in control. As an underlying stock option is exercised, the LSARs are
automatically cancelled. The LSARs were amended such that the merger of Unum
and Provident would not be considered a change of control. At December 31,
1999 there were no LSARs outstanding. At December 1998 and 1997, there were
495,750, and 557,800 LSARs outstanding, respectively.
78
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13--Reinsurance
The Company routinely assumes and cedes reinsurance with other insurance
companies. The primary purpose of ceded reinsurance is to limit losses from
large exposures; however, if the assuming reinsurer is unable to meet its
obligations, the Company remains contingently liable. The Company evaluates the
financial condition of reinsurers and monitors concentration of credit risk to
minimize this exposure. The reinsurance receivable at December 31, 1999,
relates to over 140 reinsurance relationships. Of the six major relationships
which account for approximately 75 percent of the reinsurance receivable amount
at December 31, 1999, all are with companies rated A or better by A.M. Best
Company or are fully securitized by investment-grade fixed maturity securities
held in trust.
Reinsurance activity is accounted for on a basis consistent with the terms
of the reinsurance contracts and the accounting used for the original policies
issued. Premium income and policyholder benefits are presented in the
consolidated statements of operations net of reinsurance ceded. The total
amounts deducted for reinsurance ceded are as follows:
Year Ended December
31
--------------------
1999 1998 1997
------ ------ ------
(in millions of
dollars)
Premium Income............................................. $508.3 $544.5 $673.2
Policyholder Benefits...................................... 695.5 575.2 596.0
Premium income assumed was $576.7 million, $489.0 million, and $453.9
million during 1999, 1998, and 1997, respectively.
Centre Life Reinsurance Limited
In 1996, the Company executed a definitive reinsurance agreement with Centre
Life Reinsurance Limited (Centre Re), a Bermuda-based reinsurance specialist,
for reinsurance coverage of the existing United States non-cancellable
individual disability active life reserves of one of the Company's insurance
subsidiaries, Unum Life Insurance Company of America. This agreement reinsures
all claims incurred on or after January 1, 1996. The Company has the right, but
no obligation, to recapture the business after six years without penalty. Under
the agreement, Centre Re has an obligation to absorb losses within a defined
risk layer. The Company 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
the Company. As of December 31, 1999, the attachment point had not been
reached.
The following discloses the various layers in the agreement at December 31,
1999 (in millions):
Net GAAP Reserves.................................................... $ 602
Experience Layer..................................................... 325
------
Attachment Point.................................................... 927
Centre Re's Defined Risk Layer....................................... 185
------
Defined Risk Limit.................................................. $1,112
======
Under this agreement, the Company funds a trust account equal to the amount
of the Company's exposure. This trust account provides security for amounts due
by the Company prior to reaching the attachment point. The Company controls the
management of the business, including premium collection and claims management,
79
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
under this agreement. All premiums, less amounts for management expenses and
claim payments, are transferred to the trust account on a quarterly basis. The
Company also acts as the investment manager for 80 percent of the assets in the
trust with Centre Re managing the remaining 20 percent.
This reinsurance agreement transfers risk and is accounted for as a long-
duration reinsurance contract in accordance with the provisions of Statement of
Financial Accounting Standard No. 113, Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts. The underlying operating results
of this contract are reflected in other income, and any realized gains or
losses from sales of assets are reflected as realized investment gains and
losses in the Company's consolidated statements of operations.
Included in deposit assets in the consolidated statements of financial
condition at December 31, 1999, is a deposit asset for this reinsurance
arrangement of approximately $321.1 million. The deposit asset is comprised of
the Company'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
included in other comprehensive income (loss) in the equity section of the
Company's consolidated statements of financial condition.
Other Reinsurance Operations
During the first quarter of 1999, the Company began a comprehensive
strategic review of its reinsurance operations to determine the appropriateness
of their fit within the context of the merged entity. These operations include
the reinsurance management operations of the Company's subsidiary Duncanson &
Holt, Inc. (D&H) and the risk assumption, which includes reinsurance pool
participation; direct reinsurance which includes accident and health (A&H),
long-term care (LTC), and long-term disability coverages; and Lloyd's syndicate
participations. In April 1999, the strategic review was completed, and the
Company concluded that these operations were not solidly aligned with the
Company's strength in the disability insurance market. The Company decided to
exit these operations through a combination of a sale, reinsurance, and/or
placing certain components in run-off.
During 1999, the Company recognized $327.8 million of before-tax charges
related to its reinsurance operations. The breakdown of these charges by
quarter is as follows:
1st 2nd 3rd 4th Total
------ ---- ------ ---- ------
(in millions of dollars)
North American Reinsurance Operations:
Loss on Sale of A&H and LTC Reinsurance
Management Operations (includes write-off of
$6.0 million of goodwill)...................... $ -- $ -- $ 12.9 $ -- $ 12.9
Loss on Reinsurance of A&H and LTC Risk Partici-
pations........................................ -- -- 10.0 2.7 12.7
Provision for Losses on Retained Business....... 28.6 -- 13.5 -- 42.1
International Reinsurance Operations:
Provision for Losses on Lloyd's of London
Syndicate Participations....................... 45.5 -- 141.0 -- 186.5
Provision for Losses on Reinsurance Pool
Participations Other than Lloyd's.............. -- -- 21.9 -- 21.9
Goodwill Impairment Excluding Amount Recognized
on Sale........................................ 27.0 2.0 22.7 -- 51.7
------ ---- ------ ---- ------
Total Before-Tax Charge....................... $101.1 $2.0 $222.0 $2.7 $327.8
====== ==== ====== ==== ======
80
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's first quarter charge of $101.1 million before tax and $88.0
million after tax consisted of the following:
North American Reinsurance Operations:
Provision for Losses on Retained Business--As a result of the review
performed on the Lloyd's syndicates discussed above and other third party
publicized reinsurance exposures, the Company undertook a periodic review
of certain other reinsurance facilities related to new information
regarding the ultimate cost of settling claims. The reinsurance pool
business consists of more than 20 different pool facilities, the majority
of which are managed by D&H and a few pools which are managed by third
parties. Reserve assumptions are periodically reviewed to support the
determination of the ultimate cost of settling claims for certain
reinsurance pools. During the first quarter of 1999, the Company reviewed
the actuarial assumptions used to set reserves for certain reinsurance
facilities based on the most current information available from the
reinsurance pool managers. The Company also received new information
pertaining to a reinsurance pool managed by a third party that indicated a
reserve increase was required. The Company relied primarily on the third
party pool manager's judgement and recorded its portion of the reserve as
reflected in the reinsurance pool statement from the third party pool
manager. The new information received from the managed facilities and the
third party facility indicated deterioration in loss experience, primarily
related to a longer duration of claims and increased incidence of new
claims in certain facilities. The result of these reviews was an increase
to claim reserves of $28.6 million, which was recorded in the first quarter
of 1999. The Company determined that the increase to reserves was needed
based on revised actuarial assumptions to reflect current and expected
trends in claims experience and expenses.
International Reinsurance Operations:
Provision for Losses on Lloyd's of London Syndicate Participations--The
periodic method of accounting is followed for Lloyd's syndicate
participation, which requires the premiums be recognized as revenue over
the policy term and claims, including the estimate of claims incurred but
not reported, to be recognized as incurred. During the first quarter of
1999, the Company received more information about the Lloyd's market from
various sources, including managing agents/underwriters syndicate reports
and published information from Moody's Investors Service. The information
received indicated significant deterioration in the loss experience of open
years of account primarily related to significant losses in certain
syndicates (space and aviation, accident and health, and other non-marine
classes of business) and continued pressure on the pricing of insurance
coverage provided by the Lloyd's market. In addition, the Company discussed
projected results of the Lloyd's market with the underwriters of the
syndicates that are managed through a subsidiary of the Company. These
projected results also indicated future deterioration of the open years of
account. Using this information and recent experience with prior revisions
of estimated losses in this business, the Company performed a review of its
claim reserve liabilities related to its open years of account.
The review of estimates related to open years of account was performed
based on a periodic review of these estimates as information was received
from the Lloyd's syndicates. The review resulted in revised best estimates
of the expected ultimate profit or loss for each open year of account,
which were significantly below the levels estimated in 1998. The resulting
charge to earnings in the amount of $44.0 million was reflected in the
Company's income in the first quarter of 1999 for the open years of account
1996 through 1999. In addition to the risk participation charge, the
Company recorded a charge of $1.5 million, which represented the reduction
of previously recognized profit commissions related to the Lloyd's
management company operations.
81
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Goodwill Impairment:
When an event or change in circumstance occurs that indicates the
recoverability of an asset should be assessed for impairment, a
recoverability test is performed to determine if an impairment has
occurred. Following the poor results of the reinsurance operations in the
first quarter of 1999, the Company updated the goodwill recoverability test
using the most current results and forecasts. The goodwill recoverability
test used the held-for-use model that compares the undiscounted cash flows
of these operations to determine whether those cash flows can recover the
unamortized goodwill. After factoring in the first quarter results and
current revised forecasts due to recent poor performance for these
operations, future undiscounted cash flows were insufficient to recover the
entire goodwill amount, indicating that the goodwill was impaired. Goodwill
recoverability testing of these operations performed prior to March 31,
1999 had indicated that the goodwill was not impaired.
As a result of the impairment, the Company calculated the estimated fair
value of these operations. In estimating the fair value, two valuation
techniques were utilized, a discount free cash flow model and a multiple of
earnings model. The Company believed that these valuation techniques were
appropriate for this type of business as these techniques were what the
Company would use in evaluating a potential acquisition of this type of
business. The results of the two valuation techniques created a range of
fair values from $47.0 million to $64.0 million. The Company evaluated the
range of values produced by the valuation techniques and using internal
management judgement of the potential liquidation value, the Company
determined its best estimate of fair value of its investment to be the
midpoint of the range, or $55.0 million. The estimated fair value of $55.0
million was compared to $82.0 million of book value for the investment,
resulting in a write-down of goodwill in the amount of $27.0 million in the
first quarter of 1999.
In the second quarter of 1999, the Company stated its intent to sell its
reinsurance management operations, assuming the transaction would achieve the
Company's financial objectives. The Company estimated the fair value of the
operations using the held-for-sale model, which compares the carrying value of
the asset with the fair value less costs to sell the asset. This resulted in an
additional write-down of goodwill in the amount of $2.0 million before and
after tax.
During the third quarter of 1999, the Company continued its efforts to sell
its reinsurance management operations. No potential buyers expressed interest
in acquiring the entire domestic and international reinsurance management
operations. However, in October, the Company entered into an agreement to sell
the reinsurance management operations of its A&H and LTC reinsurance facilities
and to reinsure the Company's risk participation in these facilities.
Because of the limited interest expressed by potential buyers in the
reinsurance management operations, the Company reevaluated its strategy to exit
the reinsurance operations. At that time, the Company intended to continue to
operate its North America long-term disability reinsurance operation and to
refocus it with the objective of improving profitability. With respect to
Lloyd's, the Company decided to implement a strategy which limits participation
in year 2000 underwriting risks, ceases participation in Lloyd's underwriting
risks after year 2000, and manages the run-off of its risk participation in
open years of account of Lloyd's reinsurance syndicates. The Company also
decided to discontinue its accident reinsurance business in London beginning in
year 2000. During the third quarter, the Company recognized a charge of $222.0
million before tax and $204.3 million after tax related to its strategy for the
reinsurance operations. The charge consisted of the following:
82
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
North American Reinsurance Operations:
Loss on Sale of A&H and LTC Reinsurance Management Operations--In the
third quarter of 1999 the Company entered into an agreement with American
United Life Insurance Company (AUL) to sell the reinsurance management
operations of its A&H and LTC reinsurance facilities and to reinsure the
Company's risk participation in these facilities. Certain risks related to
prior operations have not been assumed by AUL. The terms of the sale
require the Company to continue to participate in certain of the
reinsurance facilities in year 2000, thereby assuming underwriting risks.
The sale closed effective January 1, 2000. A before-tax loss of $12.9
million was recognized in the third quarter of 1999 based upon the terms
and conditions of the definitive agreement. The loss includes the write-off
of $6.0 million of goodwill related to this portion of the operations.
Provision for Loss on Reinsurance of A&H and LTC Risk Participations--
The Company entered into a separate indemnity reinsurance agreement with
AUL whereby AUL will assume the Company's existing risk participation in
the A&H and LTC reinsurance facilities. As a result, the Company recognized
a third quarter before-tax loss of $10.0 million.
Provision for Losses on Retained Business--The Company updated its
review of reserves related to the retained pool participations. Based upon
the most recent information available, the Company increased its reserves
by $10.5 million, principally related to the long-term disability business.
Also included in this provision is $3.0 million to recognize the estimated
cost of potential uncollectible reinsurance recoveries for two reinsurers
who reinsure certain of the Company's reinsurance facilities and who, as
the losses have increased, have experienced financial difficulties.
International Reinsurance Operations:
Provision for Losses on Lloyd's of London Syndicate Participations--
During the third quarter of 1999, underwriters of syndicates provided to
Lloyd's updated estimates of their expected ultimate profit or loss for
each open year of account. These estimates were significantly below earlier
estimates. Market conditions are not expected to improve dramatically in
the near term.
Consistent with overall market trends, the loss estimates received from
the underwriters of syndicates managed by a subsidiary of the Company
indicated significant deterioration in the loss experience of open years of
account from their previous estimate. This information was discussed with
underwriters and used by the Company to update its review of liabilities
related to its open syndicate years of account. The review resulted in
revised estimates of the expected ultimate loss for each open year of
account, which were significantly worse than the levels estimated in the
first quarter of 1999. The resulting $141.0 million charge for the open
syndicate years of account 1997 through 1999 was reflected in the Company's
before-tax earnings in the third quarter of 1999.
During the third quarter of 1999, the Company entered into a non-binding
agreement to sell one of its managed syndicates, and a definitive agreement
is being negotiated. Unamortized goodwill of $2.4 million was written off
in connection with this planned transaction. Under the terms of the
agreement, the new owner will manage the syndicate for year 2000 and will
manage the open syndicate years of account. The Company retains the
underwriting risk on open syndicate years and agreed to provide up to $24.7
million ((Pounds)15 million) of capacity for year 2000, down from $36.2
million ((Pounds)22 million) in 1999.
In December 1999, the Company closed the remaining four Lloyd's
syndicates. These syndicates have been placed in run-off whereby claims on
past policies will be paid but no new business will be accepted.
83
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Provision for Losses on Reinsurance Pool Participations Other than
Lloyd's--In connection with the development of the cost of exiting the
reinsurance operations, the Company updated its review of reserves related
to non Lloyd's reinsurance operations as well as future costs associated
with managing the run-off of the retained reinsurance pools liabilities.
Based upon the most recent information available, the Company increased
reserves related to its participation in certain managed and non-managed
reinsurance facilities by $21.9 million.
Goodwill Impairment:
Prior to the third quarter 1999 charge, the Company's unamortized
goodwill related to its reinsurance operations was $53.7 million. Of the
$31.0 million unamortized balance attributable to the A&H and LTC business
being sold, $6.0 million was determined to be unrecoverable and was written
off in the third quarter and is included in the loss on sale reported
above. The balance of $25.0 million was recovered through the sales
proceeds when the sale closed. The remaining unamortized balance of $22.7
million (including the balance of $2.4 million related to one of the
Lloyd's syndicates for which the Company has entered into an agreement to
sell) was determined to be unrecoverable based on revised earnings
forecasts for the reinsurance operations and was also written off in the
third quarter of 1999.
Retained Risks:
The Company has provided its best estimate of the cost of known losses.
Under this exit strategy, the Company retained certain risks, including the
exposure associated with disputes arising from reinsurance pools disclosed in
Note 17. Presently, it is not reasonably possible to determine the liability
for the retained risks.
An additional loss of $2.7 million before tax ($1.8 million after tax) was
realized in the fourth quarter of 1999 upon completion of the transaction to
reinsure the A&H and LTC risk participations.
Effective January 1, 2000, a subsidiary of the Company reinsured the inforce
individual disability income block of business of the New York Life Insurance
Company through a 100 percent indemnity modified coinsurance agreement. The
Company paid a ceding commission of $88.0 million which will be amortized as
earnings emerge from the business assumed.
84
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 14--Segment Information
Selected data by segment is as follows:
Year Ended December 31
----------------------------
1999 1998 1997
-------- -------- --------
(in millions of dollars)
Premium Income
Employee Benefits.............................. $3,900.2 $3,364.4 $2,810.1
Individual..................................... 1,730.6 1,675.4 1,480.3
Voluntary Benefits............................. 691.6 666.7 626.6
Other.......................................... 520.8 422.5 376.1
-------- -------- --------
6,843.2 6,129.0 5,293.1
Net Investment Income and Other Income
Employee Benefits.............................. 745.1 661.0 599.8
Individual..................................... 941.3 895.2 772.3
Voluntary Benefits............................. 112.9 103.7 93.9
Other.......................................... 532.3 643.7 877.1
Corporate...................................... 67.7 31.7 29.6
-------- -------- --------
2,399.3 2,335.3 2,372.7
Total Revenue (Excluding Net Realized Investment
Gains and Losses)
Employee Benefits.............................. 4,645.3 4,025.4 3,409.9
Individual..................................... 2,671.9 2,570.6 2,252.6
Voluntary Benefits............................. 804.5 770.4 720.5
Other.......................................... 1,053.1 1,066.2 1,253.2
Corporate...................................... 67.7 31.7 29.6
-------- -------- --------
9,242.5 8,464.3 7,665.8
Benefits and Expenses
Employee Benefits.............................. 4,625.9 3,489.1 2,940.4
Individual..................................... 2,382.0 2,348.0 2,012.5
Voluntary Benefits............................. 667.5 639.3 610.4
Other.......................................... 1,267.4 965.5 1,096.0
Corporate...................................... 552.3 157.2 101.3
-------- -------- --------
9,495.1 7,599.1 6,760.6
Income (Loss) Before Net Realized Investment
Gains and Losses and Federal Income Taxes
Employee Benefits.............................. 19.4 536.3 469.5
Individual..................................... 289.9 222.6 240.1
Voluntary Benefits............................. 137.0 131.1 110.1
Other.......................................... (214.3) 100.7 157.2
Corporate...................................... (484.6) (125.5) (71.7)
-------- -------- --------
(252.6) 865.2 905.2
Net Realized Investment Gains................... 87.1 55.0 11.5
-------- -------- --------
Income (Loss) Before Federal Income Taxes....... (165.5) 920.2 916.7
Federal Income Taxes............................ 17.4 302.8 299.1
-------- -------- --------
Net Income (Loss)............................... $ (182.9) $ 617.4 $ 617.6
======== ======== ========
85
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Included in benefits and expenses above is amortization of deferred policy
acquisition costs, value of business acquired, and goodwill. Amortization of
these items by segment is as follows:
Year Ended December
31
--------------------
1999 1998 1997
------ ------ ------
(in millions of
dollars)
Employee Benefits.......................................... $109.1 $ 85.2 $ 69.3
Individual................................................. 122.9 108.4 95.8
Voluntary Benefits......................................... 115.4 101.6 88.3
Other...................................................... 165.7 120.9 82.4
Corporate.................................................. 82.6 28.0 18.2
------ ------ ------
$595.7 $444.1 $354.0
====== ====== ======
December 31
-------------------
1999 1998
--------- ---------
(in millions of
dollars)
Assets
Employee Benefits........................................... $ 9,984.0 $ 9,275.7
Individual.................................................. 15,453.9 15,887.7
Voluntary Benefits.......................................... 2,103.8 2,057.3
Other....................................................... 9,215.6 9,610.2
Corporate................................................... 1,690.2 1,771.3
--------- ---------
$38,447.5 $38,602.2
========= =========
Note 15--Acquisition of Business
GENEX Services, Inc.
On February 28, 1997, the Company acquired GENEX Services, Inc. and GENEX
Services of Canada, Inc. (GENEX) at a price of $70.0 million. GENEX is a
provider of case management, vocational rehabilitation, and related services to
corporations, third party administrators, and insurance companies. These
services are utilized in the management of disability and worker's compensation
cases. The acquisition, financed through borrowings on the Company's revolving
credit facility, was accounted for by the purchase method. The fair values of
the assets acquired and liabilities assumed were $17.9 million and $8.9
million, respectively. The purchase price has been allocated to goodwill and
will be amortized on a straight-line basis over a 25 year period. The
consolidated financial statements include the operating results of GENEX from
March 1, 1997.
The Paul Revere Corporation
On March 27, 1997, the Company acquired Paul Revere, a provider of life and
disability insurance products, at a price of approximately $1.2 billion. The
transaction was financed through common equity issued to Zurich Insurance
Company, a Swiss insurer, and its affiliates in the amount of $300.0 million
(13.9 million shares of common stock), common equity of $437.5 million (17.0
million shares of common stock) and cash of $2.5 million issued to Paul Revere
shareholders, internally generated funds of $145.0 million, and borrowings on
the Company's revolving credit facility of $305.0 million. The acquisition was
accounted for by the purchase method. The fair values of the assets acquired
and liabilities assumed were $6,667.9 million and $6,809.1 million,
respectively. The purchase price has been allocated principally to the value of
business acquired with the remainder being allocated to goodwill. The interest
rate used to determine the value of
86
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
business acquired for traditional products was the reserve discount rate. The
interest rate used for interest-sensitive products was based on the current
interest rate credited on account values. The value of business acquired will
be amortized with interest based on premium income for the traditional
individual life and disability products and on the estimates of future gross
profits for interest-sensitive individual life products. Goodwill will be
amortized on a straight-line basis over a 40 year period. The consolidated
financial statements include the operating results of Paul Revere from April 1,
1997.
Pro Forma Results
The following pro forma results of operations for the year ended December
31, 1997 give effect to the acquisitions and the related financing
arrangements, including the acquisition of debt and issuance of common stock
equity. The pro forma results of operations, prepared from historical financial
results of operations of the Company, Paul Revere, and GENEX, with such
adjustments as are necessary to present the results of operations as if the
acquisitions had occurred as of the beginning of the year, are as follows for
the year ended December 31, 1997 (in millions, except share data):
Revenue Excluding Net Realized Investment Gains................... $8,085.8
Revenue Including Net Realized Investment Gains................... 8,133.7
Income Before Net Realized Investment Gains And Federal Income
Taxes............................................................ 917.2
Income Before Federal Income Taxes................................ 965.1
Net Income........................................................ 646.6
Net Income Per Common Share
Basic............................................................ 2.66
Assuming Dilution................................................ 2.61
Note 16--Sales of Portions of Lines of Business
In 1999, the Company sold certain portions of its reinsurance management
operations to AUL. See Note 13 for further discussion.
In December 1997, the Company entered into an agreement with American
General Corporation (American General) under which various affiliates of
American General agreed to acquire certain assets and assume certain
liabilities of Provident's individual and tax-sheltered annuity business. In
addition, American General acquired a number of miscellaneous group pension
lines of business which were no longer actively marketed by Provident. The sale
was completed during the second quarter of 1998.
In consideration for the transfer of statutory reserves, American General
paid the Company a ceding commission of $58.0 million. In connection with the
sale, the Company wrote off $18.7 million of goodwill associated with the
annuity business acquired from Paul Revere. Total liabilities of $2,518.9
million were assumed by American General, and total assets, excluding the
resulting reinsurance receivable, decreased $2,506.7 million. The gain
recognized at the time of the sale increased 1998 operating earnings by
$12.2 million before tax and $1.4 million after tax. Total revenue and income
before federal income taxes for the annuity business sold were $152.7 million
and $23.7 million, respectively, in 1997. Included in these amounts were net
realized investment gains of $8.0 million in 1997.
In the fourth quarter of 1996, the Company sold certain of Unum's tax-
sheltered annuity businesses to various affiliates of Lincoln National
Corporation (Lincoln). To effect the sale of this business, the Company
transferred assets of approximately $2,690.0 million into a trust account held
for the benefit of Lincoln. The sale resulted in a deferred before-tax gain of
$80.8 million, of which $72.6 million before tax and $47.0 million after tax
was recognized during 1997.
87
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 17--Commitments and Contingent Liabilities
In 1997 two alleged class action lawsuits were filed in Superior Court in
Worcester, Massachusetts (Superior Court) against the Company--one purporting
to represent all career agents of subsidiaries of Paul Revere whose employment
relationships ended on June 30, 1997 and were offered contracts to sell
insurance policies as independent producers and the other purporting to
represent independent brokers who sold certain Paul Revere individual
disability income policies with benefit riders. Motions filed by the Company to
dismiss most of the counts in the complaints, which allege various breach of
contract and statutory claims, have been denied, but the cases remain at a
preliminary stage. A hearing to determine class certification was heard on
December 20, 1999 in Massachusetts state court. The court certified a class for
the independent brokers and has denied class certification for the career
agents. The Company will appeal the class certification for the independent
brokers. The Company has filed a conditional counterclaim in each action which
requests a substantial return of commissions should the Superior Court agree
with the plaintiff's interpretation of the contracts. The Company believes that
it has strong defenses to both lawsuits and plans to vigorously defend its
position and resist certification of the classes. In addition, the same
plaintiff's attorney who has filed the purported class action lawsuits has
filed 44 individual lawsuits on behalf of current and former Paul Revere sales
managers alleging various breach of contract claims. The Company has filed a
motion in federal court to compel arbitration for 16 of the plaintiffs who are
licensed by the National Association of Securities Dealers and have executed
the Uniform Application for Registration or Transfer in the Securities Industry
(Form U-4). The federal court has denied 14 of those motions and granted two.
Three additional former general managers have filed similar lawsuits. The
Company believes that it has strong defenses and plans to vigorously defend its
position in these cases. Although the alleged class action lawsuits and
individual lawsuits are in the early stages, management does not currently
expect these suits to materially affect the financial position or results of
operations of the Company.
During September and October 1999, the Company and several of its officers
were named as defendants in five class action lawsuits filed in the United
States District Court for the District of Maine. On January 3, 2000, the Maine
district court appointed a lead class action plaintiff and ordered plaintiffs
to file a consolidated amended complaint. On January 27, 2000, a sixth
complaint against the same defendants was filed in the Southern District of New
York. On March 7, 2000, the sixth action was transferred to the District of
Maine. On February 23, 2000, two consolidated amended class action complaints
were filed against the same defendants. The first amended class action
complaint asserts a variety of claims under the Securities Exchange Act of
1934, as amended, on behalf of a putative class of shareholders who purchased
or otherwise acquired stock in the Company or Unum between February 4, 1998 and
February 9, 2000. The second amended complaint asserts a variety of claims
under the Securities Act of 1933 and the Securities Exchange Act of 1934, as
amended, on behalf of a putative class of shareholders who exchanged the common
stock of Unum or Provident for the Company's stock pursuant to the joint
proxy/registration statement issued in connection with the merger between Unum
and Provident. The complaints allege that the defendants made false and
misleading public statements concerning, among other things, Unum's and the
Company's reserves for disability insurance and pricing policies, the Company's
merger costs, and the adequacy of the due diligence reviews performed in
connection with the merger. The complaints seek money damages on behalf of all
persons who purchased or otherwise acquired Company or Unum stock in the class
period or who were issued Company stock pursuant to the merger. To date, no
class has been certified, and no defendant has answered any complaint. The
Company disputes the claims alleged in the complaint and plans to vigorously
contest them.
In certain reinsurance pools associated with the Company's reinsurance
businesses there are disputes among the pool members and reinsurance
participants concerning the scope of their obligations and liabilities
88
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
within the complex pool arrangements, including pools for which subsidiaries of
the Company acted either as pool managers or underwriting agents, as pool
members or as reinsurers. The Company's subsidiaries either have been or may in
the future be brought into disputes, arbitration proceedings, or litigation
with other pool members or reinsurers of the pools in the process of resolving
the various claims, but it is unclear what exposure Company or its subsidiaries
may ultimately have to share in the losses of pool members or reinsurers
because of the subsidiaries' activities in placing insurance or otherwise.
Various other lawsuits against the Company have arisen in the normal course
of its business. Contingent liabilities that might arise from such other
litigation are not deemed likely to materially affect the financial position or
results of operations of the Company.
Note 18--Statutory Financial Information
Statutory Net Income (Loss), Capital and Surplus, and Dividends
The Company's insurance subsidiaries' statutory net income (loss), as
reported in conformity with statutory accounting practices prescribed by state
regulatory authorities, for the years ended December 31, 1999, 1998, and 1997,
was $(233.7) million, $227.0 million, and $298.2 million, respectively.
Statutory capital and surplus at December 31, 1999 and 1998, was $2,718.1
million and $2,582.1 million, respectively. Excluding the expenses related to
the merger and early retirement offer and the changes in reserves as discussed
in Note 2, the federal income tax refund activity, and the reinsurance
operation charges, the Company's insurance subsidiaries' statutory net gain
from operations was $21.0 million for the year ended 1999.
Regulatory restrictions limit the amount of dividends available for
distribution to the Company from its insurance subsidiaries, without prior
approval by regulatory authorities, to the greater of ten percent of an
insurer's statutory surplus as regards policyholders as of the preceding year
end or the statutory net gain from operations, excluding realized investment
gains and losses, of the preceding year. The payment of dividends is further
limited to the amount of statutory unassigned surplus. Based on these
restrictions, $267.6 million will be available for the payment of dividends to
the Company from its top-tier domestic insurance subsidiaries during 2000. The
Company also has the ability to draw a dividend from its United Kingdom
subsidiary, 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 the Company from Unum Limited during 2000 is approximately $24.9
million. Regulatory restrictions do not limit the amount of dividends available
for distribution to the Company from its non-insurance subsidiaries.
Permitted Statutory Accounting Practices
The Company's insurance subsidiaries prepare their statutory-basis financial
statements in accordance with accounting practices prescribed or permitted by
the National Association of Insurance Commissioners (NAIC) and the applicable
state regulatory authorities. Prescribed statutory accounting practices include
state laws, regulations, and general administrative rules, as well as a variety
of publications of the NAIC. Permitted statutory accounting practices encompass
all accounting practices that are not prescribed; such practices may differ
from state to state, may differ from company to company within a state, and may
change in the future. At December 31, 1999, the Company had not applied any
permitted accounting practices that differed from prescribed statutory
accounting practices that had a material impact on the financial position or
results of operations of the insurance subsidiaries.
89
UNUMPROVIDENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1998, the NAIC approved a codification of statutory accounting practices
effective January 1, 2001, which will serve as a comprehensive and standardized
guide to statutory accounting principles. Following implementation, statutory
accounting principles will continue to be governed by individual state laws and
permitted practices until adoption by the various states. Accordingly, before
codification becomes effective for the Company's insurance subsidiaries, their
states of domicile must adopt codification as the prescribed basis of
accounting. The adoption of the codification will change, to some extent, the
accounting practices that the Company's insurance subsidiaries use to prepare
their statutory financial statements. At this time, the Company has not
determined the effects that codification will have on its insurance
subsidiaries' statutory financial statements.
Deposits
At December 31, 1999, the Company's insurance subsidiaries had on deposit
with regulatory authorities securities with a book value of $1,277.0 million
held for the protection of policyholders.
Note 19--Quarterly Results of Operations (Unaudited)
The following is a summary of unaudited quarterly results of operations for
1999 and 1998:
1999
--------------------------------------
4th 3rd 2nd 1st
-------- -------- -------- --------
(in millions of dollars, except
share data)
Premium Income......................... $1,738.1 $1,736.2 $1,687.4 $1,681.5
Net Investment Income.................. 528.7 513.4 518.0 499.6
Net Realized Investment Gains
(Losses).............................. (2.2) 77.9 4.2 7.2
Total Revenue.......................... 2,349.8 2,433.1 2,277.6 2,269.1
Income (Loss) Before Federal Income
Taxes................................. 208.7 (262.8) (274.6) 163.2
Net Income (Loss)...................... 136.0 (217.0) (191.2) 89.3
Net Income (Loss) Per Common Share.....
Basic................................. .57 (.91) (.80) .38
Assuming Dilution..................... .56 (.91) (.80) .37
1998
--------------------------------------
4th 3rd 2nd 1st
-------- -------- -------- --------
(in millions of dollars, except
share data)
Premium Income......................... $1,569.8 $1,560.5 $1,506.1 $1,492.6
Net Investment Income.................. 502.4 494.4 513.5 525.1
Net Realized Investment Gains.......... 24.2 16.4 5.1 9.3
Total Revenue.......................... 2,165.2 2,144.9 2,107.1 2,102.1
Income Before Federal Income Taxes..... 131.5 275.9 265.5 247.3
Net Income............................. 93.0 186.3 173.5 164.6
Net Income Per Common Share............
Basic................................. .39 .79 .73 .69
Assuming Dilution..................... .39 .77 .71 .67
Included in the amounts in the preceding table were various items related to
merger and early retirement costs (see Note 2), changes in reserves (see Notes
2 and 7), federal income tax refund activity (see Note 8), reinsurance
operation changes (see Note 13), and the sales of portions of lines of business
(see Note 16).
90
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
91
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The information required by this Item with respect to directors is included
under the caption "Information Concerning the Nominees" of the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held May 19, 2000,
and is incorporated herein by reference.
Executive Officers of the Registrant
The executive officers of the Company, all of whom are also executive
officers of its principal subsidiaries, were elected to serve in their
respective offices for one year or until their successors are chosen and
qualified.
Name Age Position
---- --- --------
J. Harold Chandler...... 50 Chairman, President, Chief Executive Officer, and Director
Thomas R. Watjen........ 45 Executive Vice President, Finance and Risk Management
Elaine D. Rosen......... 47 Executive Vice President, Customer Development
F. Dean Copeland........ 60 Executive Vice President and General Counsel
Mr. Chandler originally became Chairman of the Company on April 28, 1996;
and President and Chief Executive Officer of the Company's predecessor,
Provident Life and Accident Insurance Company of America, effective November 8,
1993. On June 30, 1999, in connection with the merger with Unum, he became
President and Chief Operating Officer of the Company, relinquishing the offices
of Chairman and CEO. He reassumed the offices of chairman and CEO of the
Company on November 1, 1999 following the retirement of James F. Orr, III.
Mr. Watjen became Executive Vice President, Finance of the Company on June
30, 1999 and assumed additional responsibilities for Risk Management on
November 1, 1999. Prior to the merger with Unum, he was Vice Chairman effective
March 26, 1997. He became Executive Vice President and Chief Financial Officer
on July 1, 1994. Prior to joining the Company, he served as a Managing Director
of the insurance practice of the investment banking firm, Morgan Stanley & Co.,
which he joined in 1987.
Mr. Copeland became Executive Vice President and General Counsel of the
Company on May 12, 1997. Prior to joining the Company, he had been a partner
since 1972 in the law firm of Alston & Bird, where he concentrated primarily on
matters related to consolidation within the financial services industry.
Ms. Rosen became Executive Vice President of the Company on June 30, 1999.
Prior to that time she had served as Executive Vice President of Unum
Corporation since May 1998 and president of Unum Life Insurance Company of
America (Unum America) since January 1997. Previously she served as Executive
Vice President of Unum America from May 1995 to December 1996.
ITEM 11. EXECUTIVE AND DIRECTOR COMPENSATION
The information required by this Item is included under the captions
"Compensation of Directors" and "Executive Compensation" of the Registrant's
Proxy Statement for the Annual Meeting of Shareholders to be held May 19, 2000,
and is incorporated herein by reference.
92
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included under the caption
"Beneficial Ownership of Company Securities" and under the caption "Security
Ownership of Directors and Officers" of the Registrant's Proxy Statement for
the Annual Meeting of Stockholders to be held May 19, 2000, and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included under the caption "Certain
Transactions" of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 19, 2000, and is incorporated herein by reference.
93
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this report: Page
(1) Financial Statements
The following report and consolidated financial statements of
UnumProvident Corporation and Subsidiaries are included in
Item 8.
Report of Ernst & Young LLP, Independent Auditors............. 38
Report of PriceWaterhouseCoopers LLP, Independent Auditors...... 39
Consolidated Statements of Financial Condition at December 31,
1999 and 1998.................................................. 40
Consolidated Statements of Operations for the three years ended
December 31, 1999.............................................. 42
Consolidated Statements of Stockholders' Equity for the three
years ended December 31, 1999.................................. 43
Consolidated Statements of Cash Flows for the three years ended
December 31, 1999.............................................. 44
Notes to Consolidated Financial Statements...................... 46
(2) Schedules Supporting Financial Statements
I. Summary of Investments--Other than Investments in Related
Parties...................................................... 97
II. Condensed Financial Information of Registrant................ 98
III. Supplementary Insurance Information.......................... 102
IV. Reinsurance.................................................. 104
V. Valuation and Qualifying Accounts............................ 105
Schedules not referred to have been omitted as inapplicable or
because they are not required by Regulation S-X.
(3) Exhibits
See Index to Exhibits on page 106 of this report.
(b) Reports on Form 8-K:
Form 8-K filed on November 3, 1999, reporting third quarter 1999 financial
results.
94
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 on March 29, 2000.
UnumProvident Corporation
(Registrant)
By: /s/ J. Harold Chandler
--------------------------------
J. Harold Chandler
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 and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ J. Harold Chandler Chairman, President, and March 29, 2000
- --------------------------------- Chief Executive Officer and
J. Harold Chandler a Director
/s/ Thomas R. Watjen Executive Vice President, March 29, 2000
- --------------------------------- Finance and Risk Management
Thomas R. Watjen
/s/ Ralph A. Rogers, Jr. Senior Vice President, March 29, 2000
- --------------------------------- Financial Resources
Ralph A. Rogers, Jr.
* Director March 29, 2000
- ---------------------------------
William L. Armstrong
* Director March 29, 2000
- ---------------------------------
Ronald E. Goldsberry
* Director March 29, 2000
- ---------------------------------
Hugh O. Maclellan, Jr.
* Director March 29, 2000
- ---------------------------------
A. S. MacMillan
* Director March 29, 2000
- ---------------------------------
George J. Mitchell
* Director March 29, 2000
- ---------------------------------
Cynthia A. Montgomery
* Director March 29, 2000
- ---------------------------------
James L. Moody, Jr.
95
Signature Title Date
--------- ----- ----
* Director March 29, 2000
_________________________________
C. William Pollard
* Director March 29, 2000
_________________________________
Lawrence R. Pugh
Director March 29, 2000
_________________________________
Steven S Reinemund
* Director March 29, 2000
_________________________________
Lois D. Rice
* Director March 29, 2000
_________________________________
John W. Rowe
* Director March 29, 2000
_________________________________
Burton E. Sorensen
/s/ Susan N. Roth
*By: ____________________________ For all of the Directors March 29, 2000
Susan N. Roth
Attorney-in-Fact
96
SCHEDULE I--SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
UnumProvident Corporation and Subsidiaries
December 31, 1999
Amount at which
shown in the
Fair statement
Type of Investment Cost Value of financial position
------------------ --------- --------- ---------------------
(in millions of dollars)
Available-for-Sale Fixed Maturity
Securities:
Bonds
United States Government and
Government Agencies and
Authorities....................... $ 73.8 $ 75.6 $ 75.6
States, Municipalities, and
Political Subdivisions............ 418.0 417.3 417.3
Foreign Governments................ 833.6 928.3 928.3
Public Utilities................... 3,586.2 3,614.1 3,614.1
Mortgage-backed Securities......... 2,831.4 2,764.7 2,764.7
Convertible Bonds.................. 100.8 98.8 98.8
All Other Corporate Bonds.......... 14,171.3 13,975.4 13,975.4
Redeemable Preferred Stocks......... 127.3 159.0 159.0
--------- --------- ---------
Total............................. 22,142.4 $22,033.2 22,033.2
--------- ========= ---------
Held-to-Maturity Fixed Maturity
Securities:
Bonds
United States Government and
Government Agencies and
Authorities....................... 7.2 $ 7.8 7.2
States, Municipalities, and
Political Subdivisions............ 2.1 2.2 2.1
Mortgage-backed Securities......... 298.0 293.2 298.0
All Other Corporate Bonds.......... 16.2 15.6 16.2
--------- --------- ---------
Total............................. 323.5 $ 318.8 323.5
--------- ========= ---------
Equity Securities:
Common Stocks....................... 14.7 $ 37.4 37.4
Nonredeemable Preferred Stocks...... 1.2 1.0 1.0
--------- --------- ---------
Total............................. 15.9 $ 38.4 38.4
--------- ========= ---------
Mortgage Loans....................... 1,311.0 1,278.1*
Real Estate Acquired in Satisfaction
of Debt............................. 43.6 35.9*
Other Real Estate.................... 205.4 175.3*
Policy Loans......................... 2,316.9 2,316.9
Other Long-term Investments.......... 26.5 26.5
Short-term Investments............... 321.5 321.5
--------- ---------
$26,706.7 $26,549.3
========= =========
- --------
* Difference between cost and carrying value results from certain valuation
allowances and other temporary declines in value.
97
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UnumProvident Corporation (Parent Company)
STATEMENTS OF FINANCIAL CONDITION
December 31
------------------
1999 1998
-------- --------
(in millions of
dollars)
ASSETS
Fixed Maturity Securities Available-for-Sale--at fair
value (cost: $9.6; $9.6)................................. $ 10.0 $ 11.4
Short-term Investments.................................... 3.1 --
Investment in Subsidiaries................................ 7,060.8 6,803.0
Short-term Notes Receivable from Subsidiaries............. 214.8 16.1
Surplus Notes of Subsidiaries............................. 250.0 250.0
Other Assets.............................................. 174.5 133.5
-------- --------
Total Assets............................................. $7,713.2 $7,214.0
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Short-term Debt from Subsidiaries......................... $ 26.6 $ 32.4
Short-term Debt........................................... 1,059.4 --
Long-term Debt............................................ 1,166.5 600.0
Other Liabilities......................................... 178.5 135.4
-------- --------
Total Liabilities........................................ 2,431.0 767.8
-------- --------
Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debt Securities of the Company............... 300.0 300.0
-------- --------
STOCKHOLDERS' EQUITY
Common Stock.............................................. 24.1 23.8
Additional Paid-in Capital................................ 1,028.6 959.2
Accumulated Other Comprehensive Income (Loss)............. (18.9) 914.7
Retained Earnings......................................... 3,957.6 4,279.2
Treasury Stock............................................ (9.2) (9.2)
Deferred Compensation..................................... -- (21.5)
-------- --------
Total Stockholders' Equity............................... 4,982.2 6,146.2
-------- --------
Total Liabilities and Stockholders' Equity............... $7,713.2 $7,214.0
======== ========
See notes to condensed financial information.
98
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
UnumProvident Corporation (Parent Company)
STATEMENTS OF OPERATIONS
Year Ended
December 31
----------------------
1999 1998 1997
------- ------ ------
(in millions of
dollars)
Dividends from Subsidiaries............................ $ 97.0 $ 77.9 $109.9
Interest from Subsidiaries............................. 24.9 21.3 17.1
Other Income........................................... 12.8 10.4 1.3
------- ------ ------
Total Revenue......................................... 134.7 109.6 128.3
------- ------ ------
Interest and Debt Expense.............................. 110.3 62.7 38.7
Other Expenses......................................... 49.6 2.6 4.3
------- ------ ------
Total Expenses........................................ 159.9 65.3 43.0
------- ------ ------
Income (Loss) Before Federal Income Taxes and Equity in
Undistributed Earnings (Losses) of Subsidiaries....... (25.2) 44.3 85.3
Federal Income Taxes (Credit).......................... (38.5) 8.1 (7.3)
------- ------ ------
Income Before Equity in Undistributed Earnings (Losses)
of Subsidiaries....................................... 13.3 36.2 92.6
Equity in Undistributed Earnings (Losses) of
Subsidiaries.......................................... (196.2) 581.2 525.0
------- ------ ------
Net Income (Loss)...................................... $(182.9) $617.4 $617.6
======= ====== ======
See notes to condensed financial information.
99
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
UnumProvident Corporation (Parent Company)
STATEMENTS OF CASH FLOWS
Year Ended December 31
-------------------------
1999 1998 1997
------- ------- -------
(in millions of
dollars)
CASH PROVIDED BY OPERATING ACTIVITIES............... $ 26.0 $ 11.6 $ 105.8
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net Sales of Short-term Investments................ 2.8 13.3 108.2
Acquisition of Business and Business Combinations.. -- 146.0 (495.9)
Cash Distribution (to) from Subsidiaries........... (492.3) 13.3 (5.0)
Short-term Notes Receivable from Subsidiaries...... (14.3) 20.5 (29.5)
Surplus Notes Issued to Subsidiaries............... -- -- (100.0)
Other.............................................. (15.9) (24.2) (0.1)
------- ------- -------
CASH PROVIDED (USED) BY INVESTING ACTIVITIES........ (519.7) 168.9 (522.3)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Short-term Borrowings from Subsidiaries........ (27.8) 7.7 24.7
Net Short-term Borrowings.......................... 602.4 -- --
Issuance of Long-term Debt......................... -- 600.0 725.0
Long-term Debt Repayments.......................... -- (725.0) (299.1)
Issuance of Company-Obligated Mandatorily
Redeemable Preferred Securities................... -- 300.0 --
Redemption of Preferred Stock...................... -- (156.2) --
Issuance of Common Stock........................... 69.7 11.9 389.8
Dividends Paid to Stockholders..................... (138.9) (139.1) (139.2)
Repurchase of Common Stock......................... -- (72.7) (286.7)
Other.............................................. -- (6.6) 2.0
------- ------- -------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES........ 505.4 (180.0) 416.5
------- ------- -------
INCREASE IN CASH.................................... $ 11.7 $ 0.5 $ --
======= ======= =======
See notes to condensed financial information.
100
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
UnumProvident Corporation (Parent Company)
NOTES TO CONDENSED FINANCIAL INFORMATION
Note 1--Basis of Presentation
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
UnumProvident Corporation and Subsidiaries.
Note 2--Surplus Notes of Subsidiaries
At December 31, 1999 and 1998, UnumProvident Corporation (Parent Company)
held from its insurance subsidiaries a $150.0 million surplus debenture due in
2006, and a $100.0 million surplus debenture due in 2027. Semi-annual interest
payments are conditional upon the approval by the insurance departments of the
subsidiaries' state of domicile. The weighted average interest rate for surplus
notes of subsidiaries was 8.2 percent, 8.1 percent, and 7.1 percent in 1999,
1998, and 1997, respectively.
101
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
UnumProvident Corporation and Subsidiaries
Future Policy
Deferred Benefits, Other Policy
Policy Losses, Claims and
Acquisition Claims, and Unearned Benefits
Segment Costs Loss Expenses Premiums Payable
------- ----------- ------------- -------- ------------
(in millions of dollars)
Year Ended December 31, 1999
Employee Benefits............. $ 826.3 $ 5,558.6 $ 15.1 $ 949.7
Individual.................... 985.7 11,484.8 269.6 377.9
Voluntary Benefits............ 438.0 868.0 16.4 99.7
Other......................... 141.2 5,427.7 79.5 294.8
-------- --------- ------ --------
Total........................ $2,391.2 $23,339.1 $380.6 $1,722.1
======== ========= ====== ========
Year Ended December 31, 1998
(1)
Employee Benefits............. $ 683.4 $ 5,181.0 $ 11.7 $ 595.4
Individual.................... 862.8 11,162.5 257.7 531.9
Voluntary Benefits............ 403.2 863.5 15.4 62.8
Other......................... 111.1 4,923.3 75.6 194.8
-------- --------- ------ --------
Total........................ $2,060.5 $22,130.3 $360.4 $1,384.9
======== ========= ====== ========
(Continued on following page)
102
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
UnumProvident Corporation and Subsidiaries
(continued from preceding page)
Benefits, Amortization
Claims, of Deferred
Net Losses and Policy Other
Premium Investment Settlement Acquisition Operating Premiums
Segment Revenue Income (2) Expenses Costs Expenses (3) Written (4)
------- -------- ---------- ---------- ------------ ------------ -----------
(in millions of dollars)
Year Ended December 31,
1999
Employee Benefits....... $3,900.2 $ 604.9 $3,663.9 $106.6 $ 855.4 $2,783.6
Individual.............. 1,730.6 873.1 1,719.9 89.5 572.6 1,660.2
Voluntary Benefits...... 691.6 106.6 392.7 113.0 161.8 514.3
Other................... 520.8 447.5 1,011.1 165.7 90.6 495.0
Corporate............... -- 27.6 -- -- 552.3
-------- -------- -------- ------ --------
Total.................. $6,843.2 $2,059.7 $6,787.6 $474.8 $2,232.7
======== ======== ======== ====== ========
Year Ended December 31,
1998
Employee Benefits....... $3,364.4 $ 541.8 $2,642.6 $ 82.6 $ 763.9 $2,353.7
Individual.............. 1,675.4 827.8 1,682.1 74.6 591.3 1,595.9
Voluntary Benefits...... 666.7 94.8 369.4 99.4 170.5 499.4
Other................... 422.5 540.0 755.6 120.9 89.0 410.9
Corporate............... -- 31.0 -- -- 157.2
-------- -------- -------- ------ --------
Total.................. $6,129.0 $2,035.4 $5,449.7 $377.5 $1,771.9
======== ======== ======== ====== ========
Year Ended December 31,
1997
Employee Benefits....... $2,810.1 $ 507.2 $2,174.5 $ 66.7 $ 699.2 $1,974.2
Individual.............. 1,480.3 692.7 1,426.7 68.7 517.1 1,399.7
Voluntary Benefits...... 626.6 84.5 354.2 87.8 168.4 482.7
Other................... 376.1 704.0 900.7 78.1 117.2 305.0
Corporate............... -- 27.3 -- -- 101.3
-------- -------- -------- ------ --------
Total.................. $5,293.1 $2,015.7 $4,856.1 $301.3 $1,603.2
======== ======== ======== ====== ========
- --------
(1) Information for 1998 has been reclassified to conform to the 1999
presentation.
(2) Net investment income is allocated based upon segmentation. Each segment
has its own specifically identified assets and receives the investment
income generated by those assets.
(3) Other operating expenses are allocated to each segment based on activity
levels, time information, and usage statistics.
(4) Excludes life insurance.
103
SCHEDULE IV--REINSURANCE
UnumProvident Corporation and Subsidiaries
Percentage
Ceded Assumed Amount
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
---------- --------- ---------- ---------- ----------
(in millions of dollars)
Year Ended December 31,
1999
Life Insurance in
Force.................. $564,730.4 $24,936.0 $2,484.5 $542,278.9 0.5%
========== ========= ======== ==========
Premium Income:
Life Insurance......... $ 1,505.4 $ 69.9 $ 16.9 $ 1,452.4 1.2%
Accident and Health
Insurance............. 5,269.4 438.4 559.8 5,390.8 10.4%
---------- --------- -------- ----------
Total................. $ 6,774.8 $ 508.3 $ 576.7 $ 6,843.2 8.4%
========== ========= ======== ==========
Year Ended December 31,
1998 (1)
Life Insurance in
Force.................. $471,209.2 $21,235.0 $2,562.1 $452,536.3 0.6%
========== ========= ======== ==========
Premium Income:
Life Insurance......... $ 1,318.3 $ 66.6 $ 18.6 $ 1,270.3 1.5%
Accident and Health
Insurance............. 4,866.2 477.9 470.4 4,858.7 9.7%
---------- --------- -------- ----------
Total................. $ 6,184.5 $ 544.5 $ 489.0 $ 6,129.0 8.0%
========== ========= ======== ==========
Life Insurance in
Force.................. $398,169.2 $22,221.2 $2,256.1 $378,204.1 0.6%
========== ========= ======== ==========
Year Ended December 31,
1997 (1)
Life Insurance......... $ 1,122.6 $ 60.2 $ 10.2 $ 1,072.6 1.0%
Accident and Health
Insurance............. 4,389.8 613.0 443.7 4,220.5 10.5%
---------- --------- -------- ----------
Total................. $ 5,512.4 $ 673.2 $ 453.9 $ 5,293.1 8.6%
========== ========= ======== ==========
Premium Income:
- --------
(1)Information for 1998 and 1997 has been reclassified to conform to the 1999
presentation.
104
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
UnumProvident Corporation and Subsidiaries
Deductions for
Balance Additions Additions Amounts Applied
at Charged to Charged to to Specific Loan Balance at
Beginning Costs and Other at Time of Sale/ End of
Description of Period Expenses Accounts Foreclosure Period
----------- --------- ---------- ---------- ---------------- ----------
(in millions of dollars)
Year Ended December 31,
1999
Mortgage loan loss
reserve (1)............ $32.8 $ 0.1 $ -- $ -- $32.9
Real estate reserve..... $51.2 $ -- $ -- $13.4 $37.8
Allowance for doubtful
accounts (deducted from
premiums Receivable and
miscellaneous Assets).. $ 2.9 $ 0.9 $ -- $ -- $ 3.8
Year Ended December 31,
1998
Mortgage loan loss
reserve (1)............ $34.9 $ 2.3 $ -- $ 4.4 $32.8
Real estate reserve
(1).................... $40.7 $10.5 $ -- $ -- $51.2
Allowance for doubtful
accounts (deducted from
premiums Receivable and
miscellaneous Assets).. $ 2.7 $ 0.2 $ -- $ -- $ 2.9
Year Ended December 31,
1997
Mortgage loan loss
reserve (1)............ $38.7 $ 3.3 $ -- $ 7.1 $34.9
Real estate reserve
(1).................... $36.3 $10.6 $ -- $ 6.2 $40.7
Allowance for doubtful
accounts (deducted from
premiums Receivable and
miscellaneous
Assets) (2)............ $ 1.2 $ 0.5 $1.0 $ -- $ 2.7
- --------
(1) Amounts shown in additions charged to cost and expenses represent realized
investment losses.
(2) Amounts shown in additions charged to other accounts represent reserves
related to acquired business.
105
UnumProvident Corporation and Subsidiaries
INDEX TO EXHIBITS
(2.1) Agreement and Plan of Share Exchange between Provident Companies, Inc.
(Provident) and Provident Life and Accident Insurance Company of
America (America) (incorporated by reference to Exhibit 2.1 of
Provident's Form 10-K filed for fiscal year ended December 31, 1995).
(2.2) Amended and Restated Agreement and Plan of Merger dated as of April 29,
1996 by and among Patriot Acquisition Corporation, The Paul Revere
Corporation, and Provident (including exhibits thereto), (incorporated
by reference to Exhibit 2.1 of Provident's Form 10-Q and Form 10-Q/A
filed for fiscal quarter ended September 30, 1996).
(2.3) Agreement and Plan of Merger, dated as of November 22, 1998, between
Unum Corporation (Unum) and Provident (incorporated by reference to
Exhibit 1 of Provident's Form 8-K filed November 24, 1998).
(3.1) Amended and Restated Certificate of Incorporation, (incorporated by
reference to Exhibit 3.1 of Provident's Form 10-K for fiscal year ended
December 31, 1995, as amended by Certificate of Amendment).
(3.2) Amended and Restated Bylaws of the Company.
(4.1) Articles of Share Exchange (incorporated by reference to Provident's
Form 10-K for fiscal year ended December 31, 1995).
(10.1) Asset and Stock Purchase Agreement by and between Healthsource and
America and its subsidiaries dated December 21, 1994. (incorporated by
reference to Exhibit 10.3 of Provident's Form 10-K for fiscal year
ended December 31, 1995).
(10.2) Annual Management Incentive Compensation Plan (MICP), adopted by
stockholders May 4, 1994 (incorporated by reference to Exhibit 10.5 of
America's From 10-K for fiscal year ended December 31, 1994), and
amended by stockholders May 1, 1996 (incorporated by reference to
Exhibit 10.4 of Provident's Form 10-K for fiscal year ended December
31, 1996) and as amended by stockholders May 7, 1997 (incorporated by
reference to Provident's Proxy Statement for the Annual Meeting of
Stockholders held May 7, 1997) and as Restated and amended by
stockholders May 6, 1998 (incorporated by reference to Provident's Form
10-Q for fiscal quarter ended June 30, 1998).*
(10.3) Stock Option Plan, adopted by stockholders May 3, 1989, as amended by
the Compensation Committee on January 10, 1990, and October 29, 1991
(incorporated by reference to Exhibit 10.6 of America's From 10-K for
fiscal year ended December 31, 1991); and as amended by the
Compensation Committee on March 17, 1992 and by the stockholders on May
6, 1992 (incorporated by reference to the registrant's Form 10-K filed
for the fiscal year ended December 31, 1992). Terminated effective
December 31, 1993.
(10.4) Provident Life and Accident Insurance Company (Accident) and
Subsidiaries Supplemental Executive Retirement Plan (incorporated by
reference to Exhibit 10.8 of Provident Life Capital Corporation
(Capital's) Registration Statement on Form S-1, Registration No. 33-
17017).*
(10.5) Form of Surplus Note, dated December 1, 1996, in the amount of $150.0
million executed by Accident in favor of Provident (incorporated by
reference to Exhibit 10.7 of Provident's Form 10-K filed for fiscal
year ended December 31, 1996).
(10.6) Description of Compensation Plan for Non-Employee Directors Plan
(incorporated by reference to Amendment No. 1 to registrant's Form 10-K
filed January 27, 1993 on Form 8), and amended by the Board of
Directors on February 8, 1994 (incorporated by reference to Exhibit
10.15 of America's Form 10-K filed for fiscal year ended December 31,
1993). Discontinued May 1998.
(10.7) Stock Option Plan, originally adopted by stockholders May 5, 1993, as
amended by stockholders on May 1, 1996 (incorporated by reference to
Exhibit 10.2 of Provident's Form 10-Q for fiscal quarter ended June 30,
1996) and as amended by stockholders on May 7, 1997 (incorporated by
reference to Provident's Proxy Statement for the Annual Meeting of
Stockholders held May 7, 1997).*
(10.8) Employee Stock Purchase Plan (of 1995) adopted by stockholders June 13,
1995 (incorporated by reference to Provident's Form 10-K for fiscal
year ended December 31, 1995).*
(10.9) Amended and Restated common stock Purchase Agreement between Provident
and Zurich Insurance Company dated as of May 31, 1996 Plan
(incorporated by reference to Exhibit 10.15 of Provident's From 10-K
for fiscal year ended December 31, 1996).
(10.10) Amended and Restated Relationship Agreement between Provident and
Zurich Insurance Company dated as of May 31, 1996 Plan (incorporated by
reference to Exhibit 10.16 of Provident's From 10-K for fiscal year
ended December 31, 1996).
(10.11) Amended and Restated Registration Rights Agreement between Provident
and Zurich Insurance Company dated as of May 31, 1996 (incorporated by
reference to Exhibit 10.17 of Provident's Form 10-K for fiscal year
ended December 31, 1996.)
(10.12) Provident Stock Plan of 1999, adopted by stockholders May 6, 1998
(incorporated by reference to Provident's Form 10-Q for fiscal quarter
ended June 30, 1998) as amended.*
(10.13) Provident Non-Employee Director Compensation Plan of 1998, adopted by
stockholders May 6, 1998 (incorporated by reference to Provident's 10-Q
for fiscal quarter ended June 30, 1998).*
(10.14) Agreement between Provident and certain subsidiaries and American
General Corporation and certain subsidiaries dated as of December 8,
1997 (incorporated by reference to Exhibit 3.2 of Provident's Form 10-Q
for fiscal quarter ended September 30, 1998).
(10.15) Employment Agreement between the Company and J. Harold Chandler
(incorporated by reference to Exhibit 10.2 of the Company's Form 10-Q
for fiscal quarter ended June 30, 1999).
(10.16) Employment Agreement between the Company and F. Dean Copeland
(incorporated by reference to Exhibit 10.3 of the Company's Form 10-Q
for fiscal quarter ended June 30, 1999).*
(10.17) Employment Agreement between the Company and Elaine D. Rosen
(incorporated by reference to Exhibit 10.4 of the Company's Form 10-Q
for fiscal quarter ended June 30, 1999).*
(10.18) Employment Agreement between the Company and Thomas R. Watjen
(incorporated by reference to Exhibit 10.5 of the Company's Form 10-Q
for fiscal quarter ended June 30, 1999).*
(10.19) Employment Agreement between the Company and James F. Orr, III
(incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q
for fiscal quarter ended June 30, 1999) as amended by the Agreement
dated November 1, 1999 between the Company and Mr. Orr.*
(10.20) Form of Change in Control Severance Agreement (incorporated by
reference to Exhibit 10.1 of the Company's Form 10-Q for fiscal quarter
ended September 30, 1999).*
(10.21) Unum Deferred Compensation Plan (incorporated by reference to Exhibit
10.1 of Unum 's Form 10-K for fiscal year ended December 31, 1995).*
(10.22) Incentive Compensation Plan for Designated Executive Officers
(incorporated by reference to Exhibit 10.2 of Unum's Form 10-K for
fiscal year ended December 31, 1996).*
(10.23) 1990 Unum Long Term Stock Incentive Plan (incorporated by reference to
Exhibit 10.4 of Unum's Form 10-K for fiscal year ended December 31,
1998).*
(10.24) 1996 Long Term Stock Incentive Plan (incorporated by reference to
Exhibit 10.5 of Unum's Form 10-K for fiscal year ended December 31,
1998).*
(10.25) Supplemental Executive Retirement Plan (incorporated by reference to
Exhibit 10.4 to Unum's Registration Statement on Form S-1 dated June
18,1986).*
(10.26) $500.0 million Credit Agreement dated as of November 2, 1999 among the
Company, the Banks listed therein, and Bank of America, National
Association as Administration Agent.
(10.27) $500.0 million Revolving Credit Agreement dated October 29, 1996
between Unum and Morgan Guaranty Trust Company of New York (assumed by
the Company as of June 30, 1999, in connection with the Merger).
(11) Statement re computation of per share earnings (incorporated herein by
reference to "Note 11 of the Notes to Consolidated Financial
Statements").
(21) Subsidiaries of the Company.
(23.1) Consent of Independent Auditors.
(23.2) Consent of Independent Auditors.
(24) Powers of Attorney.
(27) Financial Data Schedule.
__________________________
* Management contract or compensatory plan required to be filed as an exhibit
to this form pursuant to Item 14(c) of Form 10-K.
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of the Company does not exceed 10 percent of
the total assets of the Company and its consolidated subsidiaries. The Company
will furnish copies of any such instrument to the Securities and Exchange
Commission upon request.