Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 2000.
Commission file number 1-11834
UnumProvident Corporation
(Exact name of registrant as specified in its charter)
Delaware 62-1598430
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1 FOUNTAIN SQUARE 2211 CONGRESS STREET
CHATTANOOGA, TENNESSEE 37402 PORTLAND, MAINE 04122
(Address of principal executive offices)
423.755.1011
(Registrant's telephone number, including area code)
Not Applicable
(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
------------------- -----------------------------------------
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
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 12, 2001, there were 241,400,120 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 $6.0 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the annual meeting of shareholders to be
held May 10, 2001 are incorporated by reference into Part III.
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......................................................................... 6
D. Reinsurance................................................................................ 9
E. Reserves................................................................................... 10
F. Competition................................................................................ 11
G. Regulation................................................................................. 12
H. Risk Factors............................................................................... 12
I. Selected Data of Segments.................................................................. 14
J. Employees.................................................................................. 14
2. Properties..................................................................................... 15
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.......... 18
7A. Quantitative and Qualitative Information about Market Risk..................................... 38
8. Financial Statements and Supplementary Data.................................................... 39
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 93
PART III
10. Directors and Executive Officers of the Registrant............................................. 94
11. Executive and Director Compensation............................................................ 95
12. Security Ownership of Certain Beneficial Owners and Management................................. 95
13. Certain Relationships and Related Transactions................................................. 95
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 96
Signatures..................................................................................... 97
Index to Exhibits.............................................................................. 108
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, and reserves and related
assumptions. 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:
. 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 revenue and higher than expected amortization
of deferred policy acquisition costs.
. 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.
. Field force effectiveness in supporting new product offerings and
providing customer service may not meet expectations.
. Sales growth may be less than planned, which will impact revenue and
profitability.
. 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 revenue, and the Company could experience higher
than expected claims or claims with longer duration than expected.
. Legislative or regulatory changes may adversely affect the businesses
in which the Company is engaged.
. 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.
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.
1
ITEM 1. BUSINESS
General
The Company, a Delaware general business corporation, is the parent holding
company for a group of insurance and non-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 and the United Kingdom. It also
provides a complementary portfolio of other 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 $1.5 billion 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 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. During 1998,
Provident reinsured, on a 100 percent coinsurance basis, substantially all of
its in-force medical stop-loss insurance business. Also during 1998, Provident
sold its in-force individual and tax-sheltered annuity business. The transaction
did not include Provident's block of GICs or group single premium annuities
(SPAs), which continued in a run-off mode.
2
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 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 1996, Unum sold its
group tax-sheltered annuity (TSA) business. The contracts were initially
reinsured on an indemnity basis. Upon consent of the TSA contractholders and
participants, the contracts were reinsured on an assumption basis, legally
releasing Unum from future contractual obligation. Consents for assumption
reinsurance were received for 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) and the 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 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. The Company
also decided to discontinue its accident reinsurance business in London
beginning in year 2000. With respect to Lloyd's, the Company implemented a
strategy which limited participation in year 2000 underwriting risks, ceased
participation in Lloyd's underwriting risks after year 2000, and managed the
run-off of its risk participation in open years of account of Lloyd's
reinsurance syndicates. During the first quarter of 2001, the Company entered
into an agreement in principle to limit its liabilities pertaining to the
Lloyd's syndicate participations. See Note 13 of the "Notes to Consolidated
Financial Statements" for further discussion of the reinsurance operations.
During 2000, the Company completed a series of strategic transactions designed
to more closely focus its operations on its core businesses, increase its
financial flexibility, support its present credit and claims-paying ratings,
increase the risk-based capital ratios of the insurance subsidiaries involved,
and lower its leverage ratios. The primary transaction involved agreements under
which Reassure America Life Insurance Company (Reassure America), an affiliate
of Swiss Re Life & Health America Inc. (Swiss Re), reinsured on a 100 percent
indemnity coinsurance basis substantially all of the individual life insurance
and corporate-owned life insurance policies written by the Company's insurance
subsidiaries, as well as a small block of individually underwritten group life
insurance. Reassure America is also assuming responsibility for the
administration of the policies on a phased-in basis over the course of the next
year. The reinsurance agreements were effective as of July 1, 2000.
Separately, Paul Revere Life and Max Re Ltd. entered into an agreement whereby
Max Re Ltd. reinsured on a 100 percent indemnity coinsurance basis the future
claim payments on long duration group long-term disability claims which were
incurred prior to January 1, 1996. The agreement was effective January 1, 2000.
During 2000, Unum America entered into a reinsurance agreement with Manulife
Reinsurance Limited and SCOR Reinsurance Company under which Unum America will
cede through a net quota share reinsurance agreement 50 percent of the group
life volume above Unum America's aggregate retention limit. The treaties are
five-year quota share treaties ceding 25 percent of premium, life volume, and
paid claims to each reinsurer. The reinsurance agreements were effective as of
October 1, 2000.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 13 of the "Notes to Consolidated Financial Statements"
contained herein in Items 7 and 8 for further discussion of these 2000
reinsurance transactions.
Also in 2000, the Company purchased a single premium annuity for its retirees.
The pension plan transaction allowed the Company to provide a higher level of
administrative service for its retirees while also locking in favorable pension
plan performance. The proceeds from the transaction were partially offset by
actions to further strengthen the Company's financial position. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 10 of the "Notes to Consolidated Financial Statements"
contained herein in Items 7 and 8 for further discussion of this transaction.
3
The Company also sold Provident National Assurance Company, an inactive
insurance subsidiary, to Allstate Life Insurance Company. Provident National
Assurance Company's general account liabilities were reinsured by another
subsidiary of the Company, and the excess capital and surplus was transferred to
the parent to reduce short-term borrowings. This transaction closed during the
first quarter of 2001.
In the first quarter of 2001, the Company entered into a definitive agreement to
acquire the assets of EmployeeLife.com, an Internet Capital Group partner
company. This new subsidiary will enhance customer service by providing Internet
business solutions to help employers efficiently manage and administer employee
benefits. Subject to the approval of the shareholders of EmployeeLife.com and
other customary closing conditions, the transaction is expected to close during
the first half of 2001.
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, seek to meet the diverse needs of the
marketplace. The Company seeks to achieve a competitive advantage by offering
group, individual, and voluntary workplace 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 businesses 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.
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 is long-
term care insurance as a lifestyle protection solution product.
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 partner with the Company's sales force as well as representatives from
claims, customer service, and underwriting 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.
4
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
workplace accommodations to enable an employee's transition back to work. 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.
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, such as on-line
employee self-service and automated benefits eligibility and enrollment, and
through a broad and multi-channel distribution network. The Company also offers
workplace 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
5
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 includes individual
disability and individual long-term care. The Voluntary Benefits segment
includes products sold to employees through payroll deduction at the workplace.
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 individual life (previously
reported in the Individual segment) and corporate-owned life insurance,
reinsurance pools and management operations, group pension, health insurance,
and individual annuities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained herein in Item 7 for further
discussion of the Company's reporting segments.
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 $2,597.1 million of premium income in 2000. Group
life generated $1,194.8 million of premium income in 2000.
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.
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, limited 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.
Premiums for group disability insurance are generally based on expected claims
of a pool of similar risks plus provisions for administrative expenses and
profit. Some cases 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.
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.
6
Group life insurance consists primarily of renewable term life insurance with
the coverages frequently linked to employees' wages. Premiums for group life are
generally based on expected claims of a pool of similar risks plus provisions
for administrative expenses and profit. 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.
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 guaranteed renewable basis wherein the Company
maintains the right to reprice in-force policies, subject to regulatory
approval. 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 workplace 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 worker's 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
$1,643.5 million of premium income in 2000. Individual long-term care premium
income totaled $133.7 million in 2000.
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 is largely dependent upon achieving
the pricing assumptions for morbidity, persistency, interest earned rates, and
expense levels.
7
In 1994, 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. 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 developed a new individual disability product portfolio that was
released for sale in approved states early in the fourth quarter of 2000. This
product line consolidates the current offerings of the Company's insurance
subsidiaries into one new simplified product portfolio. The new portfolio
utilizes a modular approach offering customers a range of product options and
features. This portfolio was designed to combine the best features from prior
Company offerings and includes return-to-work incentives and optional long-term
care conversion benefits and/or benefits for catastrophic disabilities.
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.
Voluntary Benefits
The Voluntary Benefits segment includes a broad line of products sold to groups
of employees through payroll deduction at the workplace. These products include
life insurance and health products. Premium income for this segment totaled
$739.6 million in 2000.
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,
worker's 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 pre-tax 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.
8
Other
The Other operating segment includes results from products no longer actively
marketed, including individual life and corporate-owned life insurance,
reinsurance pools and management operations, group pension, health insurance,
and individual annuities.
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. In 1999, the Company sold the reinsurance management operations of
its A&H and LTC reinsurance facilities and reinsured the Company's risk
participation in these facilities. The Company also decided to discontinue its
accident reinsurance business in London beginning in year 2000. With respect to
Lloyd's, the Company implemented a strategy which limited participation in year
2000 underwriting risks, ceased participation in Lloyd's underwriting risks
after year 2000, and managed the run-off of its risk participation in open years
of account of Lloyd's reinsurance syndicates. During the first quarter of 2001,
the Company entered into an agreement in principle to limit its liabilities
pertaining to the Lloyd's syndicate participations. See Note 13 of the "Notes to
Consolidated Financial Statements" for further discussion of the reinsurance
operations.
The Company no longer markets group pension products, but continues to service
its block of existing business. The Company previously marketed GICs for use in
corporate tax-qualified retirement plans and group SPAs, used primarily as
funding vehicles 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.
As previously discussed, the Company reinsured its individual life and
corporate-owned life insurance during 2000, 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 policy 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. The Company does not reinsure group or individual
disability policies issued subsequent to 1999.
For ceded reinsurance agreements wherein the Company is not relieved of its
primary liability to the policyholder, the Company has control procedures to
evaluate the financial condition of reinsurers and monitor 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 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, 2000, relates to over 140 reinsurance relationships.
Of the five major relationships which account for approximately 75 percent of
the reinsurance receivable amount at December 31, 2000, 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.
9
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 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 contained herein 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.
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.
10
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 were expected to be reported during 1999 and were expected
to be affected by the claims operations integration activities. The $153.0
million claim reserve increase represented 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 believed 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 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 were 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 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 were expensed in
the period incurred and were 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 was not 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 2000,
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.
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 integrated product choices, price, and quality of customer service
and claims management.
11
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 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 16 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, Massachusetts, South Carolina, 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,
2000, 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.
12
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.
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, worker's 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.
13
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, 2000, the Company had approximately 12,400 full-time employees,
including those in its foreign operations. Some employees in Argentina,
comprising less than 1 percent of the Company's total workforce, are members of
a union.
14
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. In addition, approximately 35,000 square feet of
office space is leased and occupied in a nearby office building.
The Company occupies facilities in Portland, Maine, which are comprised of eight
owned facilities totaling 968,000 square feet of office space and 250 acres of
land, a portion of which has been developed for employee parking. In addition,
approximately 127,000 square feet of office space is leased and occupied in
three buildings with rents totaling $1.5 million per year.
The Company occupies facilities totaling 341,000 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 15 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
----------------- ---------------- ---------------
2000
1/st/ Quarter $31.9375 $11.9375 $0.1475
2/nd/ Quarter 24.6250 14.8125 0.1475
3/rd/ Quarter 27.6875 19.2500 0.1475
4/th/ Quarter 29.7500 25.4375 0.1475
1999
1/st/ Quarter $62.5000 $43.8125 $0.1428
2/nd/ Quarter 59.5000 42.4375 0.1428
3/rd/ Quarter 56.8750 28.3750 0.1475
4/th/ Quarter 36.1875 26.0000 0.1475
As of March 12, 2001 there were 22,086 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 16 of the "Notes to Consolidated
Financial Statements."
16
ITEM 6. SELECTED FINANCIAL DATA
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in millions, except share data)
Statement of Operations Data
Premium Income $ 7,057.0 $ 6,843.2 $ 6,129.0 $ 5,293.1 $ 4,288.8
Net Investment Income 2,060.4 2,059.7 2,035.4 2,015.7 1,893.4
Net Realized Investment Gains (Losses) (14.6) 87.1 55.0 11.5 (5.2)
Other Income 329.5 339.6 299.9 357.0 148.2
----------- ----------- ----------- ----------- -----------
Total Revenue 9,432.3 9,329.6 8,519.3 7,677.3 6,325.2
Benefits and Expenses 8,566.7 9,495.1 7,599.1 6,760.6 5,757.4
----------- ----------- ----------- ----------- -----------
Income (Loss) Before Federal Income Taxes 865.6 (165.5) 920.2 916.7 567.8
Federal Income Taxes 301.4 17.4 302.8 299.1 184.2
----------- ----------- ----------- ----------- -----------
Net Income (Loss) $ 564.2 $ (182.9) $ 617.4 $ 617.6 $ 383.6
=========== =========== =========== =========== ===========
Per Common Share Information
Net Income (Loss) - Basic $ 2.34 $ (0.77) $ 2.60 $ 2.62 $ 1.75
Net Income (Loss) - Assuming Dilution $ 2.33 $ (0.77) $ 2.54 $ 2.57 $ 1.72
Common Stockholders' Equity at End of Year $ 23.12 $ 20.73 $ 25.89 $ 23.46 $ 18.29
Cash Dividends $ 0.59 $ 0.58 $ 0.57 $ 0.55 $ 0.53
Weighted Average Common Shares
Outstanding (000s)
- Basic 240,880.4 239,080.6 236,975.2 230,741.2 212,401.5
- Assuming Dilution 242,061.0 239,080.6 242,348.9 235,818.2 215,301.1
Financial Position (at End of Year)
Assets $ 40,363.9 $ 38,447.5 $ 38,602.2 $ 37,040.1 $ 30,813.8
Long-term Debt, Subordinated Debt
Securities, and Preferred Stock $ 1,915.5 $ 1,466.5 $ 1,525.2 $ 1,396.2 $ 927.0
Stockholders' Equity $ 5,575.5 $ 4,982.2 $ 6,146.2 $ 5,714.1 $ 4,001.7
17
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.
The trends in new annualized sales in the Employee Benefits, Individual, and
Voluntary Benefits segments 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.
Results of Operations
2000 Significant Transactions and Events
During 2000, the Company completed a series of strategic transactions designed
to more closely focus its operations on its core businesses, increase its
financial flexibility, support its present credit and claims-paying ratings,
increase the risk-based capital ratios of the insurance subsidiaries involved,
and lower its leverage ratios. The primary transaction involved agreements under
which Reassure America Life Insurance Company (Reassure America), an affiliate
of Swiss Re Life & Health America Inc. (Swiss Re), reinsured on a 100 percent
indemnity coinsurance basis substantially all of the individual life insurance
and corporate-owned life insurance policies written by the Company's insurance
subsidiaries, as well as a small block of individually underwritten group life
insurance. The reinsurance agreements were effective as of July 1, 2000.
Separately, the Company and Max Re Ltd. entered into an agreement whereby Max Re
Ltd. reinsured on a 100 percent indemnity coinsurance basis the future claim
payments on one of the Company's insurance subsidiaries' long duration group
long-term disability claims which were incurred prior to January 1, 1996. The
agreement was effective January 1, 2000.
During 2000, the Company entered into a reinsurance agreement with Manulife
Reinsurance Limited and SCOR Reinsurance Company under which one of the
Company's insurance subsidiaries will cede through a net quota share reinsurance
agreement 50 percent of the group life volume above the aggregate retention
limit. The treaties are five-year quota share treaties ceding 25 percent of
premium, life volume, and paid claims to each reinsurer. The reinsurance
agreements were effective as of October 1, 2000.
18
Also in 2000, the Company purchased a single premium annuity for its retirees.
The pension plan transaction allowed the Company to provide a higher level of
administrative service for its retirees while also locking in favorable pension
plan performance. The proceeds from the transaction were partially offset by
actions to further strengthen the Company's financial position, namely reserve
adjustments of $65.6 million in the Company's long-term disability business and
$21.9 million in the reinsurance operations, asset write-offs and loss
provisions of $15.5 million in the reinsurance operations, and consolidation and
benefit accruals of $9.4 million. See the discussions of segment operating
results contained herein for further information.
During 2000, tax legislation was enacted in the United Kingdom that allowed
additional group tax relief among companies with common ownership. The Company
expects to realize foreign tax benefits as a result of this legislation.
1999 Significant Transactions and Events
As a result of the aforementioned merger at June 30, 1999, certain accounting
policy changes were made during 1999. The following summarizes these changes as
well as the expenses related to the merger and the early retirement offer to
employees.
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 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.
19
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.
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.
During 1999 the Company also recognized $327.8 million of before-tax charges
related to its reinsurance operations. These charges were as follows (in
millions):
North American Reinsurance Operations
Loss on Sale of A&H and LTC Reinsurance Management Operations (includes $ 12.9
write-off of $6.0 million of goodwill)
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 these charges and 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 1999
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
Consolidated Operating Results
(in millions of dollars)
Year Ended December 31
------------------------------------------------------------------
2000 % Change 1999 % Change 1998
---------- ----------- ----------
Revenue
Premium Income $ 7,057.0 3.1 % $ 6,843.2 11.7 % $ 6,129.0
Net Investment Income 2,060.4 - 2,059.7 1.2 2,035.4
Other Income 329.5 (3.0) 339.6 13.2 299.9
----------- ----------- -----------
Total Revenue 9,446.9 2.2 9,242.5 9.2 8,464.3
----------- ----------- -----------
Benefits and Expenses
Benefits and Change in Reserves for
Future Benefits 6,407.5 (5.6) 6,787.6 24.5 5,449.7
Commissions 754.1 (17.5) 913.6 10.5 826.5
Interest and Debt Expense 181.8 31.9 137.8 14.9 119.9
Deferral of Policy Acquisition Costs (595.7) (26.4) (809.3) 15.1 (703.3)
Amortization of Deferred Policy
Acquisition Costs 456.5 (3.9) 474.8 25.8 377.5
Amortization of Value of Business
Acquired and Goodwill 67.3 (44.3) 120.9 81.5 66.6
Operating Expenses 1,295.2 (30.7) 1,869.7 27.9 1,462.2
----------- ----------- -----------
Total Benefits and Expenses 8,566.7 (9.8) 9,495.1 25.0 7,599.1
----------- ----------- -----------
Income (Loss) Before Federal
Income Taxes and Net Realized
Investment Gains and Losses 880.2 N.M. (252.6) N.M. 865.2
Federal Income Taxes (Credit) 307.1 N.M. (12.9) N.M. 283.9
----------- ----------- -----------
Income (Loss) Before Net Realized
Investment Gains and Losses 573.1 N.M. (239.7) N.M. 581.3
Net Realized Investment Gains (Losses) (8.9) N.M. 56.8 57.3 36.1
----------- ----------- -----------
Net Income (Loss) $ 564.2 N.M. $ (182.9) N.M. $ 617.4
=========== =========== ===========
N.M. = not a meaningful percentage
In the following discussions 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.
21
Employee Benefits Segment Operating Results
(in millions of dollars)
Year Ended December 31
--------------------------------------------------------------
2000 % Change 1999 % Change 1998
----------- ---------- -----------
Revenue
Premium Income
Group Long-term Disability $ 2,082.7 2.4 % $ 2,034.7 13.0 % $ 1,800.7
Group Short-term Disability 514.4 8.6 473.7 28.9 367.4
Group Life 1,194.8 3.2 1,158.2 17.8 983.5
Accidental Death & Dismemberment 187.3 (1.8) 190.7 3.6 184.1
Group Long-term Care 63.3 47.6 42.9 49.5 28.7
---------- --------- ----------
Total Premium Income 4,042.5 3.6 3,900.2 15.9 3,364.4
Net Investment Income 701.8 16.0 604.9 11.6 541.8
Other Income 151.3 7.9 140.2 17.6 119.2
---------- --------- ----------
Total Revenue 4,895.6 5.4 4,645.3 15.4 4,025.4
---------- --------- ----------
Benefits and Expenses
Benefits and Change in Reserves for
Future Benefits 3,426.2 (6.5) 3,663.9 38.6 2,642.6
Commissions 322.5 (2.0) 329.0 21.0 271.9
Deferral of Policy Acquisition Costs (231.4) (7.1) (249.2) 17.2 (212.6)
Amortization of Deferred Policy
Acquisition Costs 147.2 38.1 106.6 29.1 82.6
Amortization of Value of Business Acquired 2.4 (4.0) 2.5 (3.8) 2.6
Operating Expenses 794.4 2.8 773.1 10.1 702.0
---------- --------- ----------
Total Benefits and Expenses 4,461.3 (3.6) 4,625.9 32.6 3,489.1
---------- --------- ----------
Income Before Federal Income
Taxes and Net Realized
Investment Gains and Losses $ 434.3 N.M. $ 19.4 N.M. $ 536.3
========== ========= ==========
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.
Employee Benefits new annualized sales, on a submitted date basis, decreased 9.4
percent to $862.7 million in 2000 from $952.5 million in 1999 and $981.1 million
in 1998. On an effective date basis, sales decreased 32.1 percent to $744.9
million in 2000 from $1,097.7 million in 1999 and $926.3 million in 1998.
Although total year over year comparisons show a decrease, submitted sales
during the last half of 2000 increased $93.3 million over sales submitted during
the last half of 1999. Sales that combine long-term disability, short-term
disability, and group life products also increased from prior year, showing
continued strong integrated sales and collaboration in the field. During 2000,
32 percent of all new sales were with long-term disability, short-term
disability, and group life combined coverage, compared to 26 percent in 1999.
Sales related to employee benefits can fluctuate significantly due to large case
size and timing of sales submissions. Several factors contributed to the
decrease in 2000 sales compared to 1999 and 1998, including rate increases and
turnover in the field sales force during the first half of 2000. The Company has
a number of initiatives underway to help maintain the sales momentum achieved
during the last half of 2000, including targeted incentive plans, organizational
changes to create a greater focus on the customer, and enhanced communication
with producers. In order to give the appropriate focus to the Company's primary
business markets, the Company has established national practice groups to focus
on large employers, executive benefits, and voluntary benefits. These national
practice groups partner with the Company's sales force and representatives from
claims, customer service, and underwriting to present coverage solutions to
potential customers and to manage existing customer accounts. The
22
Company expects that these actions will continue to favorably impact sales
growth, but management intends to maintain pricing discipline to balance sales
growth and profitability, which may slow the rate of long-term sales growth.
The Company monitors persistency and reflects adverse changes in persistency in
the current period's amortization of deferred policy acquisition costs. Actual
persistency experienced during 2000 for group disability, group life, and
accidental death and dismemberment products compared unfavorably to the
persistency expected, resulting in additional amortization of $34.1 million
during 2000. The adverse persistency during 2000 relates primarily to large case
terminations and an aggressive 2000 renewal program that was heavily
concentrated in the first half of the year. It is expected that persistency for
the foreseeable future will continue to be lower than historical levels for
group disability as well as group life. The Company's 2000 renewal program was
generally successful at retaining business that is relatively more profitable
than business that terminated. It is expected that the additional premium and
related profits associated with this renewal activity will emerge throughout
2001. The Company intends to maintain a disciplined approach in the re-pricing
of renewal business, while balancing the need to maximize persistency and retain
producer relationships. This approach may lead to lower profit margins on
affected cases than originally planned.
Revenue from the managed disability line of business, which includes GENEX
Services, Inc. and Options and Choices, Inc., totaled $126.1 million in 2000
compared to $107.8 million in 1999 and $96.2 million in 1998.
Group Disability
Group disability revenue was $3,200.4 million in 2000 compared to $3,029.0
million in 1999. New annualized sales for group long-term disability on a
submitted date basis were $333.8 million in 2000 and $385.2 million in 1999. New
annualized sales for group short-term disability were $148.5 million in 2000
compared to $172.0 million in 1999. On an effective date basis, new annualized
sales for long-term disability and short-term disability were $318.0 million and
$125.4 million in 2000 and $466.9 million and $203.1 million in 1999. A critical
part of the Company's strategy for group disability during 2000 involved
executing its renewal program and managing persistency, both of which management
expects will have a positive impact on future premium growth and profitability.
However, the high terminations and slow sales have decreased the earned premium
growth compared to that experienced during 1999 and 1998. 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 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 the increased duration on new
investments.
Group disability reported income of $211.0 million for 2000 compared to a loss
of $225.7 million for 1999. Included in the income for 2000 was an increase of
$65.6 million in group long-term disability claim reserves, which represents
approximately 1.2 percent of total group long-term disability claim reserves.
The increase, which resulted from lengthening the projected average claim
duration for certain of the Company's group long-term disability claims, was not
a result of deteriorating experience but was believed appropriate based on the
Company's assessment of the ultimate settlement of these claims. The 1999 loss
of $225.7 million was the result of the $191.7 million 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 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 "Results of Operations."
Excluding the adjustments to the disability claim liabilities discussed in the
preceding paragraph, the benefit ratio for group disability was 83.5 percent in
1999 compared to 87.1 percent in 2000. For long-term disability, the ratio for
2000 compared unfavorably to 1999, but showed slight improvement throughout
2000. The paid claim incidence for long-term disability compares favorably to
1999 due to lower claim acceptance rates, and claim resolution experience
continued to improve during 2000. The 2000 submitted claim incidence rate for
long-term disability was higher than the rate for 1999.
The benefit ratio for short-term disability decreased marginally from the 1999
ratio. The incidence of submitted claims for short-term disability remained
relatively constant throughout 2000 and 1999, declining slightly in 2000
compared to the 1999 rate. Negative impacts on the benefit ratio in 2000 were
the average claim duration, which increased to its highest level in recent
periods during 2000, and an increase in the average weekly indemnity.
23
Additionally, the increase in the amortization of deferred policy acquisition
costs had a negative impact on 2000 income. This increase resulted from $25.8
million of additional amortization necessitated by the higher level of group
long-term and short-term disability terminations experienced during 2000
relative to that which was expected at the time the business was written.
However, the disability business retained is relatively more profitable than the
business that terminated. The additional amortization during 1999 was $4.2
million.
Income in 2000 was positively impacted by a 5.7 percent revenue increase and an
improvement in both the commission and operating expense ratios.
As previously discussed under "Results of Operations," during 2000 the Company
entered into a 100 percent indemnity coinsurance agreement to cede the future
claim payments on one of its insurance subsidiaries' long duration group
long-term disability claims which were incurred prior to January 1, 1996. The
agreement was effective January 1, 2000.
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, on a submitted date basis, 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. On an effective date basis, new
annualized sales for long-term disability and short-term disability were $466.9
million and $203.1 million in 1999 and $426.4 million and $159.7 million in
1998.
Net investment income increased during 1999 due to the increase in the level of
invested assets allocated to this line of business and also due to the portfolio
restructuring which occurred subsequent to the merger.
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 and the $359.2 million third quarter 1999 charge as
previously discussed. 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 incidence
rates for new claims submitted for short-term disability improved during 1999 as
compared to 1998.
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.
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 expected 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 were 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. 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.
24
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 be worse than expected. Management monitors 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. Given the competitive market conditions for the
Company's disability products, it is uncertain whether pricing actions can
entirely mitigate the effect.
The Company, similar to all financial institutions, has some exposure if a
severe and prolonged recession occurs, but management believes that the Company
is well positioned if a weaker economy were to occur. Many of the Company's
products can be repriced, which would allow the Company to reflect in its
pricing any fundamental change which might occur in the risk associated with a
particular industry or company within an industry. The Company has a well
diversified book of insurance exposure, with no unusual concentrations of risk
in any one industry. Because of improvements made in the claims organization in
recent years, the Company believes it can respond to increased levels of
submitted claims which might result from a slowing economy.
Group Life, Accidental Death and Dismemberment, and Long-term Care
Group life, accidental death and dismemberment, and long-term care reported
income of $214.0 million in 2000 compared to $239.5 million in 1999. New
annualized sales on a submitted date basis decreased to $380.4 million in 2000
as compared to $395.3 million in 1999. On an effective date basis, new
annualized sales were $301.5 million in 2000 compared to $427.7 million for
1999.
Group life and long-term care both reported an increase in revenue for 2000
compared to 1999 due to increases in premium income and net investment income.
Offsetting the revenue increase was an increase in the benefit ratio when
compared to 1999. Group life reported an unfavorable benefit ratio in 2000
compared to the prior year due to an increase in the average paid claim size and
waiver incidence, partially offset by favorable paid mortality incidence.
The 2000 benefit ratio for accidental death and dismemberment compares
unfavorably with 1999. The increase in the average paid claim size contributed
to the unfavorable comparison. Submitted incidence for accidental death and
dismemberment has improved relative to 1999.
The reinsurance transaction with Reassure America, discussed under Item 1
contained herein, reduced 2000 group life and accidental death and dismemberment
premium income and benefits approximately $15.4 million and $11.7 million,
respectively.
25
The reinsurance transaction with Manulife Reinsurance Limited and SCOR
Reinsurance Company, under which an insurance subsidiary of the Company cedes
through a net quota share reinsurance agreement 50 percent of the group life
volume above the aggregate retention limit, does not meet the conditions for
reinsurance accounting and is therefore accounted for as a deposit. As such,
there is no effect on reported premium income or benefits. The only impact on
the income statement is the risk charge paid to the reinsurers.
See Note 13 of the "Notes to Consolidated Financial Statements" for further
discussion of the 2000 reinsurance transactions.
Group long-term care reported a higher benefit ratio for 2000 compared to 1999.
The long-term care net claim resolution rate for 2000 is below the average rate
for 1999, primarily due to a decrease in claim recoveries. The 2000 incidence
rates for both submitted and paid claims improved over the prior year.
The amortization of deferred policy acquisition costs for 2000 includes $8.3
million of additional amortization due to the higher level of terminations for
group life and accidental death and dismemberment products experienced during
2000 relative to that which was expected at the time the policies were written.
Positively impacting 2000 income was an improvement in the commission and
operating expense ratios.
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.
New annualized sales on a submitted date basis increased to $395.3 million in
1999 compared to $363.2 million in 1998. On an effective date basis, sales were
$427.7 million in 1999 and $340.2 million in 1998. Premium persistency for group
life in 1999 was lower than historical levels, and subsequently 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.
26
Individual Segment Operating Results
(in millions of dollars)
Year Ended December 31
--------------------------------------------------------
2000 % Change 1999 % Change 1998
------------ ----------- ------------
Revenue
Premium Income
Individual Disability $ 1,643.5 5.8 % $ 1,553.5 1.6 % $ 1,528.7
Individual Long-term Care 133.7 45.3 92.0 50.3 61.2
----------- ---------- -----------
Total Premium Income 1,777.2 8.0 1,645.5 3.5 1,589.9
Net Investment Income 840.3 9.0 771.1 6.7 722.6
Other Income 122.0 100.7 60.8 7.6 56.5
----------- ---------- -----------
Total Revenue 2,739.5 10.6 2,477.4 4.6 2,369.0
----------- ---------- -----------
Benefits and Expenses
Benefits and Change in Reserves for
Future Benefits 1,858.4 15.8 1,604.2 2.9 1,559.0
Commissions 254.3 (7.4) 274.5 4.3 263.3
Deferral of Policy Acquisition Costs (208.4) 4.8 (198.8) 16.7 (170.4)
Amortization of Deferred Policy
Acquisition Costs 91.1 17.2 77.7 19.2 65.2
Amortization of Value of Business Acquired 40.7 30.9 31.1 (1.0) 31.4
Operating Expenses 405.3 (6.7) 434.6 0.3 433.2
----------- ---------- -----------
Total Benefits and Expenses 2,441.4 9.8 2,223.3 1.9 2,181.7
----------- ---------- -----------
Income Before Federal Income
Taxes and Net Realized
Investment Gains and Losses $ 298.1 17.3 $ 254.1 35.7 $ 187.3
=========== ========== ===========
The Individual segment includes results from the individual disability and
individual long-term care lines of business. Individual life, which was
previously included in the Individual segment, is no longer actively marketed
and is now reported in the Other segment. Historical by segment results have
been reclassified. See "Other Segment Operating Results" for further discussion
of the individual life line of business.
Individual Disability
New annualized sales in the individual disability line of business were $116.1
million in 2000 compared to $124.1 million in 1999 and $136.6 million in 1998.
As discussed in the "Employee Benefits Segment Operating Results," several
factors have contributed to the decrease in sales. However, persistency of
existing individual disability income business remained high during 1999 and
2000. The Company has developed a new individual disability product portfolio
which was released for sale in approved states early in the fourth quarter of
2000. This product line consolidates the current offerings of the Company's
insurance subsidiaries into one new simplified product portfolio. The new
portfolio utilizes a modular approach offering customers a range of product
options and features. This portfolio was designed to combine the best features
from prior Company offerings and includes return-to-work incentives and optional
long-term care conversion benefits and/or benefits for catastrophic
disabilities. Management expects that premium income in the individual
disability line will grow on a year-over-year basis, contingent on further state
approvals of the new product portfolio, as the portfolio transition produces
increasing levels of new sales of individual disability products and as a result
of an increased focus on integrated disability sales in group and individual, as
well as other sales initiatives discussed under "Employee Benefits Segment
Operating Results."
27
Revenue was $2,585.6 million in 2000 compared to $2,371.9 million in 1999. The
growth in 2000 revenue was driven primarily by the growth in premium income as
well as net investment income and other income. Premium income in 2000 included
$96.6 million from an inforce block of individual disability business reinsured
effective January 1, 2000. Other income benefited from the income on assets held
in trust under this reinsurance arrangement. Net investment income for
individual disability increased due to the increase in the level of invested
assets allocated to this line of business.
Income in the individual disability line of business was $285.3 million in 2000,
an increase of $28.6 million from the prior year. As discussed in the preceding
"Results of Operations," 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. Excluding this 1999 adjustment,
individual disability income decreased $10.3 million in 2000 compared to 1999.
This line reported an increase in the benefit ratio for 2000 compared to last
year's ratio, excluding the 1999 discount rate change. Submitted incidence for
2000 is slightly higher than the average for the year 1999, while paid incidence
has improved relative to the prior year. The claim acceptance rate has been
declining throughout 1999 and 2000, and the net claim resolution rate for 2000
compares favorably with 1999. Offsetting these favorable trends was an increase
in reserves for existing claims and claims in dispute. Individual disability
benefited from improved commission and operating expense ratios for 2000 as
compared to 1999. The amortization of value of business acquired increased in
2000 primarily as a result of the amortization on the block of inforce business
reinsured effective January 1, 2000.
Income in the individual disability income line of business increased to $256.7
million in 1999 from $190.0 million in 1998. Excluding the 1999 discount rate
change of $38.9 million, this line reported an increase in the benefit ratio in
1999 compared to 1998. The 1999 claim resolution rate compared unfavorably with
1998, but showed 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.
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. See Note 7 of the "Notes to
Consolidated Financial Statements" for further discussion.
Individual Long-term Care
The individual long-term care line of business reported increased premium income
for both 2000 and 1999 as compared to the previous years, primarily due to
continued new sales growth. New annualized sales were $47.7 million in 2000,
$40.0 million in 1999, and $23.5 million in 1998. The Company expects the strong
sales momentum in individual long-term care to continue. Net investment income
continues to increase due to the growth in this line of business.
Income for 2000 was $12.8 million, compared to losses of $2.6 million in 1999
and $2.7 million in 1998. The increase in revenue, as well as improvements in
both the benefit ratio and operating expense ratios, contributed to the year
over year increases.
28
Voluntary Benefits Segment Operating Results
(in millions of dollars)
Year Ended December 31
----------------------------------------------------------
2000 % Change 1999 % Change 1998
----------- ----------- ------------
Revenue
Premium Income $ 739.6 6.9 % $ 691.6 3.7 % $ 666.7
Net Investment Income 113.4 6.4 106.6 12.4 94.8
Other Income 6.3 - 6.3 (29.2) 8.9
----------- ----------- ------------
Total Revenue 859.3 6.8 804.5 4.4 770.4
----------- ----------- ------------
Benefits and Expenses
Benefits and Change in Reserves for
Future Benefits 447.2 13.9 392.7 6.3 369.4
Commissions 151.8 9.4 138.7 (7.0) 149.1
Deferral of Policy Acquisition Costs (151.9) 2.8 (147.8) 1.4 (145.7)
Amortization of Deferred Policy
Acquisition Costs 112.3 (0.6) 113.0 13.7 99.4
Amortization of Value of Business Acquired 2.3 (4.2) 2.4 9.1 2.2
Operating Expenses 143.6 (14.8) 168.5 2.2 164.9
----------- ----------- ------------
Total Benefits and Expenses 705.3 5.7 667.5 4.4 639.3
----------- ----------- ------------
Income Before Federal Income
Taxes and Net Realized
Investment Gains and Losses $ 154.0 12.4 $ 137.0 4.5 $ 131.1
=========== =========== ============
The Voluntary Benefits segment includes the results of products sold to
employees through payroll deduction at the workplace. These products include
life insurance and health products, primarily disability, accident and sickness,
and cancer.
Revenue in the Voluntary Benefits segment increased to $859.3 million in 2000
from $804.5 million in 1999 and $770.4 million in 1998. Sales growth and
continued favorable persistency were the primary factors contributing to the
increase in premium income. New annualized sales in this segment were $265.0
million in 2000, $245.3 million in 1999, and $233.8 million in 1998. Management
continues its efforts to increase sales through the sales initiatives discussed
under "Employee Benefits Segment Operating Results." The investment income
growth in 2000 as compared to 1999 was due to the repositioning of the
investment portfolio subsequent to the merger.
Income for 2000 increased 12.4 percent over 1999, primarily due to revenue
growth of $54.8 million. An additional positive impact on 2000 income was a
favorable operating expense ratio attributable to costs savings resulting from
the merger. The 2000 benefit ratio was unfavorable compared to 1999. The primary
drivers were unfavorable results in the life product line and an increase in the
incurred and paid loss ratios for the cancer product line.
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, accident and sickness, and disability product lines.
29
Other Segment Operating Results
Year Ended December 31
----------------------------------------------------------
2000 % Change 1999 % Change 1998
----------- ----------- -----------
Revenue
Premium Income $ 497.7 (17.9)% $ 605.9 19.3 % $ 508.0
Net Investment Income 377.2 (31.4) 549.5 (14.8) 645.2
Other Income 29.5 (68.0) 92.2 (19.5) 114.6
---------- ----------- -----------
Total Revenue 904.4 (27.5) 1,247.6 (1.6) 1,267.8
---------- ----------- -----------
Benefits and Expenses
Benefits and Change in Reserves for
Future Benefits 675.7 (40.0) 1,126.8 28.2 878.7
Other Expenses 185.4 (38.1) 299.3 18.3 253.1
---------- ----------- -----------
Total Benefits and Expenses 861.1 (39.6) 1,426.1 26.0 1,131.8
---------- ----------- -----------
Income (Loss) Before Federal
Income Taxes and Net Realized
Investment Gains and Losses $ 43.3 N.M. $ (178.5) N.M. $ 136.0
========== =========== ===========
The Other operating segment includes results from products no longer actively
marketed, including individual life and corporate-owned life insurance,
reinsurance pools and management operations, group pension, health insurance,
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.
Individual Life and Corporate-Owned Life
As previously discussed, during 2000 the Company reinsured substantially all of
the individual life and corporate-owned life insurance blocks of business. The
Company ceded approximately $3.3 billion of reserves to the reinsurer. The
$388.2 million before-tax and $252.3 million after-tax gain on these
transactions was deferred and is being amortized into income based upon expected
future premium income on the traditional insurance policies ceded and estimated
future gross profits on the interest-sensitive insurance policies ceded. The
Company recognized a 2000 before-tax realized investment loss of $25.9 million
on the fixed maturity securities transferred to the reinsurer. In connection
with this realized loss, the Company retrospectively adjusted deferred policy
acquisition costs and value of business acquired related to interest-sensitive
individual life policies with credits to current period amortization of $9.4
million and $1.5 million, respectively, to reflect investment experience. See
"Investments" for further discussion of the realized investment loss.
Total revenue and income for individual life and corporate-owned life insurance
was $236.1 million and $49.6 million, respectively, in 2000 compared to $435.0
million in revenue and $65.6 million in income for 1999.
Reinsurance Pools and Management
The Company's reinsurance 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. During
1999, the Company concluded that these operations were not solidly aligned with
the Company's strength in the disability insurance market and decided to exit
these operations through a combination of a sale, reinsurance, and/or placing
certain components in run-off. In 1999, the Company sold the reinsurance
management operations of its A&H and LTC reinsurance facilities and reinsured
the Company's risk participation in these facilities. The Company also decided
to discontinue its London accident reinsurance pool participation beginning in
year 2000. With respect to Lloyd's, the Company implemented a strategy which
limited participation in year 2000 underwriting risks, ceased participation in
Lloyd's underwriting risks after year 2000, and
30
managed the run-off of its risk participation in open years of account of
Lloyd's reinsurance syndicates. During the first quarter of 2001, the Company
entered into an agreement in principle to limit its liabilities pertaining to
the Lloyd's syndicate participations. See Note 13 of the "Notes to Consolidated
Financial Statements" for further discussion of the reinsurance operations.
During 2000, the reinsurance pools and management operations reported a loss of
$32.7 million compared to a loss of $279.7 million in 1999. Included in the 2000
results were $37.4 million of charges related to the Company's London accident
reinsurance pool participation. During 1999, the Company recorded charges
resulting from its decision to exit these pools, but at that time there was
insufficient information to fully evaluate all of the exposures. Working with
the pool managers in London, the Company now has a clearer view of the potential
cost to fund these exposures and provide for the run-off of its participation.
The 2000 charges included a claim reserve adjustment of $21.9 million and
uncollectible receivables and loss provisions of $15.5 million.
The reinsurance pools and management reported a loss of $279.7 million in 1999
compared to income of $10.0 million in 1998. The 1999 loss was the result of
charges related to the decision to exit the reinsurance operations, as discussed
in the preceding paragraphs. These charges totaled $270.1 million in 1999, with
an additional $57.7 million recorded in the Corporate segment related to the
write-off of goodwill. See "Results of Operations" contained herein in Item 7
and Note 13 of the "Notes to Consolidated Financial Statements" in Item 8 for
further discussion of the 1999 charges related to the reinsurance operations.
Also, as previously discussed in the preceding "Results of Operations," during
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 the group long-term disability reinsurance income reported in
this line of business 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 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.
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.
31
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 $48.1 million in 2000, $67.7 million in
1999, and $31.7 million in 1998. As previously discussed under "Results of
Operations," 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 $49.5 million in 2000, $484.6 million
in 1999, and $125.5 million in 1998. Interest and debt expense was $181.8
million in 2000, $137.8 million in 1999, and $112.0 million in 1998 due to
increased corporate borrowings. The amortization of goodwill was $22.3 million
in 2000, $82.6 million in 1999, and $28.0 million in 1998. The Company recorded
write-downs of goodwill of $57.7 million during 1999 related to its reinsurance
operations. See previous discussion under "Other Segment Operating Results" and
Note 13 of the "Notes to Consolidated Financial Statements."
Results for 2000 were positively impacted by the gain of $116.1 million on the
pension plan transaction, partially offset by consolidation and benefit accruals
of $9.4 million. See previous discussion contained herein in "Results of
Operations" and Note 10 of the "Notes to Consolidated Financial Statements."
As previously discussed, 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 were $60.2 million, and costs associated with the vesting of
restricted stock were $17.5 million.
Exit activities related to duplicate facilities/asset abandonments consist of
closing of duplicate offices and write-off of redundant computer hardware and
software. The cost associated with these office closures was approximately $25.6
million, which represents the cost of future minimum lease payments less any
estimated amounts recovered under subleases. Also, certain physical assets,
primarily computer equipment, redundant systems, and systems incapable of
supporting the combined entity, were abandoned as a result of the merger,
resulting in a write-down of the assets' book values by approximately $41.8
million.
The exit plan was complete as of June 30, 2000.
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.
32
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.
Subsequent to the June 30, 1999 merger and continuing through the first half of
2000, 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 in order to reduce vulnerability to interest rate risk in the future
and increase investment income. Excluding net investment income attributable to
the individual life and corporate-owned life insurance blocks of business ceded
effective as of July 1, 2000, net investment income for 2000 increased 8.6
percent over 1999 due to increased yields and growth in the asset base.
During 2000, the Company reported net realized investment losses before tax of
$14.6 million, including the realized investment loss of $25.9 million on the
investment-grade fixed maturity securities transferred to the reinsurer in
connection with the individual life and corporate-owned life reinsurance
transactions. The loss on these transferred securities was driven by a change in
market interest rates and was not attributable to any credit deterioration.
Excluding the reinsurance transaction related loss, the Company reported 2000
net gains of $51.0 million from the sale of fixed maturity and equity
securities. Offsetting these gains was a $94.0 million realized investment loss
recognized as a result of management's determination that the value of certain
fixed maturity investments had other than temporarily declined.
The following table provides the distribution of invested assets for the years
indicated. Policy loans are reported on a gross basis in the consolidated
statements of financial condition and in the table below. As of December 31,
2000, $2.2 billion of policy loans were ceded, and the investment income thereon
is no longer included in income.
December 31
-------------------
2000 1999
---- ----
Investment-Grade Fixed Maturity Securities 78.3% 76.1%
Below-Investment-Grade Fixed Maturity Securities 6.6 8.1
Equity Securities 0.1 0.2
Mortgage Loans 4.3 4.8
Real Estate 0.4 0.8
Policy Loans 9.1 8.7
Other Invested Assets 1.2 1.3
----- -----
Total 100.0% 100.0%
===== =====
Fixed Maturity Securities
The Company's investment in mortgage-backed securities was approximately $3.5
billion and $3.1 billion on an amortized cost basis at December 31, 2000 and
1999, respectively. At December 31, 2000, the mortgage-backed securities had an
average life of 12.6 years and effective duration of 11.2 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.
The Company's exposure to below-investment-grade fixed maturity securities at
December 31, 2000, was $1,760.8 million, representing 7.2 percent of invested
assets excluding ceded policy loans, 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 $2,147.4 million at December
31, 1999, representing 8.1 percent of invested assets.
33
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.
Mortgage Loans and Real Estate
The Company's mortgage loan portfolio was $1,135.6 million and $1,278.1 million
at December 31, 2000 and 1999, 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 an investment valuation allowance for mortgage loans 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 has remained low in 2000 and 1999, 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. No new mortgage
loans were added to the Company's investment portfolio during 2000 other than
one purchase money mortgage for $14.8 million associated with the sale of real
estate.
At December 31, 2000 and 1999, impaired loans totaled $17.7 million and $18.1
million, respectively. Included in the impaired loans at December 31, 2000 were
$6.5 million of loans which had a related, specific investment valuation
allowance of $2.4 million and $11.2 million of loans which had no related,
specific allowance. 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 $8.5 million and $8.7 million at December
31, 2000 and 1999, respectively, and represent loans that have been refinanced
with terms more favorable to the borrower. Interest lost on restructured loans
was immaterial for 2000 and 1999.
Real estate was $116.7 million and $211.2 million at December 31, 2000 and 1999.
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 $18.3 million at December 31, 2000, and $79.4 million at December 31, 1999.
Investment valuation allowances for 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.
Management monitors the risk associated with the invested asset portfolio and
regularly reviews and adjusts the investment valuation allowance. As a result of
management's most recent review of the overall mortgage loan portfolio and based
on management's expectation that delinquencies and problem loans will remain
low, the valuation allowance on mortgage loans was reduced $20.0 million during
2000. At December 31, 2000, the balance in the valuation allowance for mortgage
loans and real estate was $12.9 million and $25.6 million, respectively.
Other
The Company's exposure to non-current investments totaled $45.0 million at
December 31, 2000, or 0.2 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.
34
The Company utilizes interest rate futures contracts, current and 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
and products. 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 $1,211.5 million for the
year ended December 31, 2000, as compared to $1,566.7 million and $1,719.3
million for the comparable periods of 1999 and 1998, 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 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, 2000, the Company had
outstanding from its insurance subsidiaries a $150.0 million surplus debenture
due in 2006 with a weighted average interest rate during 2000 of 8.20 percent
and a $100.0 million surplus debenture due in 2027 with a weighted average
interest rate during 2000 of 8.25 percent. Semi-annual interest payments are
conditional upon the approval by the insurance department of the state of
domicile.
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. Generally, for life insurance subsidiaries
domiciled or commercially domiciled in the United States, that limitation equals
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 2000, $267.6 million was available for the payment of dividends to the
Company from its domestic insurance subsidiaries, and approximately $24.9
million was available for the payment of dividends from Unum Limited, and
. in 2001, $359.9 million will be available for the payment of dividends to
the Company from its domestic insurance subsidiaries, and approximately
$20.9 million will be available for the payment of dividends from Unum
Limited.
35
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.
At December 31, 2000, the Company had short-term and long-term debt totaling
$402.2 million and $1,615.5 million, respectively. At December 31, 2000,
approximately $551.0 million was available for additional financing under the
Company's revolving credit facilities. Contingent upon market conditions and
corporate needs, management may refinance short-term notes payable for
longer-term securities.
In October 2000, the Company entered into $1.0 billion senior revolving credit
facilities with a group of banks. The facilities, which are split into five-year
revolver and 364-day portions, replaced a 364-day revolver which expired in
October 2000 and a five-year revolver which has been canceled. The new
facilities are available for general corporate purposes, including support of
the Company's $1.0 billion commercial paper program, and contain certain
covenants that, among other provisions, include a minimum tangible net worth
requirement, a maximum leverage ratio restriction, and a limitation on debt
relative to the consolidated statutory earnings of the Company's insurance
subsidiaries.
During the third quarter of 2000, the Company filed with the Securities and
Exchange Commission a shelf registration on Form S-3 covering the issuance of up
to $1.0 billion of securities in order to provide funding alternatives for its
maturing debt. The shelf registration became effective in September 2000. In
March 2001, the Company completed a long-term debt offering, issuing $575.0
million of 7.625% senior notes due March 1, 2011. Contingent upon market
conditions and corporate needs, funding will be used to refinance short-term
debt on a long-term basis and to fund other corporate needs.
In April 2000, the Company issued $200.0 million of variable rate notes, due in
April 2001, in a privately negotiated transaction. The notes were used to
refinance other short-term debt and had a weighted average interest rate of 7.33
percent during 2000. The current interest rate on these notes is 6.49 percent.
In March 1998, the Company completed a public offering of $200.0 million of
7.25% senior notes due March 15, 2028. 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.
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. In December 1998, the Company issued $250.0 million of 6.75 %
senior notes, which mature in 2028.
In the fourth quarter of 1998, the Company rescinded its stock repurchase
program as a result of the pending merger. During 1998, the Company acquired
approximately 1.4 million shares of its common stock in the open market at an
aggregate cost of $72.7 million.
36
Ratings
Standard & Poor's Corporation (S&P), Moody's Investors Service (Moody's), Fitch,
Inc. (Fitch), formerly Fitch/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.
On August 23, 2000, Moody's lowered the senior debt rating of the Company to
Baa1 from A3, lowered the financial strength ratings of the Company's insurance
subsidiaries to A2 from A1, and confirmed the short-term rating at Prime-2. The
Company has not experienced a material impact on its new sales or persistency of
existing business as a result of these ratings changes. In March 2001, in
connection with the Company's issuance of $575.0 million of 7.625% senior notes
due March 1, 2011, S&P, Moody's, and Fitch affirmed the senior debt and
financial strength ratings at the existing levels.
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 Fitch AM Best
- ----------------------------------------------------------------------------------------------------------------------
UnumProvident Corporation
- ----------------------------------------------------------------------------------------------------------------------
Senior Debt A (Strong) Baa1 (Medium Grade) A- (High Not Rated
Credit Quality)
- ----------------------------------------------------------------------------------------------------------------------
Junior Subordinated Debt BBB (Good) Baa2 (Medium Grade) BBB+ (Good Not Rated
Credit Quality)
- ----------------------------------------------------------------------------------------------------------------------
Commercial Paper A-2 (Good) Prime-2 (Strong F2 (Good Not Rated
Ability) Credit Quality)
- ----------------------------------------------------------------------------------------------------------------------
U.S. Insurance Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------
Provident Life & Accident AA- (Very Strong) A2 (Good Financial AA-(Very Strong) A+ (Superior)
Security)
- ----------------------------------------------------------------------------------------------------------------------
Provident Life & Casualty Not Rated Not Rated Not Rated A+ (Superior)
- ----------------------------------------------------------------------------------------------------------------------
Unum Life of America AA- (Very Strong) A2 (Good Financial AA-(Very Strong) A+ (Superior)
Security)
- ----------------------------------------------------------------------------------------------------------------------
First Unum Life AA- (Very Strong) A2 (Good Financial AA-(Very Strong) A+ (Superior)
Security)
- ----------------------------------------------------------------------------------------------------------------------
Colonial Life & Accident AA- (Very Strong) A2 (Good Financial AA-(Very Strong) A+ (Superior)
Security)
- ----------------------------------------------------------------------------------------------------------------------
Paul Revere Life AA- (Very Strong) A2 (Good Financial AA-(Very Strong) A+ (Superior)
Security)
- ----------------------------------------------------------------------------------------------------------------------
Paul Revere Variable AA- (Very Strong) A2 (Good Financial AA-(Very Strong) A+ (Superior)
Security)
- ----------------------------------------------------------------------------------------------------------------------
Paul Revere Protective AA- (Very Strong) A2 (Good Financial AA-(Very Strong) A+ (Superior)
Security)
- ----------------------------------------------------------------------------------------------------------------------
37
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 $0.8 billion and $0.7
billion at December 31, 2000 and 1999, respectively. The fair values of mortgage
loans and held-to-maturity securities, which are reported in the consolidated
statements of financial condition at amortized cost, would decrease by
approximately $70 million and $40 million, respectively, at December 31, 2000
and by approximately $80 million and $40 million, respectively, at December 31,
1999. The fair values of policy loans, which are also reported at amortized
cost, would decrease approximately $200 million at December 31, 1999, assuming
an immediate increase of 100 basis points in interest rates. During 2000, over
90 percent of the policy loan portfolio was ceded to a reinsurer on a 100
percent indemnity coinsurance basis (see Notes 1 and 13 of the "Notes to
Consolidated Financial Statements"). The impact from interest rate risk on the
fair values of policy loans net of ceding was immaterial at December 31, 2000.
At December 31, 2000 and 1999, 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.
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 7.7 percent and 8.9 percent of total
assets at December 31, 2000 and 1999, respectively, and 9.7 percent and 9.4
percent of total revenue for 2000 and 1999, respectively. Assuming foreign
exchange rates decreased 10 percent from the December 31, 2000 and 1999 levels,
year end 2000 and 1999 stockholders' equity would not be materially affected.
38
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, 2000 and 1999,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2000.
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 revenues
constituting 54% of the related consolidated totals for the year ended December
31, 1998. 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, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 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 12, 2001, except for
Notes 13 and 15, for which the
date is February 27, 2001
39
REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
UnumProvident Corporation and Subsidiaries
In our opinion, the consolidated statements of income, comprehensive income,
stockholders' equity and cash flows of Unum Corporation and its subsidiaries
(not presented separately herein) present fairly, in all material respects, the
results of their operations and their cash flows for the year ended December 31,
1998, in conformity with accounting principles generally accepted in the United
States of America. 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 audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, 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
audit provides a reasonable basis for the opinion expressed above. We have not
audited any financial statements of the Unum Corporation subsequent to December
31, 1998.
/s/ PRICEWATERHOUSECOOPERS LLP
Portland, Maine
February 2, 1999
40
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
UnumProvident Corporation and Subsidiaries
December 31
2000 1999
(in millions of dollars)
--------------------------------------
Assets
Investments
Fixed Maturity Securities
Available-for-Sale - at fair value (amortized cost: $21,931.2; $22,142.4) $22,242.3 $22,033.2
Held-to-Maturity - at amortized cost (fair value: $369.8; $318.8) 346.6 323.5
Equity Securities - at fair value (cost: $23.2; $15.9) 24.5 38.4
Mortgage Loans 1,135.6 1,278.1
Real Estate 116.7 211.2
Policy Loans 2,426.7 2,316.9
Other Long-term Investments 32.3 26.5
Short-term Investments 279.4 321.5
--------- ---------
Total Investments 26,604.1 26,549.3
Other Assets
Cash and Bank Deposits 107.1 292.4
Accounts and Premiums Receivable 1,851.3 1,144.3
Reinsurance Receivable 6,046.5 4,741.2
Accrued Investment Income 532.2 543.6
Deferred Policy Acquisition Costs 2,424.0 2,391.2
Value of Business Acquired 591.6 534.1
Goodwill 683.3 706.4
Property and Equipment - at cost less accumulated depreciation 387.5 399.7
Miscellaneous 1,068.7 686.2
Separate Account Assets 67.6 459.1
--------- ---------
Total Assets $40,363.9 $38,447.5
========= =========
See notes to consolidated financial statements.
41
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - Continued
UnumProvident Corporation and Subsidiaries
December 31
2000 1999
(in millions of dollars)
-----------------------------------
Liabilities and Stockholders' Equity
Liabilities
Policy and Contract Benefits $ 1,796.8 $ 1,722.1
Reserves for Future Policy and Contract Benefits 25,633.9 23,339.1
Unearned Premiums 332.8 380.6
Other Policyholders' Funds 2,645.1 3,521.8
Federal Income Tax
Current 68.4 33.3
Deferred 430.8 238.3
Short-term Debt 402.2 1,075.0
Long-term Debt 1,615.5 1,166.5
Other Liabilities 1,495.3 1,229.5
Separate Account Liabilities 67.6 459.1
--------- ---------
Total Liabilities 34,488.4 33,165.3
--------- ---------
Commitments and Contingent Liabilities--Note 15
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: 241,310,917 and 240,515,180 shares 24.1 24.1
Additional Paid-in Capital 1,040.2 1,028.6
Accumulated Other Comprehensive Income (Loss)
Net Unrealized Gains on Securities 212.8 19.8
Foreign Currency Translation Adjustment (72.1) (38.7)
Retained Earnings 4,379.7 3,957.6
Treasury Stock - at cost: 176,295 shares (9.2) (9.2)
--------- ----------
Total Stockholders' Equity 5,575.5 4,982.2
--------- ---------
Total Liabilities and Stockholders' Equity $40,363.9 $38,447.5
========= =========
See notes to consolidated financial statements.
42
CONSOLIDATED STATEMENTS OF OPERATIONS
UnumProvident Corporation and Subsidiaries
Year Ended December 31
2000 1999 1998
(in millions of dollars, except share data)
---------------------------------------------
Revenue
Premium Income $ 7,057.0 $6,843.2 $ 6,129.0
Net Investment Income 2,060.4 2,059.7 2,035.4
Net Realized Investment Gains (Losses) (14.6) 87.1 55.0
Other Income 329.5 339.6 299.9
--------- -------- ---------
Total Revenue 9,432.3 9,329.6 8,519.3
--------- -------- ---------
Benefits and Expenses
Policyholder Benefits 6,407.5 6,787.6 5,449.7
Commissions 754.1 913.6 826.5
Interest and Debt Expense 181.8 137.8 119.9
Deferral of Policy Acquisition Costs (595.7) (809.3) (703.3)
Amortization of Deferred Policy Acquisition Costs 456.5 474.8 377.5
Amortization of Value of Business Acquired and Goodwill 67.3 120.9 66.6
Other Operating Expenses 1,295.2 1,869.7 1,462.2
--------- -------- ---------
Total Benefits and Expenses 8,566.7 9,495.1 7,599.1
--------- -------- ---------
Income (Loss) Before Federal Income Taxes 865.6 (165.5) 920.2
Federal Income Taxes (Credit)
Current 195.7 141.2 128.3
Deferred 105.7 (123.8) 174.5
--------- -------- ---------
Total Federal Income Taxes 301.4 17.4 302.8
--------- -------- ---------
Net Income (Loss) $ 564.2 $ (182.9) $ 617.4
========= ======== =========
Net Income (Loss) Per Common Share
Basic $ 2.34 $ (0.77) $ 2.60
Assuming Dilution $ 2.33 $ (0.77) $ 2.54
See notes to consolidated financial statements.
43
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
UnumProvident Corporation and Subsidiaries
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, 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
Comprehensive Income
Net Income 564.2 564.2
Change in Net Unrealized
Gains on Securities (net of
tax expense of $96.5) 193.0 193.0
Change in Foreign Currency
Translation Adjustment
(net of tax credit of $7.5) (33.4)
(33.4)
---------
Total Comprehensive Income 723.8
---------
Common Stock Activity 11.6 11.6
Dividends to Stockholders (142.1) (142.1)
------- ----- -------- -------- -------- -------- -------- ---------
Balance at December 31, 2000 $ - $24.1 $1,040.2 $ 140.7 $4,379.7 $ (9.2) $ - $ 5,575.5
======= ===== ======== ======== ======== ======== ======== =========
See notes to consolidated financial statements.
44
CONSOLIDATED STATEMENTS OF CASH FLOWS
UnumProvident Corporation and Subsidiaries
Year Ended December 31
2000 1999 1998
(in millions of dollars)
---------------------------------------
Cash Flows from Operating Activities
Net Income (Loss) $ 564.2 $ (182.9) $ 617.4
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided by Operating Activities
Policy Acquisition Costs Capitalized (595.7) (809.3) (703.3)
Amortization of Policy Acquisition Costs 456.5 474.8 377.5
Amortization of Value of Business Acquired and Goodwill 67.3 120.9 66.6
Depreciation 71.1 58.0 47.9
Net Realized Investment (Gains) Losses 14.6 (87.1) (55.0)
Reinsurance Receivable 386.7 130.1 (48.9)
Insurance Reserves and Liabilities 781.0 2,391.1 1,475.4
Federal Income Taxes 127.6 (189.9) 211.5
Other (661.8) (339.0) (269.8)
--------- --------- ---------
Net Cash Provided by Operating Activities 1,211.5 1,566.7 1,719.3
--------- --------- ---------
Cash Flows from Investing Activities
Proceeds from Sales of Investments
Available-for-Sale Securities 1,711.3 3,773.9 2,117.3
Proceeds from Maturities of Investments
Available-for-Sale Securities 805.0 1,023.8 1,513.1
Held-to-Maturity Securities 1.3 0.3 0.5
Proceeds from Sales and Maturities of Other Investments 362.8 268.3 217.7
Purchase of Investments
Available-for-Sale Securities (3,149.3) (6,237.5) (3,849.2)
Held-to-Maturity Securities (23.0) (22.2) (1.9)
Other Investments (385.2) (209.1) (532.7)
Net Sales (Purchases) of Short-term Investments 41.4 (76.8) (67.9)
Acquisition of Business (94.2) -- --
Disposition of Business (78.2) -- 58.0
Other (57.6) (75.3) (73.3)
--------- --------- ---------
Net Cash Used by Investing Activities $ (865.7) $(1,554.6) $ (618.4)
--------- --------- ---------
See notes to consolidated financial statements.
45
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
UnumProvident Corporation and Subsidiaries
Year Ended December 31
2000 1999 1998
(in millions of dollars)
----------------------------------------
Cash Flows from Financing Activities
Deposits to Policyholder Accounts $ 33.8 $ 175.1 $ 184.3
Maturities and Benefit Payments from
Policyholder Accounts (209.5) (613.0) (1,250.7)
Net Short-term Debt and Commercial Paper
(Repayments) Borrowings (223.8) 692.6 (74.5)
Issuance of Long-term Debt - - 900.0
Long-term Debt Repayments - - (793.1)
Issuance of Company-Obligated Mandatorily
Redeemable Preferred Securities - - 300.0
Redemption of Preferred Stock - - (156.2)
Issuance of Common Stock 11.6 69.7 11.9
Dividends Paid to Stockholders (142.1) (138.9) (139.1)
Repurchase of Common Stock - - (72.7)
Other - (18.6) 4.6
--------- -------- ----------
Net Cash (Used) Provided by Financing Activities (530.0) 166.9 (1,085.5)
--------- -------- ----------
Effect of Foreign Exchange Rate Changes on Cash (1.1) 2.2 1.3
--------- -------- ----------
Net (Decrease) Increase in Cash and Bank Deposits (185.3) 181.2 16.7
Cash and Bank Deposits at Beginning of Year 292.4 111.2 94.5
--------- -------- ----------
Cash and Bank Deposits at End of Year $ 107.1 $ 292.4 $ 111.2
========= ======== ==========
See notes to consolidated financial statements.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UnumProvident Corporation and Subsidiaries
Note 1--Significant Accounting Policies
Basis of Presentation: The accompanying consolidated financial statements have
been prepared on the basis of generally accepted accounting principles (GAAP).
Such accounting principles differ from statutory accounting practices prescribed
or permitted by state regulatory authorities (see Note 16). The consolidated
financial statements include the accounts of UnumProvident Corporation and its
subsidiaries (the Company). Material intercompany transactions have been
eliminated. Certain prior year amounts have been reclassified to conform to
current year presentation.
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
presented herein give effect to the merger as if it had been completed at the
beginning of the earliest period presented.
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 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 individual life and corporate-owned life insurance,
reinsurance pools and management operations, group pension, health insurance,
and individual annuities. 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.
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 $31.0
million and $42.8 million as of December 31, 2000 and 1999, respectively.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 1--Significant Accounting Policies - Continued
Policy Loans are presented at unpaid balances directly related to policyholders.
Included in policy loans are $2,237.6 million and $35.6 million of policy loans
ceded to reinsurers at December 31, 2000 and 1999, respectively. See Note 13.
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 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.
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.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 1--Significant Accounting Policies - Continued
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.
Reinsurance Receivable: The Company routinely cedes reinsurance to other
insurance companies. For ceded reinsurance agreements wherein the Company is not
relieved of its legal liability to its policyholders, the Company reports assets
and liabilities on a gross basis. Reinsurance receivables include the balances
due from reinsurers under the terms of these reinsurance agreements for ceded
policy and contract benefits, ceded future policy and contract benefits, and
ceded unearned premiums, less ceded policy loans.
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.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 1--Significant Accounting Policies - Continued
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.
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
8.13 percent. The accumulated amortization for value of business acquired was
$168.7 million and $133.2 million as of December 31, 2000 and 1999,
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 $85.9 million and $64.1 million as of December 31, 2000 and
1999, 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.
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 $350.1 million and $376.1 million as of December 31,
2000 and 1999, 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 of London
(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 uses its historical
experience and information obtained from its managing agents to estimate
revenues, losses, expenses, and the related assets and liabilities. See Note 13.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 1--Significant Accounting Policies - Continued
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 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
2000 1999
------------------------------------------
Active Life Reserves - Current Year Issues
Traditional Life 6.00% to 7.25% 6.75% to 8.75%
Individual Disability 6.18% to 9.00% 5.50% to 9.00%
Disabled Lives Reserves - Current Year Claims
Individual Disability 6.65% to 8.00% 6.65% to 8.00%
Group Disability 7.35% 7.35% to 7.60%
Disabled Lives Reserves - Prior Year Claims
Individual Disability 6.65% to 8.00% 6.65% to 8.00%
Group Disability 7.35% 7.35% 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.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 1--Significant Accounting Policies - Continued
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 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 one of the Company's subsidiaries prior to its 1986 conversion from a
mutual to a stock life insurance company will remain participating as long as
the policies remain in force. A Participation Fund Account (PFA) was established
for the benefit of all of such 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
$361.6 million and $362.2 million at December 31, 2000, and 1999, respectively,
and represented approximately 0.9 percent of consolidated assets for both years
and 1.0 percent and 1.1 percent of consolidated liabilities for December 31,
2000 and 1999, 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 and related interpretations. 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:
Statement of Position 98-7 (SOP 98-7), Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk
Effective January 1, 2000, the Company adopted the provisions of SOP 98-7 which
provide guidance on applying the deposit method of accounting to insurance and
reinsurance contracts that do not transfer insurance risk. The effect of the
adoption of SOP 98-7 on the Company's financial position and results of
operations was immaterial.
Financial Accounting Standards Board Interpretation No. 44 (Interpretation 44),
Accounting for Certain Transactions Involving Stock Compensation
Effective July 1, 2000, the Company adopted the provisions of Interpretation 44
which clarify the application of Opinion 25. The adoption of the Interpretation
had no effect on the Company's financial position or results of operations.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 1--Significant Accounting Policies - Continued
Accounting Pronouncements Outstanding:
Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for
Derivative Instruments and Hedging Activities, and Statement of Financial
Accounting Standards No. 138 (SFAS 138), Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of FASB Statement No.
133
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.
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.
SFAS 138, issued in 2000, addresses several issues that apply to derivative
instruments and hedging activities and amends certain accounting and reporting
standards of SFAS 133.
The Company will adopt the provisions of SFAS 133 and SFAS 138 effective January
1, 2001. The adoptions of these pronouncements are not expected to have a
material impact on the Company's financial position or results of operations.
Statement of Financial Accounting Standards No. 140 (SFAS 140), Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities
SFAS 140 was issued in September 2000 and replaces Statement of Financial
Accounting Standards No. 125. SFAS 140 revises the standards for accounting and
reporting for transfers and servicing of financial assets and extinguishments of
liabilities. SFAS 140 is effective for transfers occurring after March 31, 2001.
The adoption of SFAS 140 is not expected to have a material impact on the
Company's financial position or results of operations.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
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.
Merger Expenses
During 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 were $60.2 million, and costs associated with the
vesting of restricted stock were $17.5 million.
Exit activities related to duplicate facilities/asset abandonments consisted of
closing of duplicate offices and the write-off of redundant computer hardware
and software. The cost associated with these office closures was approximately
$25.6 million, which represents the cost of future minimum lease payments less
any estimated amounts recovered under subleases. Also, certain physical assets,
primarily computer equipment, redundant systems, and systems incapable of
supporting the combined entity, were abandoned as a result of the merger,
resulting in a write-down of the assets' book values by approximately $41.8
million.
The exit plan was complete as of June 30, 2000.
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.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 2--Merger - Continued
Accounting Policy Changes
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 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 Rates Former 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.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 2--Merger - Continued
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
=======
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.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 2--Merger - Continued
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 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.
Results of Operations
The results of operations for the separate companies and the combined amounts
for the periods prior to the merger were as follows:
Six Months Ended Year Ended
June 30, 1999 December 31, 1998
(in millions of dollars)
------------------------------------------------------
Revenue
Unum $ 2,557.8 $ 4,581.3
Provident 1,988.9 3,938.0
--------- ---------
Combined Revenue $ 4,546.7 $ 8,519.3
========= =========
Net Income (Loss)
Unum $ (189.7) $ 363.4
Provident 87.8 254.0
--------- ---------
Combined Net Income (Loss) $ (101.9) $ 617.4
========= =========
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 3--Fair Values of Financial Instruments
The carrying amounts and fair values of the Company's financial instruments are
as follows:
December 31
(in millions of dollars)
-------------------------------------------------------------------
2000 1999
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------------------------------------
Assets
Fixed Maturity Securities:
Available-for-Sale $22,110.4 $22,110.4 $22,035.7 $22,035.7
Derivatives Hedging Available-for-Sale 131.9 131.9 (2.5) (2.5)
Held-to-Maturity 346.6 369.8 323.5 318.8
Equity Securities 24.5 24.5 38.4 38.4
Mortgage Loans 1,135.6 1,183.0 1,278.1 1,281.2
Policy Loans 2,426.7 2,426.7 2,316.9 2,211.1
Short-term Investments 279.4 279.4 321.5 321.5
Cash and Bank Deposits 107.1 107.1 292.4 292.4
Deposit Assets 658.5 658.5 616.6 616.6
Liabilities
Policyholders' Funds:
Deferred Annuity Products 1,665.3 1,665.3 2,014.6 2,014.6
Other 386.7 396.6 538.7 551.3
Short-term Debt 402.2 402.2 1,075.0 1,075.0
Long-term Debt 1,615.5 1,465.8 1,166.5 1,061.6
Company-Obligated Mandatorily Redeemable
Preferred Securities 300.0 245.9 300.0 268.5
Derivatives Hedging Liabilities (4.3) (4.3) (5.9) (5.9)
The following methods and assumptions were used by the Company in estimating the
fair values of its financial instruments:
Fixed Maturity Securities: Fair values 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 are based on quoted market prices.
Mortgage Loans: Fair values 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.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 3--Fair Values of Financial Instruments - Continued
Policy Loans: At December 31, 2000, the carrying amounts approximate fair value.
At December 31, 1999, fair values were estimated using discounted cash flow
analyses based on interest rates current at that time.
Short-term Investments, Cash and Bank Deposits, and Deposit Assets: Carrying
amounts approximate fair value.
Policyholders' Funds: The carrying amount for deferred annuity products
approximate fair value. Other policyholders' funds include guaranteed investment
contacts (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 approximate fair value.
Long-term Debt and Company-Obligated Mandatorily Redeemable Preferred
Securities: Fair values 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 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.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 4--Investments
Securities
The amortized cost and fair values of securities by security type are as
follows:
December 31, 2000
(in millions of dollars)
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------
Available-for-Sale Securities
United States Government and
Government Agencies and Authorities $ 76.9 $ 14.9 $ - $ 91.8
States, Municipalities, and Political Subdivisions 155.0 3.5 0.2 158.3
Foreign Governments 752.1 131.7 0.8 883.0
Public Utilities 3,138.1 141.4 47.3 3,232.2
Mortgage-backed Securities 3,159.8 162.9 5.9 3,316.8
All Other Corporate Bonds 14,536.4 772.1 844.0 14,464.5
Redeemable Preferred Stocks 112.9 2.4 19.6 95.7
--------- -------- ------ ---------
Total Fixed Maturity Securities 21,931.2 1,228.9 917.8 22,242.3
Equity Securities 23.2 4.0 2.7 24.5
--------- -------- ------ ---------
$21,954.4 $1,232.9 $920.5 $22,266.8
========= ======== ====== =========
Held-to-Maturity Securities
United States Government and
Government Agencies and Authorities $ 6.9 $ 1.6 $ - $ 8.5
States, Municipalities, and Political Subdivisions 1.5 0.1 - 1.6
Mortgage-backed Securities 320.7 20.6 - 341.3
All Other Corporate Bonds 17.5 0.9 - 18.4
--------- -------- ------ ----------
$ 346.6 $ 23.2 $ - $ 369.8
========= ======== ====== =========
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 4--Investments - Continued
December 31, 1999
(in millions of dollars)
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------
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
========= ======== ====== =========
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 4--Investments - 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, 2000
(in millions of dollars)
--------------------------------------
Amortized Fair
Cost Value
--------------------------------------
Available-for-Sale Securities
1 year or less $ 265.3 $ 332.2
Over 1 year through 5 years 2,222.3 2,305.5
Over 5 years through 10 years 4,914.6 4,797.5
Over 10 years 11,369.2 11,490.3
----------- -----------
18,771.4 18,925.5
Mortgage-backed Securities 3,159.8 3,316.8
----------- -----------
$ 21,931.2 $ 22,242.3
=========== ===========
Held-to-Maturity Securities
1 year or less $ 0.5 $ 0.5
Over 1 year through 5 years 0.2 0.2
Over 10 years 25.2 27.8
----------- -----------
25.9 28.5
Mortgage-backed Securities 320.7 341.3
----------- -----------
$ 346.6 $ 369.8
=========== ===========
At December 31, 2000, 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 $1,760.8 million or 6.6 percent of invested
assets. The amortized cost of these securities was $2,161.1 million.
Deposit assets in the form of marketable securities held in trust are reported
in miscellaneous assets in the consolidated statements of financial condition.
Unrealized gains (losses) on these securities were $23.6 million and $(25.9)
million, respectively, at December 31, 2000 and 1999.
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, 2000 and
1999, were $36.0 million and $(123.1) million, respectively.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 4--Investments - Continued
The components of the change in net unrealized gains on securities included in
other comprehensive income (loss) are as follows:
Year Ended December 31
2000 1999 1998
(in millions of dollars)
--------------------------------------------------------
Change in Net Unrealized Gains
Before Reclassification Adjustment $ 384.5 $(2,159.3) $244.6
Reclassification Adjustment for Net Realized
Investment (Gains) Losses 14.6 (87.1) (55.0)
Change in Unrealized Gains on Deposit Assets 49.5 (237.5) 83.9
Change in the Adjustment to Reserves for
Future Policy and Contract Benefits (159.1) 1,014.8 (72.6)
Change in Tax Liability (96.5) 519.5 (67.2)
-------- ----------- --------
Change in Net Unrealized Gains $ 193.0 $ (949.6) $133.7
======= ========== ======
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 reported investment in mortgage
loans considered to be impaired was $17.7 million and $18.1 million,
respectively, at December 31, 2000 and 1999. Included in the impaired loans at
December 31, 2000 were loans of $6.5 million which had a related allowance for
losses of $2.4 million and loans of $11.2 million which had no related allowance
for losses. Included in the impaired loans at December 31, 1999 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.
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, 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
===== ====== ===== =====
Year Ended December 31, 2000
Mortgage Loans $32.9 $ - $20.0 $12.9
Real Estate 37.8 - 12.2 25.6
----- ------ ----- -----
Total $70.7 $ - $32.2 $38.5
===== ====== ===== =====
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 4--Investments - Continued
Net Investment Income
Sources for net investment income are as follows:
Year Ended December 31
2000 1999 1998
(in millions of dollars)
-----------------------------------------------------
Fixed Maturity Securities $1,824.1 $1,712.7 $1,708.4
Equity Securities 0.1 0.1 0.4
Mortgage Loans 100.7 111.2 106.4
Real Estate 24.7 37.0 32.5
Policy Loans 120.3 222.3 206.5
Other Long-term Investments 11.2 6.8 9.8
Short-term Investments 27.1 56.0 59.8
-------- -------- --------
Gross Investment Income 2,108.2 2,146.1 2,123.8
Less Investment Expenses 24.7 63.0 64.3
Less Investment Income on PFA Assets 23.1 23.4 24.1
-------- -------- --------
Net Investment Income $2,060.4 $2,059.7 $2,035.4
======== ======== ========
Realized Investment Gains and Losses
Realized investment gains (losses) are as follows:
Year Ended December 31
2000 1999 1998
(in millions of dollars)
---------------------------------------------------
Fixed Maturity Securities
Gross Gains $ 93.4 $ 82.6 $ 69.6
Gross Losses (197.6) (99.9) (16.1)
Equity Securities 9.8 25.8 4.2
Mortgage Loans, Real Estate, and Other Invested Assets 42.9 17.1 (4.5)
Deposit Assets 25.5 61.4 1.4
Derivatives 11.4 0.1 0.4
------- ------ -------
$ (14.6) $ 87.1 $ 55.0
======= ====== =======
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.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 5--Derivative Financial Instruments - Continued
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 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 $73.8 million at December 31, 2000.
Hedging Activity
The table below summarizes by notional amounts the activity for each category of
derivatives.
Swaps
------------------------------------
Receive Receive Receive
Variable/ Fixed/Pay Fixed/Pay
Pay Fixed Fixed Variable Forwards Futures Options Total
(in millions of dollars)
-----------------------------------------------------------------------------------
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 - 15.8 569.0 40.0 283.3 - 908.1
Terminations 8.2 - 600.0 122.9 283.3 294.0 1,308.4
----- ------- -------- ------ ------- ------- --------
Balance at December 31, 2000 $ - $ 28.1 $1,135.0 $ - $ - $ 7.3 $1,170.4
===== ======= ======== ====== ======= ======= ========
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, 2000, whereby the Company receives a
fixed rate and pays a variable rate. The weighted average interest rates assume
current market conditions.
2001 2002 2003 2007 Total
(in millions of dollars)
------------------------------------------------------------
Receive Fixed/Pay Variable:
Notional Value $620.0 $329.0 $126.0 $ 60.0 $1,135.0
Weighted Average Receive Rate 7.51% 7.55% 7.65% 13.37% 7.85%
Weighted Average Pay Rate 6.40% 6.40% 6.40% 12.64% 6.73%
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 5--Derivative Financial Instruments - Continued
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 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 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 $1,075.0 million, $1,482.9
million, and $1,285.0 million at December 31, 2000, 1999, and 1998,
respectively. The deferred gain on these contracts was $82.3 million, $94.0
million, and $63.7 million, at December 31, 2000, 1999, and 1998, respectively.
In 2000, 1999, and 1998, the Company amortized into net investment income $3.5
million, $3.1 million, and $1.9 million, respectively, of the deferred gains
from this program. Realized investment gains from this program during 2000 were
$6.3 million. Realized investment gains and losses from this program during 1999
and 1998 were immaterial.
At December 31, 2000 and 1999, the Company had an unrealized gain of $123.1
million and $0.3 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, 2000, 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, 2000
and 1999, the outstanding notional amount of these options was $7.3 million for
both years, and the fair values and carrying amounts were $4.3 million and $5.9
million, respectively.
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 was $8.2 million
and terminated as scheduled in 2000. Additionally, the Company entered into
several foreign currency interest rate swaps to hedge the currency risk of
certain foreign currency denominated fixed income securities purchased in 1999
and 2000. The notional amount outstanding for these currency hedges was $28.1
million and $12.3 million, at December 31, 2000 and 1999, respectively. The
derivatives are scheduled for termination in the years 2006 through 2010. The
unrealized gain on these swaps at December 31, 2000 and 1999 was $4.1 million
and $0.2 million, respectively.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 5--Derivative Financial Instruments - Continued
Program 3 - Continued
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 was $0.2
million and $0.8 million for 2000 and 1999, respectively. At December 31, 2000
and 1999, the Company had an unrealized gain of $4.7 million and an unrealized
loss of $2.9 million, respectively, on this swap.
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, 2000, 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 $25.4 million and $26.7
million at December 31, 2000 and 1999, respectively.
The deferred gain amortized into earnings was $1.3 million for each of the years
ended December 31, 2000, 1999, and 1998.
At December 31, 2000, the Company had no open contracts under this program.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 6--Value of Business Acquired
A reconciliation of value of business acquired is as follows:
2000 1999 1998
(in millions of dollars)
------------------------------------------------
Balance at January 1 $534.1 $570.5 $699.0
Acquisition of Business 138.4 - 5.0
Disposition of Business (31.2) - (90.6)
Interest Accrued 43.8 40.4 43.2
Amortization (88.8) (78.7) (81.8)
Change in Foreign Currency Translation Adjustment (4.7) 1.9 (4.3)
------ ------ ------
Balance at December 31 $591.6 $534.1 $570.5
====== ====== ======
The estimated net amortization of value of business acquired for each of the
next five years is $45.6 million in 2001, $44.2 million in 2002, $42.8 million
in 2003, $41.2 million in 2004, and $39.8 million in 2005. Acquisition and
disposition activity relates to certain reinsurance transactions. See Note 13.
Note 7--Liability for Unpaid Claims and Claim Adjustment Expenses
Changes in the liability for unpaid claims and claim adjustment expenses are as
follows:
2000 1999 1998
(in millions of dollars)
----------------------------------------------------------
Balance at January 1 $15,344.5 $13,159.1 $11,979.3
Less Reinsurance Recoverables 2,087.9 1,614.8 1,494.3
--------- --------- ---------
Net Balance at January 1 13,256.6 11,544.3 10,485.0
Acquisition of Business - Note 13 602.5 - -
Incurred Related to:
Current Year 4,565.0 4,853.8 4,220.9
Prior Years
Interest 872.1 705.4 646.6
Incurred 19.6 757.5 40.8
--------- --------- ---------
Total Incurred 5,456.7 6,316.7 4,908.3
--------- --------- ---------
Paid Related to:
Current Year 1,496.1 1,538.2 1,266.7
Prior Years 3,087.5 3,066.2 2,582.3
--------- --------- ---------
Total Paid 4,583.6 4,604.4 3,849.0
--------- --------- ---------
Net Balance at December 31 14,732.2 13,256.6 11,544.3
Plus Reinsurance Recoverables 3,964.6 2,087.9 1,614.8
--------- --------- ---------
Balance at December 31 $18,696.8 $15,344.5 $13,159.1
========= ========= =========
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 7--Liability for Unpaid Claims and Claim Adjustment Expenses - Continued
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 2000,
1999, and 1998. 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 been incurred but not yet reported are considered liabilities of the
Company. These claims were expected to be reported during 1999 and were expected
to be affected by the claims operations integration activities. The $153.0
million claim reserve increase represented 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 believed 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 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 were 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 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
were involved in the process of implementing the new work processes and required
training. Implementation and related systems conversions continued 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 was not
material after the end of 1999.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 7--Liability for Unpaid Claims and Claim Adjustment Expenses - Continued
Actions by management to mitigate the effect on resolution rates included
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 were expensed in the period incurred and were 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 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 was
not 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 showed 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 were
very different from the Paul Revere acquisition, the claims integration
activities were similar, and the Paul Revere experience was 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 impacted the
Company as a result of the merger. One primary difference was that the duration
of the potential disruption in the merger was 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 provided 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 would not change. The historical experience of Paul Revere provided a
statistical reference for the expected experience for the Company when adjusted
for the projected effects of the claims integration plans.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 7--Liability for Unpaid Claims and Claim Adjustment Expenses - Continued
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 included $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. 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
--------------------------------------------------------
1/st/ 2/nd/ 3/rd/ 4/th/
(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 $ -
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
2000 % 1999 % 1998 %
(in millions of dollars)
--------------------------------------------------------------------------------
Statutory Income Tax (Credit) $303.0 35.0% $(57.9) 35.0% $322.1 35.0%
Tax-exempt Investment Income (13.5) (1.6) (22.0) 13.3 (28.9) (3.1)
Income Tax Settlements - - (14.2) 8.6 - -
Business Restructuring Charges - - 17.2 (10.4) - -
Tax Basis in Foreign Subsidiary (44.5) (5.1) - - - -
Change in Valuation Allowance 42.5 4.9 65.7 (39.7) 1.2 0.1
Goodwill 6.9 0.8 25.9 (15.7) 14.9 1.6
Other Items, Net 7.0 0.8 2.7 (1.6) (6.5) (0.7)
------ ----- ------ ----- ------ -----
Effective Tax $301.4 34.8% $ 17.4 (10.5)% $302.8 32.9%
====== ===== ====== ===== ====== =====
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 8--Federal Income Taxes - Continued
Deferred income tax liabilities consist of the following:
December 31
2000 1999
(in millions of dollars)
-----------------------------------------
Deferred Tax Liability
Deferred Policy Acquisition Costs $527.1 $433.4
Net Unrealized Gains on Securities 105.1 0.9
Value of Business Acquired 210.2 184.6
Policy Reserve Adjustments 49.7 4.3
Property and Equipment 18.5 22.0
Other Employee Benefits 19.8 -
Other 24.5 20.9
------ ------
Gross Deferred Tax Liability 954.9 666.1
------ ------
Deferred Tax Asset
Net Operating Losses 226.4 255.0
Reinsurance Gains 131.9 -
Alternative Minimum Tax Credits 11.7 28.2
Accrued Liabilities 24.7 30.6
Tax Basis in Foreign Subsidiary 44.5 -
Realized Investment Gains and Losses 88.2 34.0
Postretirement Benefits 68.2 59.9
Other Employee Benefits - 72.8
Foreign Currency Translation 22.8 15.0
Other 21.2 6.2
------ ------
Gross Deferred Tax Asset 639.6 501.7
Less Valuation Allowance 115.5 73.9
------ ------
Net Deferred Tax Asset 524.1 427.8
------ ------
Net Deferred Tax Liability $430.8 $238.3
====== ======
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, 2000, 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 2001, 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.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 8--Federal Income Taxes - 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
2000 1999 1998
(in millions of dollars)
------------------------------------------------------
Income (Loss) Before Tax Subject to Foreign Taxation $ 109.5 $(213.5) $ 76.5
======= ======= =======
Foreign Income Tax Expense (Credit):
Current $ 54.3 $ 38.0 $ 26.8
Deferred (23.6) (40.9) 0.3
------- ------- -------
Total $ 30.7 $ (2.9) $ 27.1
======= ======= =======
For most of the Company's subsidiaries, tax years through 1995 are closed to
further assessment by the Internal Revenue Service (IRS). During 2000, the IRS
continued its examination of subsequent years. 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, the Company reached a settlement with the IRS relating to its
federal income tax liability for the 1986 through 1992 tax years. Results for
the year ended December 31, 1999 increased $36.8 million due to settlements of
these prior year tax issues.
The Company's subsidiaries had net operating loss carryforwards of approximately
$641.7 million, alternative minimum tax credit carryforwards of approximately
$11.7 million, and capital loss carryforwards of $1.9 million as of December 31,
2000. 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
capital loss carryforwards begin expiring in 2005.
Federal income taxes paid during 2000, 1999, and 1998 were $165.6 million, $77.8
million, and $104.8 million, respectively.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 9--Debt and Company-Obligated Mandatorily Redeemable Preferred Securities
Debt
Short-term debt consists of the following at December 31 (in millions):
2000 1999
------------------------------------------------
Weighted Weighted
Average Average
Interest Interest
Balance Rate Balance Rate
------------------------------------------------
Commercial Paper $ - -% $ 597.8 6.3%
Current Portion of Medium-term Notes Payable - - 260.0 6.6
Private Placements 400.0 7.2 200.0 7.0
Other Short-term Debt 2.2 4.8 17.2 2.9
------- --------
Total $ 402.2 $1,075.0
======= ========
In April 2000, the Company issued $200.0 million of variable rate notes in a
privately negotiated transaction. The notes are due in April 2001 and were used
to refinance other short-term debt and had a weighted average interest rate of
7.33 percent during 2000.
Long-term debt consists of the following:
December 31
2000 1999
(in millions of dollars)
------------------------------
Commercial Paper, average interest rate of 7.743% $ 449.0 $ -
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 144.0 144.0
--------- --------
Total $ 1,615.5 $1,166.5
========= ========
In October 2000, the Company entered into $1.0 billion senior revolving credit
facilities with a group of banks. The facilities, which are split into five-year
revolver and 364-day portions, replaced a 364-day revolver which expired in
October 2000 and a five-year revolver which has been canceled. Interest is
variable based upon a London Interbank Offered Rate (LIBOR) plus a margin or an
alternate base rate. At December 31, 2000, approximately $551.0 million was
available for additional financing under the Company's revolving credit
facilities.
In August 2000, the Company filed with the Securities and Exchange Commission a
shelf registration statement on Form S-3 covering the issuance of up to $1.0
billion of securities in order to provide funding alternatives for its maturing
debt. The shelf registration became effective in September 2000, but as of
December 31, 2000, no securities had been issued.
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 9--Debt and Company-Obligated Mandatorily Redeemable Preferred Securities -
Continued
Commercial paper debt is due within one year, but has been classified as long-
term at December 31, 2000 because the Company has the ability through the new
senior revolving credit facilities to convert this obligation into longer-term
debt. The Company intends to refinance the commercial paper either by issuing
additional commercial paper or by replacing commercial paper debt with long-term
debt issued under the currently effective shelf registration statement.
Of the $1,615.5 million of long-term debt at December 31, 2000, $449.0 million
will mature in 2001, $35.0 million will mature in 2002, $20.0 million will
mature in 2003, and $1,111.5 million will mature in 2005 and thereafter.
Interest paid on short-term and long-term debt during 2000, 1999, and 1998 was
$156.9 million, $115.2 million, and $100.5 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 2000, 1999, and 1998 was $22.2 million, $22.2
million, and $11.1 million, respectively.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 10--Pensions and Other Postretirement Benefits
The Company sponsors several defined benefit pension and postretirement plans
for its employees, including non-qualified pension plans. The following tables
provide the changes in the benefit obligation and fair value of plan assets and
statements of the funded status of the plans.
Pension Benefits Postretirement Benefits
-----------------------------------------------------------
2000 1999 2000 1999
(in millions of dollars)
-----------------------------------------------------------
Change in Benefit Obligation
Balance at January 1 $ 651.5 $ 648.8 $ 165.5 $ 152.1
Service Cost 12.0 22.7 4.9 5.7
Interest Cost 45.4 46.2 13.2 11.4
Plan Amendments (12.4) - 16.0 (13.2)
Actuarial (Gain) Loss (6.3) (117.3) 4.1 (6.2)
Early Retirement - Note 2 - 95.2 - 30.7
Benefits Paid (36.4) (44.1) (11.9) (15.0)
Settlement (343.1) - - -
--------- -------- ------- --------
Balance at December 31 310.7 651.5 191.8 165.5
--------- -------- ------- --------
Change in Fair Value of Plan Assets
Balance at January 1 927.3 809.4 11.2 10.0
Actual Return on Plan Assets (33.1) 159.8 - 1.7
Contributions 6.8 2.2 11.6 14.5
Benefits Paid (36.4) (44.1) (11.9) (15.0)
Settlement (343.1) - - -
--------- --------- ------- --------
Balance at December 31 521.5 927.3 10.9 11.2
--------- -------- ------- --------
Funded (Underfunded) Status of the Plans at December 31 210.8 275.8 (180.9) (154.3)
Unrecognized Net Actuarial (Gain) Loss (99.4) (346.7) 0.8 (7.0)
Unrecognized Prior Service Cost (25.2) (14.7) (8.0) (26.0)
Unrecognized Net Transition Obligation 0.9 1.3 - -
--------- -------- -------- --------
Prepaid (Accrued) Benefit Cost $ 87.1 $ (84.3) $(188.1) $ (187.3)
========= ======== ======= ========
During the fourth quarter of 2000, the Company, through its defined benefit
pension plan, purchased a single premium annuity to fund the Company's
retirement benefit obligation for approximately 3,000 retirees. This transaction
resulted in a gain of $116.1 million before tax, or $75.5 million after tax.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 10--Pensions and Other Postretirement Benefits - Continued
At December 31, 2000, the plan assets include 448,784 shares of the Company's
common stock with a fair value of $12.1 million. The amount of dividends paid
during 2000 was not material.
The weighted average assumptions used in the measurement of the Company's
benefit obligation are as follows:
Pension Benefits Postretirement Benefits
-------------------------------------------------------
2000 1999 2000 1999
-------------------------------------------------------
Discount Rate 7.60% 7.75% 7.60% 7.75%
Expected Return on Plan Assets 9.00% 8.50 to 10.00% 6.00% 8.50%
Rate of Compensation Increase 4.50% 4.00% - -
For measurement purposes, the annual rate of increase in the per capita cost of
covered health care benefits assumed for 2001 was 7.5 percent. The rate range
was assumed to change gradually to a rate of 5.5 percent for 2004 and remain at
that level thereafter.
A one percent increase or decrease in the assumed health care cost trend rate at
December 31, 2000 and 1999 would have an insignificant impact on the net
periodic postretirement benefit cost and postretirement benefit obligation.
The following table provides the components of the net periodic benefit cost
(credit) and early retirement cost for the plans described above.
Pension Benefits Postretirement Benefits
-----------------------------------------------------------------------
2000 1999 1998 2000 1999 1998
(in millions of dollars)
-----------------------------------------------------------------------
Service Cost $ 12.0 $ 22.7 $ 25.9 $ 4.9 $ 5.7 $ 5.5
Interest Cost 45.4 46.2 40.5 13.2 11.4 9.5
Expected Return on Plan Assets (82.6) (79.9) (62.8) (0.7) (0.9) (0.8)
Net Amortization and Deferral (23.3) (12.5) (8.5) (1.9) 2.4 (4.0)
Early Retirement - Note 2 - 95.2 - - 30.7 -
Settlement (116.1) - - - - -
------- ------- ------- ------- ------- ------
$(164.6) $ 71.7 $ (4.9) $ 15.5 $ 49.3 $ 10.2
======= ======= ======= ======= ======= ======
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 11--Stockholders' Equity and Earnings Per Share
Preferred Stock
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.
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
2000 1999 1998
(in millions, except share data)
------------------------------------------------
Numerator
Net Income (Loss) $ 564.2 $ (182.9) $ 617.4
Preferred Stock Dividends - - 1.9
---------- ----------- ----------
Available to Common Stockholders $ 564.2 $ (182.9) $ 615.5
========== =========== ==========
Denominator (000s)
Weighted Average Common Shares - Basic 240,880.4 239,080.6 236,975.2
Dilution for Assumed Exercise of Stock Options 1,180.6 - 5,373.7
--------- ----------- ----------
Weighted Average Common Shares - Assuming Dilution 242,061.0 239,080.6 242,348.9
========= =========== ==========
Net Income (Loss) Per Common Share
Basic $ 2.34 $ (0.77) $ 2.60
Assuming Dilution $ 2.33 $ (0.77) $ 2.54
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. Approximately 10.7 million, 3.7 million, and 2.4
million options for the years ended December 31, 2000, 1999 and 1998,
respectively, were not considered dilutive due to the options being 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.
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
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 $28.8 million, $6.6 million, and $38.1 million for
2000, 1999, and 1998, 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.
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:
2000 1999 1998
-------------------------- -------------------------- -------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------------- -------------- --------------
(000s) (000s) (000s)
------ ------ ------
Outstanding at January 1 14,299 $36.04 15,023 $30.43 15,516 $26.01
Granted 5,299 15.71 3,795 48.15 2,406 51.68
Exercised (612) 16.04 (3,460) 22.38 (2,402) 22.45
Forfeited or Expired (2,786) 33.66 (1,059) 44.43 (497) 34.89
------ ------ ------
Outstanding at December 31 16,200 30.53 14,299 36.04 15,023 30.43
====== ====== ======
December 31, 2000
-------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------------------- -------------------------------------
Weighted Average
Range of Shares Remaining Years Weighted Average Shares Weighted Average
Exercise Prices (000s) in Contractual Life Exercise Price (000s) Exercise Price
--------------- ------ ------------------- ---------------- ------ ----------------
$ 10 to 19 5,059 7.7 $14.74 1,159 $18.09
20 to 29 3,661 5.2 25.42 2,840 25.41
30 to 39 3,404 5.5 34.92 3,380 34.94
40 to 49 1,400 7.8 45.52 661 45.98
50 to 59 2,676 7.8 53.99 2,071 53.62
------ ------
10 to 59 16,200 6.7 30.53 10,111 34.88
====== ======
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 12--Incentive Compensation and Stock Purchase Plans - Continued
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 201,626; 86,497; and 75,575 shares to
employees with a weighted average exercise price of $16.73, $31.71, and $39.00
in 2000, 1999, and 1998, 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.
The weighted average assumptions used in estimating compensation cost for the
Company during 2000 and 1999 and for the Provident plans in 1998 are as follows:
Year Ended December 31
2000 1999 1998
-------------- ------------- --------------
Volatility 24.2% 24.0% 17.9%
Risk-free Rate of Return 6.6% 5.5% 5.6%
Dividend Payout Rate Per Share $0.590 $0.590 $0.548
Time of Exercise
Stock Option Plan 6.0 years 5.7 years 7.0 years
ESPP 3 months 3 months 3 months
Weighted Average Fair Value of Awards Granted During the Year
Stock Option Plan $2.73 $14.33 $14.59
ESPP $5.20 $10.77 $ 9.51
Assumptions used in estimating compensation cost for Unum plans in 1998 are as
follows:
Volatility 23.8% to 26.4%
Risk-free Rate of Return 4.2% to 5.3%
Dividend Payout Rate 1.0%
Time of Exercise 4 to 8 years
Weighted Average Fair Value of
Options Granted During the Year $12.88
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 12--Incentive Compensation and Stock Purchase Plans - Continued
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
2000 1999 1998
(in millions of dollars, except share data)
-----------------------------------------------------
Net Income (Loss) $ 556.0 $ (223.6) $ 608.5
Net Income (Loss) Per Common Share
Basic 2.31 (0.94) 2.56
Assuming Dilution 2.30 (0.94) 2.51
Note 13--Reinsurance
In the normal course of business, the Company assumes reinsurance from and cedes
reinsurance to 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, 2000, relates to over 140 reinsurance relationships.
Of the five major relationships which account for approximately 75 percent of
the reinsurance receivable amount at December 31, 2000, 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
2000 1999 1998
(in millions of dollars)
-----------------------------------------
Premium Income $665.3 $508.3 $544.5
Policyholder Benefits 820.8 695.5 575.2
Premium income assumed was $618.1 million, $576.7 million, and $489.0 million
during 2000, 1999, and 1998, respectively.
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 13--Reinsurance - Continued
Effective January 1, 2000, an insurance 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 is being
amortized as earnings emerge from the business assumed.
During 2000 the Company entered into a 100 percent indemnity coinsurance
agreement to cede the future claim payments on one of its insurance
subsidiaries' long duration group long-term disability claims which were
incurred prior to January 1, 1996. Total policy reserves ceded were
approximately $177.9 million. The agreement was effective January 1, 2000. The
gain on the transaction was immaterial.
Effective July 1, 2000, the Company entered into various reinsurance agreements
with Reassure America Life Insurance Company (Reassure America), an affiliate of
Swiss Re Life & Health America Inc., under which Reassure America reinsured on a
100 percent indemnity coinsurance basis substantially all of the individual life
insurance and corporate-owned life insurance policies written by the Company's
insurance subsidiaries, as well as a small block of individually underwritten
group life insurance. Reassure America has a current A.M. Best rating of A++
(superior). In consideration of the transfer of reserves, the Company received a
ceding commission of $601.0 million. Total liabilities of $3,346.8 million and
policy loans of $2,040.9 million were assumed by Reassure America. The $388.2
million before-tax and $252.3 million after-tax gain on these transactions was
deferred and is being amortized into income based upon expected future premium
income on the traditional insurance policies ceded and estimated future gross
profits on the interest-sensitive insurance policies ceded.
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, 2000, the attachment point had not been reached.
The following discloses the various layers in the agreement at December 31, 2000
(in millions):
Net GAAP Reserves $ 713.2
Experience Layer 385.0
----------
Attachment Point 1,098.2
Centre Re's Defined Risk Layer 145.4
----------
Defined Risk Limit $1,243.6
=========
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 13--Reinsurance - Continued
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,
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 miscellaneous assets in the consolidated statements of financial
condition at December 31, 2000, is a deposit asset for this reinsurance
arrangement of approximately $410.6 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
The Company's reinsurance 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 syndicate participations. During 1999, 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. In 1999, the Company sold the reinsurance management
operations of its A&H and LTC reinsurance facilities and reinsured the Company's
risk participation in these facilities. The Company also decided to discontinue
its London accident reinsurance pool participation beginning in year 2000. With
respect to Lloyd's, the Company implemented a strategy which limited
participation in year 2000 underwriting risks, ceased participation in Lloyd's
underwriting risks after year 2000, and managed the run-off of its risk
participation in open years of account of Lloyd's reinsurance syndicates. During
the first quarter of 2001, the Company entered into an agreement in principle to
limit its liabilities pertaining to the Lloyd's syndicate participations.
The table below summarizes the charges recognized by the Company during 2000 and
1999 related to the reinsurance operations (in millions).
2000 1999
---------- ----------
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 37.4 21.9
Goodwill Impairment Excluding Amount Recognized on Sale - 51.7
-------- --------
Total Before-Tax Charge $37.4 $327.8
======== ========
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 13--Reinsurance - Continued
A discussion of these charges is as follows:
North American Reinsurance Operations
Loss on Sale of A&H and LTC Reinsurance Management Operations
In 1999 the Company sold the reinsurance management operations of its A&H
and LTC reinsurance facilities to American United Life Insurance Company
(AUL) and also reinsured the Company's risk participation in these
facilities with AUL (see below). Certain risks related to prior operations
were not assumed by AUL. The terms of the sale required the Company to
continue to participate in certain of the reinsurance facilities in year
2000, thereby assuming underwriting risks. A before-tax loss of $12.9
million, including the write-off of $6.0 million of goodwill related to this
portion of the operations, was recognized during 1999.
Loss on Reinsurance of A&H and LTC Risk Participations
The Company entered into a separate indemnity reinsurance agreement with AUL
whereby AUL would assume the Company's existing risk participation in the
A&H and LTC reinsurance facilities. As a result, the Company recognized a
1999 before-tax loss of $12.7 million.
Provision for Losses on Retained Business
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 $39.1 million during 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.
Also included in the 1999 charge was $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
The periodic method of accounting is followed for Lloyd's syndicate
participation, which requires premiums to be recognized as revenue over the
policy term and claims, including the estimate of claims incurred but not
reported, to be recognized as incurred. Throughout 1999, the Company
received updated estimates and information about the Lloyd's market from
various sources, including managing agents and underwriters of syndicates
and published information from Moody's Investors Service. Consistent with
overall market trends, the information and loss estimates received indicated
significant deterioration in the
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 13--Reinsurance - Continued
loss experience of open years of account. The deterioration in loss
experience related primarily 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. The Company also 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. Market
conditions were not expected to improve dramatically in the near term.
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 $185.0 million was reflected in the Company's
income during 1999 for the open years of account 1996 through 1999.
In addition to the risk participation charge, during 1999 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.
As previously stated, during the first quarter of 2001, the Company entered
into an agreement in principle to limit its liabilities pertaining to the
Lloyd's syndicate participations.
Provision for Losses on Reinsurance Pool Participations Other than Lloyd's
In connection with the development of the cost of exiting the reinsurance
operations, during 1999 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 this review, the Company increased reserves related to its
participation in certain managed and non-managed reinsurance facilities by
$21.9 million in 1999.
During 2000, the Company recognized $37.4 million of additional charges
related to the run-off of the Company's London accident reinsurance pool
participation. During 1999, the Company recorded charges resulting from its
decision to exit these pools, but at that time there was insufficient
information to fully evaluate all of the exposures. Working with the pool
managers in London, the Company revised its estimates to reflect current and
expected trends in claims experience and expenses. The 2000 charge included
an increase of $21.9 million in claim reserves for certain of the
reinsurance pools and $15.5 million related to uncollectible receivables and
loss provisions.
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 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 1999 results and
the revised forecasts current at that time, 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.
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 13--Reinsurance - Continued
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. The estimated fair value was compared to the 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 management operations using the held-for-sale model, which compares the
carrying value of the asset with the fair value less costs to sell. This
resulted in an additional write-down of goodwill in the amount of $2.0
million.
Following the write-downs of $27.0 million and $2.0 million, the Company's
remaining 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 and included in the $12.9 million loss on
the 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 was determined to be unrecoverable based on revised
earnings forecasts for the reinsurance operations and was written off during
the third quarter of 1999. The total write-down of goodwill was $51.7
million during 1999, exclusive of the $6.0 million included in the loss on
the sale.
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 15.
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 14--Segment Information
Selected data by segment is as follows:
Year Ended December 31
2000 1999 1998
(in millions of dollars)
--------------------------------------------
Premium Income
Employee Benefits $ 4,042.5 $ 3,900.2 $ 3,364.4
Individual 1,777.2 1,645.5 1,589.9
Voluntary Benefits 739.6 691.6 666.7
Other 497.7 605.9 508.0
---------- ---------- -----------
7,057.0 6,843.2 6,129.0
Net Investment Income and Other Income
Employee Benefits 853.1 745.1 661.0
Individual 962.3 831.9 779.1
Voluntary Benefits 119.7 112.9 103.7
Other 406.7 641.7 759.8
Corporate 48.1 67.7 31.7
---------- ---------- -----------
2,389.9 2,399.3 2,335.3
Total Revenue (Excluding Net Realized Investment Gains and Losses)
Employee Benefits 4,895.6 4,645.3 4,025.4
Individual 2,739.5 2,477.4 2,369.0
Voluntary Benefits 859.3 804.5 770.4
Other 904.4 1,247.6 1,267.8
Corporate 48.1 67.7 31.7
---------- ---------- -----------
9,446.9 9,242.5 8,464.3
Benefits and Expenses
Employee Benefits 4,461.3 4,625.9 3,489.1
Individual 2,441.4 2,223.3 2,181.7
Voluntary Benefits 705.3 667.5 639.3
Other 861.1 1,426.1 1,131.8
Corporate 97.6 552.3 157.2
---------- ---------- -----------
8,566.7 9,495.1 7,599.1
Income (Loss) Before Net Realized Investment Gains
and Losses and Federal Income Taxes
Employee Benefits 434.3 19.4 536.3
Individual 298.1 254.1 187.3
Voluntary Benefits 154.0 137.0 131.1
Other 43.3 (178.5) 136.0
Corporate (49.5) (484.6) (125.5)
---------- ---------- -----------
880.2 (252.6) 865.2
Net Realized Investment Gains (Losses) (14.6) 87.1 55.0
---------- ---------- -----------
Income (Loss) Before Federal Income Taxes 865.6 (165.5) 920.2
Federal Income Taxes 301.4 17.4 302.8
---------- ---------- -----------
Net Income (Loss) $ 564.2 $ (182.9) $ 617.4
========== ========== ===========
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 14--Segment Information - 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
2000 1999 1998
(in millions of dollars)
-------------------------------------------
Employee Benefits $ 149.6 $ 109.1 $ 85.2
Individual 131.8 108.8 96.6
Voluntary Benefits 114.6 115.4 101.6
Other 105.5 179.8 132.7
Corporate 22.3 82.6 28.0
--------- -------- --------
$ 523.8 $ 595.7 $ 444.1
========= ======== ========
December 31
2000 1999
Assets (in millions of dollars)
----------------------------------------
Employee Benefits $ 11,282.8 $ 9,984.0
Individual 16,162.6 13,831.3
Voluntary Benefits 2,210.4 2,103.8
Other 9,864.8 10,838.2
Corporate 843.3 1,690.2
------------ -----------
$ 40,363.9 $ 38,447.5
============ ===========
Note 15--Commitments and Contingent Liabilities
Commitments
During 2000, the Company entered into an agreement to sell Provident National
Assurance Company, an inactive subsidiary of the Company. The transaction, which
was subject to regulatory approval, closed in the first quarter of 2001.
Contingent Liabilities
In 1997 two alleged class action lawsuits were filed in Superior Court in
Worcester, Massachusetts (Superior Court) against UnumProvident and several of
its subsidiaries, The Paul Revere Corporation, The Paul Revere Life Insurance
Company, The Paul Revere Variable Annuity Insurance Company, The Paul Revere
Protective Life Insurance Company, and the Company. One of the lawsuits purports
to represent all career agents of subsidiaries of The Paul Revere Corporation
(Paul Revere) whose employment relationships ended on June 30, 1997 and were
offered contracts to sell insurance policies as independent producers. The other
purports to represent independent brokers who sold certain Paul Revere
individual disability income policies with benefit riders. Motions filed by
UnumProvident and affiliates to dismiss most of the counts in the complaints,
which allege various breach of contract and statutory claims, have been denied.
A hearing to determine class certification was heard on December 20, 1999 in
Superior Court. The court certified a class for the independent brokers and has
denied class certification for the career agents. UnumProvident and affiliates
appealed the class certification for the independent brokers, but the appeal was
denied. Summary judgment motions were heard on November 10, 2000, and all
motions from plaintiffs and defendants were denied. A trial date for the class
action is set for March 26, 2001. UnumProvident and affiliates have filed a
conditional counterclaim in the class action which requests a substantial return
of commissions should the Superior Court agree with the plaintiffs'
interpretation of the contracts. The career agent plaintiffs have re-filed, but
not served, their complaint seeking class
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 15--Commitments and Contingent Liabilities - Continued
action status by limiting the issues to those in the certified broker class
action. UnumProvident and affiliates believe that they have strong defenses to
both lawsuits and plans to vigorously defend their position.
In addition, the same plaintiffs' attorney who had initially filed the class
action lawsuits has filed 50 individual lawsuits on behalf of current and former
Paul Revere sales managers alleging various breach of contract claims.
UnumProvident and affiliates filed a motion in federal court to compel
arbitration for 17 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 denied 15 of those motions and granted two. UnumProvident and affiliates
appealed the denial of the 15 motions before the First Circuit Court of Appeals,
but the District Court decision was affirmed. The two cases set for arbitration
should be heard in 2001, but plaintiffs have appealed the arbitration ruling to
the First Circuit Court of Appeals. Oral argument has been set for March 7,
2001. Eight of the other cases are tentatively set to begin trials in 2002.
UnumProvident and affiliates believe that they have strong defenses and plans to
vigorously defend their position in these cases. Although the individual
lawsuits described above 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, and that action
was voluntarily dismissed by the plaintiff on June 12, 2000. 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.
On April 10, 2000, the defendants filed a motion to dismiss the complaints. On
January 8, 2001, the district court affirmed a Recommended Decision by the
Magistrate Judge, entered November 8, 2000, that granted in part, and denied in
part, the motion. The district court granted the motion to dismiss plaintiff's
claims (i) under Section 10(b) of the Securities Exchange Act of 1934, (ii)
under Section 14(a) of the Securities Exchange Act of 1934 on behalf of the
former shareholders of Unum Corporation, and (iii) under Section 12(a) of the
Securities Act of 1933 on behalf of purchasers of UnumProvident stock after the
merger. The district court also dismissed plaintiff's claims relating to
disclosures regarding the costs associated with Unum's exit from its reinsurance
business, but otherwise denied defendants' motion to dismiss plaintiff's claims
under Sections 11 and 12(a) (2) of the Securities Act of 1933 and the claim
under Section 14(a) of the Securities Exchange Act of 1934.
On February 16, 2001, each defendant answered the complaint by denying generally
the material allegations of the complaint. On January 30, 2001, the district
court issued an Amended Scheduling Order that, among other things, ordered all
discovery to be complete by July 10, 2001, and directed that the case be
prepared for trial in November 2001. Pre-trial discovery is now underway. The
Company disputes the claims alleged in the complaint and plans to vigorously
contest them.
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 15--Commitments and Contingent Liabilities - Continued
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 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 or 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. See Note 13 for further discussion regarding reinsurance
pool participation.
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 16--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, 2000, 1999, and 1998, was $353.5
million, $(233.7) million, and $227.0 million, respectively. Statutory net gain
(loss) from operations was $414.8 million, $(220.7) million, and $266.2 million
for the years ended December 31, 2000, 1999, and 1998, 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 operations charges, the Company's insurance subsidiaries' statutory
net gain from operations was $21.0 million for the year ended 1999. Statutory
capital and surplus at December 31, 2000 and 1999, was $3,263.0 million and
$2,718.1 million, respectively.
Regulatory restrictions limit the amount of dividends available for distribution
to the Company from its insurance subsidiaries without prior approval by
regulatory authorities. Generally, that limitation equals 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. Based on the applicable
restrictions, $359.9 million will be available for the payment of dividends to
the Company from its top-tier domestic insurance subsidiaries during 2001. The
Company also has the ability to draw a dividend from its United Kingdom
subsidiary, Unum Limited. Such dividends are limited 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 2001 is approximately $20.9 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. Currently, 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, 2000, 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.
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 16--Statutory Financial Information - Continued
The NAIC and the insurance subsidiaries' states of domicile have approved a
codification of statutory accounting practices effective January 1, 2001, which
will serve as a comprehensive and standardized guide to statutory accounting
principles. The codification changes, to some extent, the accounting practices
that the Company's insurance subsidiaries use to prepare their statutory
financial statements. The cumulative effect of changes in accounting principles
adopted to conform to the codification of statutory accounting principles will
be reported as an adjustment to statutory surplus as of January 1, 2001. Based
on preliminary estimates, the Company believes that these accounting changes
will have a positive impact on consolidated statutory surplus for the Company's
insurance subsidiaries.
Deposits
At December 31, 2000, the Company's insurance subsidiaries had on deposit with
regulatory authorities securities with a book value of $1,407.6 million held for
the protection of policyholders.
Note 17--Quarterly Results of Operations (Unaudited)
The following is a summary of unaudited quarterly results of operations for 2000
and 1999:
2000
----------------------------------------------------------------
4/th/ 3/rd/ 2/nd/ 1/st/
----------------------------------------------------------------
(in millions of dollars, except share data)
----------------------------------------------------------------
Premium Income $1,731.7 $1,754.6 $1,789.9 $1,780.8
Net Investment Income 482.9 482.4 543.0 552.1
Net Realized Investment Gains (Losses) (2.2) (14.0) 1.8 (0.2)
Total Revenue 2,302.8 2,311.7 2,423.7 2,394.1
Income Before Federal Income Taxes 231.1 208.5 219.6 206.4
Net Income 149.6 137.0 143.1 134.5
Net Income Per Common Share
Basic .62 .57 .59 .56
Assuming Dilution .62 .57 .59 .56
1999
----------------------------------------------------------------
4/th/ 3/rd/ 2/nd/ 1/st/
----------------------------------------------------------------
(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
During the third quarter of 1999, the Company incurred net charges of $592.2
million before tax ($436.2 million after tax) related to reserve increases,
reinsurance operation activities, and merger costs, partially offset by interest
income on a federal income tax refund. During the second quarter of 1999, the
Company incurred net charges of $508.8 million before tax ($350.3 million after
tax) related to reserve increases and merger and early retirement
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
UnumProvident Corporation and Subsidiaries
Note 17--Quarterly Results of Operations (Unaudited) - Continued
costs. During the first quarter of 1999, the Company incurred net charges of
$101.1 million before tax ($88.0 million after tax) related to reserve increases
and reinsurance operation activities. See notes preceding for further
discussion.
92
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
93
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 10, 2001,
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 certain principal subsidiaries, were elected to serve for one year or until
their successors are chosen and qualified.
Name Age Position
---- --- --------
J. Harold Chandler 51 Chairman, President, Chief Executive Officer, and Director
Thomas R. Watjen 46 Executive Vice President, Finance and Risk Management
F. Dean Copeland 61 Executive Vice President, Legal and Administrative Affairs,
and General Counsel
Robert O. Best 51 Senior Vice President, Customer Service, and Chief Information Officer
Robert C. Greving 49 Senior Vice President, Finance, and Chief Actuary
Ralph W. Mohney 49 Senior Vice President, Customer Care
John S. Roberts 45 Senior Vice President, Underwriting
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 the additional Risk Management responsibilities on November
1, 1999. Prior to the merger with Unum, he was Vice Chairman and Chief Financial
Officer of the Company, positions he assumed on 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 and assumed the additional responsibilities of Executive
Vice President, Legal and Administrative Affairs, on June 30, 1999. Prior to
joining the Company in May 1997, he was 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.
Mr. Best became Senior Vice President, Customer Service, and Chief
Information Officer in March 2000. Following the merger with Unum he became
Senior Vice President, Customer Service in June 1999. Prior to the merger he
served as Executive Vice President, Customer Service, and Chief Information
Officer of the Company beginning in May 1997. He joined the Company as Senior
Vice President and Chief Information Officer in July 1994.
Mr. Greving became Senior Vice President, Finance, and Chief Actuary in
August 2000. He joined the Company as Senior Vice President and Chief Actuary in
April 1997. Prior to joining the Company, he was Executive Vice President and
Chief Actuary of Southwestern Financial Services, Corp. from June 1990 until
March 1997.
94
Mr. Mohney became Senior Vice President, Customer Care in December 1999. He
had served as Senior Vice President, Claims from June 1997, and Vice President,
Claims from October 1994. Mr. Mohney originally joined Accident in 1974.
Mr. Roberts was named Senior Vice President, Underwriting following the
merger with Unum. He had served as Executive Vice President of Unum America
since 1998. In 1997 he was named Senior Vice President of Unum America's Product
Center Group. Prior to that time he had served as Senior Vice President of Long-
term Disability for Unum America since 1994. He originally joined Unum America
in 1977.
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 10, 2001,
and is incorporated herein by reference.
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 10, 2001, 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 10, 2001, and is incorporated herein by reference.
95
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 ......................................... 39
Report of PriceWaterhouseCoopers LLP, Independent Auditors ................................ 40
Consolidated Statements of Financial Condition at December 31, 2000 and 1999 .............. 41
Consolidated Statements of Operations for the three years ended December 31, 2000........... 43
Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 2000 ....................................................................... 44
Consolidated Statements of Cash Flows for the three years ended December 31, 2000........... 45
Notes to Consolidated Financial Statements ................................................ 47
(2) Schedules Supporting Financial Statements
I. Summary of Investments - Other than Investments in Related Parties .................. 99
II. Condensed Financial Information of Registrant ....................................... 100
III. Supplementary Insurance Information ................................................ 104
IV. Reinsurance ......................................................................... 106
V. Valuation and Qualifying Accounts ................................................... 107
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 108 of this report.
(b) Reports on Form 8-K:
Form 8-K filed on January 3, 2001, reporting changing role for
Elaine D. Rosen.
Form 8-K filed on February 12 2001, reporting fourth quarter 2000
financial results.
Form 8-K filed on March 2, 2001, reporting issuance of 7.625%
senior notes.
96
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 28, 2001.
UnumProvident Corporation
(Registrant)
/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.
Name Title Date
- ------------------------------- --------------------------------------- -----------------
/s/ J. Harold Chandler Chairman, President, and Chief
- ------------------------------- Executive Officer and a Director March 28, 2001
J. Harold Chandler
/s/ Thomas R. Watjen Executive Vice President, Finance and
- ------------------------------- Risk Management March 28, 2001
Thomas R. Watjen
/s/ Robert C. Greving Senior Vice President, Finance, and
- ------------------------------- Chief Actuary
Robert C. Greving March 28, 2001
* Director
- -------------------------------
William L. Armstrong March 28, 2001
* Director
- -------------------------------
Ronald E. Goldsberry March 28, 2001
* Director
- -------------------------------
Hugh O. Maclellan, Jr. March 28, 2001
* Director
- -------------------------------
A. S. MacMillan March 28, 2001
* Director
- -------------------------------
George J. Mitchell March 28, 2001
* Director
- -------------------------------
Cynthia A. Montgomery March 28, 2001
* Director
- -------------------------------
James L. Moody, Jr. March 28, 2001
97
Name Title Date
- ------------------------------------------ ------------------------------- ---------------
* Director
- ------------------------------------------
C. William Pollard March 28, 2001
* Director
- ------------------------------------------
Lawrence R. Pugh March 28, 2001
* Director
- ------------------------------------------
Lois D. Rice March 28, 2001
* Director
- ------------------------------------------
John W. Rowe March 28, 2001
* Director
- ------------------------------------------
Burton E. Sorensen March 28, 2001
* By: /s/ Susan N. Roth For all of the Directors
- ------------------------------------------
Susan N. Roth March 28, 2001
Attorney-in-Fact
98
SCHEDULE I--SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
UnumProvident Corporation and Subsidiaries
December 31, 2000
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 $ 76.9 $ 91.8 $ 91.8
States, Municipalities, and Political Subdivisions 155.0 158.3 158.3
Foreign Governments 752.1 883.0 883.0
Public Utilities 3,131.8 3,226.1 3,226.1
Mortgage-backed Securities 3,159.8 3,316.8 3,316.8
Convertible Bonds 65.3 48.6 48.6
All Other Corporate Bonds 14,477.4 14,422.0 14,422.0
Redeemable Preferred Stocks 112.9 95.7 95.7
------------ ------------ ------------
Total 21,931.2 $ 22,242.3 22,242.3
------------ ------------ ------------
Held-to-Maturity Fixed Maturity Securities:
Bonds
United States Government and Government
Agencies and Authorities 6.9 $ 8.5 6.9
States, Municipalities, and Political Subdivisions 1.5 1.6 1.5
Mortgage-backed Securities 320.7 341.3 320.7
All Other Corporate Bonds 17.5 18.4 17.5
------------ ------------ ------------
Total 346.6 $ 369.8 346.6
------------ ============ ------------
Equity Securities:
Common Stocks 22.0 $ 23.6 23.6
Nonredeemable Preferred Stocks 1.2 0.9 0.9
------------ ------------ ------------
Total 23.2 $ 24.5 24.5
------------ ============ ------------
Mortgage Loans 1,148.5 1,135.6 *
Real Estate Acquired in Satisfaction of Debt 24.3 18.2 *
Other Real Estate 149.1 98.5 *
Policy Loans 2,426.7 2,426.7
Other Long-term Investments 32.3 32.3
Short-term Investments 279.4 279.4
------------ ------------
$ 26,361.3 $ 26,604.1
============ ============
*Difference between cost and carrying value results from certain valuation
allowances and other temporary declines in value.
99
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UnumProvident Corporation (Parent Company)
STATEMENTS OF FINANCIAL CONDITION
December 31
2000 1999
(in millions of dollars)
-------------------------------------
ASSETS
Fixed Maturity Securities
Available-for-Sale--at fair value (cost: $10.1; $9.6) $ 10.4 $ 10.0
Investment in Subsidiaries 7,835.1 7,060.8
Short-term Notes Receivable from Subsidiaries 183.6 214.8
Surplus Notes of Subsidiaries 250.0 250.0
Other Assets 472.1 177.6
---------- ----------
Total Assets $ 8,751.2 $ 7,713.2
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Short-term Debt from Subsidiaries $ 491.9 $ 26.6
Short-term Debt 400.0 1,059.4
Long-term Debt 1,615.5 1,166.5
Other Liabilities 368.3 178.5
----------- ----------
Total Liabilities 2,875.7 2,431.0
----------- ----------
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 24.1
Additional Paid-in Capital 1,040.2 1,028.6
Accumulated Other Comprehensive Income (Loss) 140.7 (18.9)
Retained Earnings 4,379.7 3,957.6
Treasury Stock (9.2) (9.2)
----------- ----------
Total Stockholders' Equity 5,575.5 4,982.2
----------- ----------
Total Liabilities and Stockholders' Equity $ 8,751.2 $ 7,713.2
=========== ==========
See notes to condensed financial information.
100
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
UnumProvident Corporation (Parent Company)
STATEMENTS OF OPERATIONS
Year Ended December 31
2000 1999 1998
(in millions of dollars)
-------------------------------------------------------
Dividends from Subsidiaries $ 138.8 $ 97.0 $ 77.9
Interest from Subsidiaries 20.8 24.9 21.3
Other Income 22.8 12.8 10.4
--------- ---------- ---------
Total Revenue 182.4 134.7 109.6
--------- ---------- ---------
Interest and Debt Expense 204.3 110.3 62.7
Other Expenses (Credit) (101.3) 49.6 2.6
--------- ---------- ---------
Total Expenses 103.0 159.9 65.3
--------- ---------- ---------
Income (Loss) Before Federal Income Taxes and Equity
in Undistributed Earnings (Losses) of Subsidiaries 79.4 (25.2) 44.3
Federal Income Taxes (Credit) (10.7) (38.5) 8.1
--------- ---------- ---------
Income Before Equity in Undistributed Earnings (Losses)
of Subsidiaries 90.1 13.3 36.2
Equity in Undistributed Earnings (Losses) of Subsidiaries 474.1 (196.2) 581.2
--------- ---------- ---------
Net Income (Loss) $ 564.2 $ (182.9) $ 617.4
========= ========== =========
See notes to condensed financial information.
101
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
UnumProvident Corporation (Parent Company)
STATEMENTS OF CASH FLOWS
Year Ended December 31
2000 1999 1998
(in millions of dollars)
--------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES $ 78.3 $ 26.0 $ 11.6
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net Sales of Short-term Investments 2.6 2.8 13.3
Acquisition of Business and Business Combinations - - 146.0
Cash Distributions (to) from Subsidiaries (224.0) (492.3) 13.3
Short-term Notes Receivable from Subsidiaries 31.2 (14.3) 20.5
Other (22.5) (15.9) (24.2)
----------- ----------- ----------
CASH PROVIDED (USED) BY INVESTING ACTIVITIES (212.7) (519.7) 168.9
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Short-term Borrowings from Subsidiaries 465.3 (27.8) 7.7
Net Short-term Debt and Commerical Paper
(Repayments) Borrowings (210.4) 602.4 -
Issuance of Long-term Debt - - 600.0
Long-term Debt Repayments - - (725.0)
Issuance of Company-Obligated Mandatorily
Redeemable Preferred Securities - - 300.0
Redemption of Preferred Stock - - (156.2)
Issuance of Common Stock 11.6 69.7 11.9
Dividends Paid to Stockholders (142.1) (138.9) (139.1)
Repurchase of Common Stock - - (72.7)
Other - - (6.6)
----------- ----------- ----------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES 124.4 505.4 (180.0)
----------- ----------- ----------
INCREASE (DECREASE) IN CASH $ (10.0) $ 11.7 $ 0.5
========== =========== ==========
See notes to condensed financial information.
102
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, 2000 and 1999, 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' states of domicile. The weighted average interest rate for surplus
notes of subsidiaries was 8.2 percent in 2000 and 1999, and 8.1 percent in 1998.
Note 3--Other Expenses (Credit)
As reported in Note 10 of the consolidated financial statements of UnumProvident
Corporation and Subsidiaries, during 2000 UnumProvident Corporation, through its
defined benefit pension plan, purchased a single premium annuity to fund its
retirement benefit obligation. This transaction resulted in a gain of $116.1
million and is reported in other expenses (credit).
103
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, 2000
Employee Benefits $ 907.8 $ 6,197.4 $ 17.5 $1,020.4
Individual 1,006.0 11,624.0 274.8 356.2
Voluntary Benefits 477.6 1,302.9 14.8 107.3
Other 32.6 6,509.6 25.7 312.9
--------- ---------- -------- ---------
Total $ 2,424.0 $ 25,633.9 $ 332.8 $ 1,796.8
========= ========== ======== =========
Year Ended December 31, 1999
Employee Benefits $ 826.3 $ 5,558.6 $ 15.1 $ 949.7
Individual 891.2 10,182.5 267.9 355.3
Voluntary Benefits 438.0 868.0 16.4 99.7
Other 235.7 6,730.0 81.2 317.4
--------- ---------- -------- ---------
Total $ 2,391.2 $ 23,339.1 $ 380.6 $ 1,722.1
========= ========== ======== =========
(Continued on following page)
104
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 (1) Expenses Costs Expenses (2) Written (3)
(in millions of dollars)
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2000
Employee Benefits $4,042.5 $ 701.8 $3,426.2 $147.2 $ 887.9 $2,850.5
Individual 1,777.2 840.3 1,858.4 91.1 491.9 1,780.1
Voluntary Benefits 739.6 113.4 447.2 112.3 145.8 544.7
Other 497.7 377.2 675.7 105.9 79.5 424.6
Corporate - 27.7 - - 97.6
-------- -------- -------- ------ --------
Total $7,057.0 $2,060.4 $6,407.5 $456.5 $1,702.7
======== ======== ======== ====== ========
Year Ended December 31, 1999
Employee Benefits $3,900.2 $ 604.9 $3,663.9 $106.6 $ 855.4 $2,783.6
Individual 1,645.5 771.1 1,604.2 77.7 541.4 1,660.2
Voluntary Benefits 691.6 106.6 392.7 113.0 161.8 514.3
Other 605.9 549.5 1,126.8 177.5 121.8 495.0
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 1,589.9 722.6 1,559.0 65.2 557.5 1,595.9
Voluntary Benefits 666.7 94.8 369.4 99.4 170.5 499.4
Other 508.0 645.2 878.7 130.3 122.8 410.9
Corporate - 31.0 - - 157.2
-------- -------- -------- ------ --------
Total $6,129.0 $2,035.4 $5,449.7 $377.5 $1,771.9
======== ======== ======== ====== ========
(1) 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.
(2) Other operating expenses are allocated to each segment based on activity
levels, time information, and usage statistics.
(3) Excludes life insurance.
(4) The individual life line of business, which was previously reported in the
Individual segment, is now reported in the Other segment. Prior period
results have been reclassified to conform to current reporting.
105
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, 2000
Life Insurance in Force $581,765.8 $62,312.3 $2,081.7 $521,535.2 0.4%
========== ========= ======== ==========
Premium Income:
Life Insurance $ 1,642.6 $ 209.5 $ 15.7 $ 1,448.8 1.1%
Accident and Health Insurance 5,461.6 455.8 602.4 5,608.2 10.7%
---------- --------- -------- ---------
Total $ 7,104.2 $ 665.3 $ 618.1 $ 7,057.0 8.8%
========== ========= ======== ==========
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
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%
========== ========= ======== ==========
106
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
UnumProvident Corporation and Subsidiaries
Deductions for
Additions Additions Amounts Applied
Balance at Charged to Charged to to Specific Loan Deductions for Balance at
Beginning Costs and Other at Time of Sale/ Amounts Deemed End of
Description of Period Expenses Accounts Foreclosure Uncollectible Period
(in millions of dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2000
Mortgage loan loss reserve $32.9 $ - $ - $20.0 $ - $12.9
Real estate reserve $37.8 $ - $ - $12.2 $ - $25.6
Allowance for doubtful accounts
(deducted from premiums
receivable and miscellaneous
assets) $ 3.8 $ 11.7 $ - $ - $ 7.0 $ 8.5
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
(1) Amounts shown in additions charged to cost and expenses represent realized
investment losses.
107
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) Restated Certificate of Incorporation of UnumProvident Corporation.
(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, as amended by stockholders May 1, 1996 and
May 7, 1997, as restated and amended by stockholders May 6, 1998, and
as amended by the Compensation Committee on February 8, 2001.*
(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 Form 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.
108
(10.7) Stock Plan of 1994, originally adopted by stockholders May 5, 1993, as
amended by stockholders on May 1, 1996 and on May 7, 1997 and as
amended by the Compensation Committee on February 8, 2001. *
(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 Form 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 Form 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) UnumProvident Stock Plan of 1999, adopted by stockholders May 6, 1998,
as amended by stockholders June 30, 1999 and as amended by the
Compensation Committee on February 8, 2001. *
(10.13) UnumProvident Non-Employee Director Compensation Plan of 1998, adopted
by stockholders May 6, 1998 and as amended by the Compensation
Committee on February 8, 2001. *
(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 as
amended by the Agreement dated November 10, 2000. *
(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 as amended
by the Agreement dated December 12, 2000. *
(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 (incorporated by
reference to the Company's Form 10-K for fiscal year ended December 31,
1999). *
(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 as amended by the Compensation
Committee February 8, 2001. *
(10.24) 1996 Long Term Stock Incentive Plan as amended by the Compensation
Committee February 8, 2001. *
(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) UnumProvident Supplemental Pension Plan. *
109
(10.27) $500 million Five Year Credit Agreement dated as of October 31, 2000
among the Company, Bank of America, N.A. as Administrative Agent,
Citicorp, USA, Inc. and Wachovia Bank, N.A. as Co-Syndication Agents,
Fleet National Bank as Documentation Agent and the Banks listed
therein.
(10.28) $500 million 364-Day Credit Agreement dated as of October 31, 2000
among the Company, Bank of America, N.A. as Administrative Agent,
Citicorp, USA, Inc. and Wachovia Bank, N.A. as Co-Syndication Agents,
Fleet National Bank as Documentation Agent and the Banks listed
therein.
(10.29) Administrative Reinsurance Agreement between Provident Life and
Accident Insurance Company and Reassure America Life Insurance Company
dated to be effective July1, 2000 (incorporated by reference to the
Company's Form 8-K filed March 2, 2001).
(10.30) Augmenting Agreement dated November 6, 2000 among the Company, Bank of
America, N.A. as Administrative Agent, and the Royal Bank of Canada
relating to $500 million Five Year Credit Agreement.
(10.31) Augmenting Agreement dated November 6, 2000 among the Company, Bank of
America, N.A. as Administrative Agent, and the Royal Bank of Canada
relating to $364-Day Credit Agreement.
(10.32) 2000 Annual Incentive Plan.*
(11) Statement re computation of per share earnings (incorporated herein by
reference to "Note 11 of the Notes to Consolidated Financial
Statements").
(12.1) Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
(12.2) Statement Regarding Computation on Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.
(21) Subsidiaries of the Company.
(23.1) Consent of Independent Auditors.
(23.2) Consent of Independent Auditors.
(24) Powers of Attorney
- --------------------------
* 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.
110