-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FLX5KRtQm6ef9MT9iSQWErljmiVpgVWCL3NJPh/8yM3yZghrG5O1sce1MNlL1hdH 0jFnMgjVoUd9EcKctR07yw== 0000950146-97-000414.txt : 19970326 0000950146-97-000414.hdr.sgml : 19970326 ACCESSION NUMBER: 0000950146-97-000414 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970325 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNUM CORP CENTRAL INDEX KEY: 0000795581 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 010405657 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-52741 FILM NUMBER: 97562228 BUSINESS ADDRESS: STREET 1: 2211 CONGRESS ST P612 CITY: PORTLAND STATE: ME ZIP: 04122 BUSINESS PHONE: 207-770-43 MAIL ADDRESS: STREET 1: 2211 CONGRESS STREET CITY: PORTLAND STATE: ME ZIP: 04122 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission file number 1-9254 UNUM Corporation (Exact name of registrant as specified in its charter) ---------------- Delaware 01-0405657 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2211 Congress Street, Portland, Maine 04122 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (207) 770-2211 Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common stock, $0.10 par value New York Stock Exchange Pacific Stock Exchange Preferred stock purchase rights New York Stock Exchange Pacific Stock Exchange 8.8% Junior Subordinated Deferrable Interest New York Stock Exchange Debentures, Series A, Due 2025
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 7, 1997, was approximately $5,384,300,000. As of March 7, 1997, 70,832,485 shares of the registrant's common stock were outstanding. ---------------- DOCUMENTS INCORPORATED BY REFERENCE Information from the Registrant's proxy statement for the Annual Meeting of Shareholders on May 9, 1997, is incorporated by reference into Part III. Exhibit Index appears on page 76. ================================================================================ TABLE OF CONTENTS PART I
Item Page - ---- ---- 1. Business .............................................................................. 1 A. Description of Business ............................................................ 1 B. Disability Insurance Segment ....................................................... 2 C. Special Risk Insurance Segment .................................................... 4 D. Colonial Products Segment ......................................................... 5 E. Retirement Products Segment ....................................................... 5 F. Investments ......................................................................... 6 G. Risk Management and Reinsurance ................................................... 7 H. Reserves ........................................................................... 8 I. Employees ......................................................................... 8 J. Competition ......................................................................... 8 K. Regulation ........................................................................ 8 L. Participation Fund Account .......................................................... 9 2. Properties ........................................................................... 10 3. Legal Proceedings ..................................................................... 10 4. Submission of Matters to a Vote of Security Holders .................................... 10 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters ............ 10 6. Selected Financial Data ............................................................... 11 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 8. Financial Statements and Supplementary Data .......................................... 33 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ... 66 PART III 10. Directors and Executive Officers of the Registrant .................................... 66 A. Directors of the Registrant ......................................................... 66 B. Executive Officers of the Registrant ................................................ 66 11. Executive Compensation ............................................................... 67 12. Security Ownership of Certain Beneficial Owners and Management ........................ 67 13. Certain Relationships and Related Transactions ....................................... 67 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..................... 68 Signatures ........................................................................... 69 Index to Exhibits ..................................................................... 76
PART I Item 1--Business A. Description of Business UNUM Corporation is a Delaware corporation organized in 1985 as an insurance holding company. UNUM Corporation and subsidiaries ("UNUM") are the leading providers of group long term disability insurance ("group LTD") in the United States and the United Kingdom. UNUM is also a major provider of employee benefits, individual disability insurance and special risk reinsurance. UNUM also markets long term care insurance. The operations of the subsidiaries, as described below, account for substantially all of UNUM's consolidated assets and revenues. UNUM Corporation is based in Portland, Maine, and through its affiliates has operations in North America, the United Kingdom and the Pacific Rim. Effective December 31, 1996, UNUM merged Commercial Life Insurance Company ("Commercial Life") into UNUM Life Insurance Company of America ("UNUM America") to accelerate growth of its special risk business, increase its commitment to the Association Group disability business, and to improve operating and capital efficiencies. Following the merger, UNUM America is a leader in special risk insurance and professional association insurance marketing. UNUM conducts its operations in the United States through a number of wholly-owned subsidiaries including: UNUM America, a Maine life insurance company licensed in 49 states and Canada, the leading provider of group disability insurance in the nation and a provider of employee benefits and long term care insurance; First UNUM Life Insurance Company ("First UNUM"), a New York life insurance company; Duncanson & Holt, Inc. ("D&H"), a New York corporation and a leading accident and health reinsurance underwriting manager; Colonial Companies, Inc. ("Colonial Companies"), a Delaware holding company whose wholly-owned subsidiary, Colonial Life & Accident Insurance Company ("Colonial"), is a leader in payroll-deducted voluntary employee benefits offered to employees at their worksites; and UNUM Holding Company, a Delaware corporation. Through UNUM Holding Company, UNUM Corporation also owns Claims Service International, Inc., a Delaware corporation, which provides claims administration services, and UNUM Sales Corporation, a Delaware corporation. As of December 31, 1996, UNUM Sales Corporation is no longer registered as a licensed broker-dealer coinciding with the sale of UNUM America and First UNUM's respective group tax-sheltered annuity ("TSA") businesses as discussed below. UNUM Corporation also holds all of the outstanding capital stock of UNUM European Holding Company, which is incorporated in the United Kingdom. UNUM's United Kingdom operations are conducted by UNUM Limited, which is the United Kingdom's leader in group disability insurance and a wholly-owned subsidiary of UNUM European Holding Company, and by Duncanson & Holt Europe Ltd., a wholly-owned subsidiary of D&H. UNUM's Japanese operations are conducted through a wholly-owned subsidiary, UNUM Japan Accident Insurance Company Limited, a Japanese non-life insurance company, which was established in 1994. On October 1, 1996, UNUM America and First UNUM closed the sale of their respective TSA businesses to The Lincoln National Life Insurance Company and Lincoln Life & Annuity Company of New York ("Lincoln"), both subsidiaries of Lincoln National Corporation. The sale involved approximately 1,700 group contractholders and assets under management of approximately $3.3 billion. The purchase price (ceding commission) at closing was approximately $71 million. The contracts have initially been reinsured on an indemnity basis. Upon consent of the TSA contractholders and/or participants, the contracts will be considered reinsured on an assumption basis, legally releasing UNUM America and First UNUM from future contractual obligation to the respective contractholders and/or participants. On March 26, 1993, UNUM merged with Colonial Companies. Under the merger agreement, UNUM exchanged 0.731 shares of its common stock for each share of Colonial Companies Class A and Class B common stock outstanding on March 26, 1993. UNUM issued approximately 11.4 million shares of common stock from treasury in connection with the merger. In addition, outstanding options to acquire shares of Colonial Companies Class B common stock were converted into options to acquire shares of UNUM common stock. The merger was accounted for as a pooling of interests. To more clearly reflect UNUM's management of its businesses and to more appropriately group its product portfolios, UNUM began reporting its operations, effective January 1, 1995, principally in four business segments: 1 Disability Insurance, Special Risk Insurance, Colonial Products and Retirement Products. Corporate includes transactions that are generally non-insurance related and interest expense on corporate borrowings. For comparative purposes, 1994 information was previously restated to reflect reporting in these segments. Refer to Item 7 and Item 8 (Note 16) for more information. B. Disability Insurance Segment The Disability Insurance segment, which in 1996 accounted for 59.0% of UNUM's revenues and 63.0% of its income before income taxes, includes disability products offered in North America, the United Kingdom and Japan including: group LTD, group short term disability ("group STD"), individual disability, Association Group disability, disability reinsurance operations and long term care insurance. UNUM America and First UNUM: UNUM America and First UNUM market their group and individual insurance products, which are included in the Disability Insurance and Special Risk Insurance segments, through a network of 35 offices in the United States and Canada which utilize brokers to distribute these products. As of December 31, 1996, these branch offices were organized into five regions and were staffed with approximately 870 management, sales, service and administrative personnel. Group Long Term Disability UNUM America and First UNUM's group LTD product is the Disability Insurance segment's principal product. UNUM America and First UNUM target sales of group LTD to executive, administrative and management personnel, and other professionals, such as doctors, attorneys, accountants and engineers. Since 1976, UNUM America and First UNUM combined have been the United States' leading provider of group LTD according to EMPLOYEE BENEFIT PLAN REVIEW, a recognized industry publication. Group LTD provides employees with insurance coverage for loss of income in the event of inability to work due to sickness or injury. Most policies begin providing benefits following 90- or 180-day waiting periods and continue providing benefits until the employee reaches age 65-70. Group LTD benefits are paid monthly and generally are limited to two-thirds of the employee's earned income up to a specified maximum benefit. Premiums for group LTD insurance are based upon the expected mortality, morbidity and persistency of the insured group, as well as assumptions concerning operating expenses and investment income. The group LTD product is sold primarily on a basis that permits annual repricing. This enables UNUM to adjust the pricing of its products to more closely match the underlying claim experience and interest rate environment. Individual Disability Individual disability products provide coverage for loss of income for professionals, corporate executives, business owners and administrative support personnel in the event of disability. As reported in the Life Insurance Marketing Research Association's 1995 INDIVIDUAL HEALTH ISSUES AND INFORCE SURVEY for the United States and Canada, the most recent available data, UNUM America and First UNUM combined were the fourth largest provider of individual disability income policies measured by inforce premium. On October 23, 1996, UNUM announced the execution of a definitive reinsurance agreement between UNUM America and Centre Life Reinsurance Limited ("Centre Re"), a Bermuda based reinsurance specialist, for reinsurance coverage of the active life reserves of UNUM America's existing United States non-cancellable individual disability ("ID") block of business. This agreement does not reinsure any claims incurred prior to January 1, 1996. The agreement follows UNUM's announcement in late 1994, as discussed below, that it would no longer market the non-cancellable form of ID coverage in the United States. The agreement was effective December 31, 1996. For a detailed discussion of the reinsurance agreement refer to Item 8 (Note 6). UNUM announced in November 1994 that it would discontinue sales of the traditional, fixed price, non-cancellable individual disability product ("non-cancellable product") in the United States upon introduction of a new disability product in each state. During the second quarter of 1995, UNUM introduced the Lifelong Disability Protection ("LDP") product, which replaces the non-cancellable product. LDP policies are issued on a "guaranteed renewable" basis, which means that UNUM cannot refuse to renew any policy, but it does reserve the right to 2 increase premiums for inforce policies. This right to change premiums is or may be subject to various state insurance department rules, regulations, and approvals. The LDP product provides benefits and transitional support for moderate disabilities, while providing richer benefits for severe disabilities. Various options are available that permit tailoring of insurance coverage to the specific client's needs. The most common options include up to 60% base income replacement coverage, an option to purchase up to 40% further coverage in the event of catastrophic injury or illness involving the loss of two or more Activities of Daily Living, and an automatic option to convert to a long term care policy at retirement age. Following the approval of the LDP product, sales of the non-cancellable product have been discontinued in the United States. UNUM also markets buy/sell and key person coverage and policies that provide reimbursement for business overhead expenses incurred during a period of disability. Individual disability insurance premium rates are based on expected mortality, morbidity and persistency, as well as assumptions concerning policy related expenses, inflation and investment income. Following the completion of its merger with Commercial Life, UNUM America is a leading provider of disability insurance in the association marketplace, offering disability income coverage to members of professional associations. UNUM expects to introduce new conditionally renewable products for sale through its association channel in the first quarter of 1997, subject to regulatory approvals. As a result of the merger, UNUM now reports the operations of the Association Group disability business with the individual disability business. Group Short Term Disability Group STD provides employees with insurance coverage for loss of income in the event of inability to work due to sickness or injury. Most of these policies begin providing benefits immediately for accidents, or following a one-week waiting period for sickness, and continue providing benefits for up to 26 weeks. Group STD benefits are paid weekly and generally are limited to 60% of the employee's earned income up to a specified maximum benefit. As reported by EMPLOYEE BENEFIT PLAN REVIEW, UNUM America and First UNUM combined were the top provider of group STD for 1995, based on premium and number of inforce lives. Long Term Care UNUM America and First UNUM market long term care ("LTC") insurance to employer groups and individuals. The group LTC product is offered on an employer or employee-paid basis, and employer groups may offer coverage to retirees, spouses, parents and grandparents, in addition to the employee. LTC provides insurance coverage for nursing home and home care costs when the insured sustains the loss of two or more Activities of Daily Living or sustains cognitive impairment. LTD Reinsurance UNUM America assumes certain insurance risks through long term disability reinsurance operations managed by Duncanson & Holt Services Inc., a leading manager of group LTD reinsurance in the United States and wholly-owned subsidiary of D&H. UNUM Limited: UNUM Limited was the leading provider for 1995 of group LTD insurance in the United Kingdom, as reported by EMPLOYERS RE. INTERNATIONAL. UNUM Limited targets group LTD sales to executive, administrative and management personnel, and other professionals. These products are marketed through a network of independent brokers. UNUM Limited's group LTD products provide employees with insurance coverage for loss of income in the event of inability to work due to sickness or injury. UNUM Limited also markets individual disability insurance through brokers and agents to self-employed individuals and those not covered under group policies. Premiums for group LTD and individual disability insurance are based upon the expected mortality, morbidity and persistency of the insured group, as well as assumptions concerning operating expenses and investment income. In May 1994, UNUM Limited assumed the management of the group risk portfolio of Windsor Life Assurance Company Limited ("Windsor Life"), which included group LTD and group life products. Windsor Life was the third largest group LTD provider in the United Kingdom in 1993, as reported by EMPLOYERS RE. INTERNATIONAL. 3 UNUM Japan: On June 20, 1994, the Japanese Ministry of Finance granted UNUM a provisional license that allowed UNUM to establish a non-life insurance company, UNUM Japan Accident Insurance Company Limited ("UNUM Japan"), to market disability and other accident products in Japan. UNUM Japan has subsequently received an official license. UNUM Japan targets sales of group and individual long term disability products ("LTD products") to executive, administrative and management personnel, and other professionals. These products are marketed through contracted independent agents and brokers. The LTD products provide employees with insurance coverage for loss of income in the event of inability to work due to sickness or injury. Most of these policies begin providing benefits following 90- or 365-day waiting periods and continue providing benefits until the employee reaches age 65-70. The benefits of the LTD products are paid monthly and generally are limited to 60% of the employee's earned income up to a specified maximum benefit. Premiums for LTD insurance are based upon the expected mortality, morbidity and persistency of the insured group, as well as assumptions concerning operating expenses and investment income. UNUM Japan also acquires premiums as a reinsurer of LTD products in Japan and Hong Kong. These reinsurance treaty arrangements are mostly quota share coinsurance. The direct insurer is subject to compliance with UNUM Japan's risk management standards for pricing, underwriting, and claims management. Refer to Item 7 and Item 8 (Note 16) under the caption "Disability Insurance Segment" for more information. C. Special Risk Insurance Segment The Special Risk Insurance segment in 1996 accounted for 20.1% of UNUM's revenues and 23.2% of its income before income taxes. The Special Risk Insurance segment includes group life, special risk accident insurance, non-disability reinsurance operations, reinsurance underwriting management operations and other special risk insurance products. The Special Risk Insurance segment's group insurance products are sold primarily on a basis that permits annual repricing. This enables UNUM to adjust the pricing of its products to more closely match the underlying claim experience and interest rate environment. UNUM America and First UNUM's group life insurance products provide term insurance to a broad range of employees. As reported by EMPLOYEE BENEFIT PLAN REVIEW for 1995, UNUM America and First UNUM combined were the seventh largest writer of group life insurance in the United States, based on number of inforce contracts. UNUM America and First UNUM also offer group universal life insurance on a payroll deduction basis through a network of independent brokers and specialty agents, and group accidental death and dismemberment riders. In addition, term life insurance is sold through the association group channel. Following the completion of its merger with Commercial Life, UNUM America is a leading provider of group special risk accident products, including group travel and voluntary accident insurance. UNUM America markets special risk products, which are offered on an employer or employee-paid basis, through a network of independent brokers and specialty agents. On July 30, 1992, UNUM purchased D&H, a leading accident and health reinsurance underwriting manager. As a reinsurance underwriting manager, D&H is authorized to conduct reinsurance business on behalf of the member companies participating in its reinsurance facilities. D&H provides pool management services that may include marketing, underwriting, administration, claims payment and actuarial services for client companies. D&H and its subsidiaries do not bear any insurance risk, with the exception of Duncanson & Holt Underwriters Ltd., a wholly- owned subsidiary of Duncanson & Holt Europe Ltd. On May 3, 1996, D&H acquired three associated reinsurance underwriting managers specializing in accident and health business. D&H has offices throughout the United States and in London, Toronto, Bermuda and Singapore. During 1995, Duncanson & Holt Europe Ltd., an affiliate of D&H based in the United Kingdom, was authorized by Lloyd's of London to establish two new Lloyd's Managing Agents and to acquire a third existing Lloyd's Managing Agent. Each manages a syndicate that underwrites primarily personal accident and other "non-marine" classes of business at Lloyd's of London. The non-disability reinsurance operations include UNUM America's participation in reinsurance facilities managed by D&H, facilities managed by non-related companies and direct reinsurance arrangements primarily for 4 accident and health, long term care and special risks. As a member company in reinsurance facilities, UNUM America assumes a share of the insurance risk of the facility. Refer to Item 7 and Item 8 (Note 16) under the caption "Special Risk Insurance Segment" for more information. D. Colonial Products Segment The Colonial Products segment in 1996 accounted for 13.5% of UNUM's revenues and 27.0% of its income before income taxes. The Colonial Products segment includes Colonial and affiliates. Colonial markets a broad line of payroll-deducted, voluntary benefits to employees at their worksites, while focusing on accident and sickness, cancer and life products. Colonial markets its products nationwide primarily through a 7,900-member independent contractor sales force. Colonial's accident policies generally provide benefit payments for disability income, death, dismemberment or major injury. Accident policies are designed to supplement other benefits available through Social Security, workers' compensation, and other insurance plans. Colonial offers a wide range of life insurance products, with universal life and whole life accounting for most of the life insurance sold. Colonial's cancer policies are designed to provide payments for hospitalization and scheduled medical benefits. All of Colonial's insurance policies are issued on a nonparticipating basis. More than 98% of Colonial's premiums for 1996 were derived from policies marketed to employees at their worksites, with premiums in most cases to be collected through payroll deduction. Such policies are issued on a "guaranteed renewable" basis, which means that Colonial cannot refuse to renew any policy, but it does reserve the right on a product-by-product basis to increase premiums for inforce policies. This right to change premiums is or may be subject to various state insurance department rules, regulations, and approvals. Colonial markets its accident and health products as qualified fringe benefits that can be purchased with pretax dollars as part of a flexible benefits program pursuant to Section 125 of the Internal Revenue Code. In 1996, premiums from sales to employees participating in such programs accounted for approximately 50% of total premiums. A flexible benefits program assists employers in managing their benefits and compensation packages and provides policyholders with the ability to choose the benefits that best meet their needs. Although Congress might change the tax laws to limit or eliminate fringe benefits available on a pretax basis and such a change could limit or eliminate Colonial's ability to continue marketing its products in this way, Colonial believes its products provide policyholders value, which will remain even if the tax advantages offered by flexible benefit programs are eliminated. Colonial Companies' subsidiary, BenefitAmerica, Inc. ("BenefitAmerica"), offers employers administrative services for their employee benefit programs. The services offered by BenefitAmerica include administration of flexible spending accounts, which are offered under an employer's flexible benefits plan pursuant to Section 125 of the Internal Revenue Code, as well as other administrative services to those plans. The services offered by BenefitAmerica complement the services and products offered to employers by Colonial. Refer to Item 7 and Item 8 (Note 16) under the caption "Colonial Products Segment" for more information. E. Retirement Products Segment The Retirement Products segment accounted for 7.0% of UNUM's revenues and 0.4% of its income before income taxes in 1996. This segment includes UNUM America and First UNUM's tax-sheltered annuities ("TSA"), guaranteed investment contracts, deposit administration accounts, 401(k) plans, individual life and group medical insurance, all of which are no longer actively marketed. On October 1, 1996, UNUM America and First UNUM closed the sale of their respective TSA businesses to The Lincoln National Life Insurance Company and Lincoln Life & Annuity Company of New York ("Lincoln"), both subsidiaries of Lincoln National Corporation. The sale involved approximately 1,700 group contractholders and assets under management of approximately $3.3 billion. The purchase price (ceding commission) at closing was approximately $71 million. The contracts have initially been reinsured on an indemnity basis. Upon consent of the TSA contractholders and/or participants, the contracts will be considered reinsured on an assumption basis, legally releasing UNUM America and First UNUM from future contractual obligation to the respective contractholders and/or participants. Refer to Item 7 and Item 8 (Note 16) under the caption "Retirement Products Segment" for more information. 5 F. Investments Refer to Item 7 under the caption "Investments" for more information. Additional information about UNUM's mortgage loan portfolio is provided below. Effective January 1, 1996, UNUM began using the categories for geographic region and property type established by the American Council of Life Insurance. For comparative purposes, 1995 information has been restated in the tables below to reflect this change. UNUM management believes that its mortgage loan portfolio is well diversified geographically and among property types. The mortgage loan portfolio percentages by geographic region and property type at December 31, 1996, and 1995, were as follows: Geographic Region 1996 1995 ---- ---- New England ............ 12.4% 12.3% Mid-Atlantic ............ 12.7 11.3 South Atlantic ......... 16.1 16.6 Mountain ............... 7.5 7.9 Pacific .................. 15.7 14.1 West South Central ...... 6.8 7.8 East South Central ...... 5.4 5.6 West North Central ...... 11.3 10.1 East North Central ...... 12.0 14.2 Other .................. 0.1 0.1 ------ ------ Total .................. 100.0% 100.0% ====== ====== Property Type 1996 1995 ---- ---- Office Building ......... 26.1% 28.2% Retail ............... 33.0 33.5 Industrial ............ 27.1 23.3 Apartment ............ 8.2 7.1 Hotel/Motel ............ 3.8 5.6 1-4 Family ............ 0.1 0.1 Other Commercial ...... 1.7 2.2 ------ ------ Total ............... 100% 100% ====== ====== Mortgage loans delinquent 60 days or more on a contract delinquency basis by geographic region and property type were as follows at December 31, 1996, and 1995 (dollars in millions): Geographic Region 1996 1995 ---- ---- Mid-Atlantic ............ $3.5 $-- East North Central ...... 2.1 2.8 ----- ---- Total .................. $5.6 $2.8 ===== ==== Property Type 1996 1995 ---- ---- Office Building ...... $-- $2.8 Retail ............... 5.6 -- ---- ----- Total ............... $5.6 $2.8 ==== ===== Effective January 1, 1995, UNUM adopted Financial Accounting Standard ("FAS") No. 114, "Accounting by Creditors for Impairment of a Loan," which defined the principles to measure and record a loan when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans by geographic region and property type were as follows at December 31, 1996, and 1995 (dollars in millions): Geographic Region 1996 1995 ---- ---- New England ............ $14.6 $14.9 Mid-Atlantic ............ 8.4 3.6 South Atlantic ......... 9.1 11.7 Mountain ............... 8.8 12.3 West South Central ...... 4.8 4.8 West North Central ...... 2.6 -- East North Central ...... 2.1 2.8 ------ ------ Total .................. $50.4 $50.1 ====== ====== Property Type 1996 1995 ---- ---- Office Building ...... $22.0 $28.7 Retail ............... 18.2 16.0 Industrial ............ 10.2 5.4 ------ ------ Total ............... $50.4 $50.1 ====== ====== 6 Mortgage loans that were restructured prior to the adoption of FAS 114, by geographic region and property type were as follows at December 31, 1996, and 1995 (dollars in millions): Geographic Region 1996 1995 ---- ---- New England ............ $0.7 $3.3 South Atlantic ......... 13.3 13.5 Mountain ............... 7.7 7.8 Pacific .................. 7.9 9.6 West South Central ...... 2.5 2.6 West North Central ...... 8.7 8.7 East North Central ...... 14.0 14.4 ----- ----- Total .................. $54.8 $59.9 ===== ===== Property Type 1996 1995 ---- ---- Office Building ...... $24.3 $25.0 Retail ............... 12.5 12.6 Industrial ............ 5.8 5.8 Apartment ............ 4.4 7.0 Hotel/Motel ............ 7.8 7.9 Other Commercial ...... -- 1.6 ------ ------ Total ............... $54.8 $59.9 ====== ====== G. Risk Management and Reinsurance Risk management, which includes product design, pricing, underwriting, reserving and benefits management, involves a determination of the type and amount of risk that an insurer is willing to accept, administration and evaluation of business inforce, and control of claims. UNUM has underwriters organized within business segments who evaluate policy applications on the basis of information provided by the applicant and other sources. UNUM reinsures with other companies portions of the insurance risk it has underwritten. Reinsurance allows UNUM to sell policies with higher benefits than the entire risk that UNUM is willing to assume. UNUM remains liable to the insured for the payment of policy benefits if the reinsurers cannot meet their obligations under the reinsurance agreements. Within the Disability Insurance and Special Risk Insurance segments, UNUM America and First UNUM have underwriters for group disability, individual disability, Association Group disability, group life, long term care, and accidental death and dismemberment products. These underwriting functions are aligned geographically with UNUM America and First UNUM's five sales regions. Quotes for prospective customers are based upon UNUM America and First UNUM's experience with profitability and persistency of the respective employer's risk category. The maximum group LTD, group STD, Association Group disability and LTC monthly benefit varies, but the usual maximum monthly amount available is $35,000, $10,000, $10,000 and $6,000, respectively. For group life insurance products, UNUM retains up to $750,000 per individual life and reinsures the balance with other insurance carriers. In addition, UNUM America reinsures the risk on its accidental death and dismemberment contracts that exceeds $400,000 on any one life. During 1996, UNUM America entered into an agreement for reinsurance coverage of the active life reserves of UNUM America's existing United States non-cancellable individual disability block of business. For more information on the reinsurance agreement refer to Item 1B under the caption "Individual Disability." During 1995, UNUM America and First UNUM introduced the guaranteed renewable Lifelong Disability Protection product ("LDP"), following the decision in late 1994 to discontinue sales of the traditional fixed price, non-cancellable individual disability insurance product in the United States. At the end of 1996, the LDP product has been approved in all 50 states and the District of Columbia. UNUM requires medical examinations, financial data, and other information to make a decision on the acceptability of the individual risk and to appropriately classify an applicant for individual disability insurance products. On new sales of the LDP product, UNUM retains up to $8,000 basic monthly indemnity per life for personal disability coverages. UNUM also retains up to $20,000 per life for business overhead expense coverages and $500,000 per life for buy/sell coverages. The financial and medical underwriting areas of UNUM Limited handle the underwriting of group and individual disability policies and group life policies. The maximum yearly initial benefit for group LTD is 326,000 pounds sterling. UNUM Limited retains 75,000 pounds sterling of this risk and reinsures the balance. The maximum yearly initial benefit for individual disability insurance is 125,000 pounds sterling, and amounts over 40,000 pounds sterling per annum are reinsured. On group life business, UNUM Limited retains 60% of the risk up to a maximum of 225,000 pounds sterling per individual life. UNUM (except for Colonial) reinsures the risk of individual life insurance contracts that exceed $425,000 on any one life. Colonial limits its risk for death and dismemberment benefits to $100,000 per life. During 1996, 7 Colonial entered into an agreement to reinsure a majority of the mortality risk on new and inforce universal life business, for which Colonial retains 20% of the risk under $100,000 per individual life. Colonial also has reinsurance on its cancer insurance products that provides coverage for claim payments in excess of $55,000 in any one year, per claimant, up to a lifetime maximum of $1 million per claimant. In addition to the reinsurance arrangements above, UNUM is covered by catastrophe reinsurance, which provides additional protection against aggregate losses in excess of $1 million up to a maximum of $250 million. This protection is activated whenever one catastrophic event causes the disability and/or death of three or more lives insured under UNUM's disability, life, or personal accident contracts. Reinsurance premiums assumed and ceded for the year ended December 31, 1996, were $252.9 million and $106.4 million, respectively. No current or planned reinsurance activity is expected to have a significant impact on the ability of UNUM to underwrite additional insurance. H. Reserves The reserves reported in the consolidated financial statements have been computed in accordance with generally accepted accounting principles ("GAAP"). These reserve balances generally differ from those specified by the laws of the various states and carried in the statutory financial statements. The differences between GAAP and statutory reserves arise from the use of different mortality, morbidity, interest, expense and lapse assumptions. Pursuant to insurance laws of the states of Maine, New York, and South Carolina, the United Kingdom and Japan, UNUM's insurance subsidiaries (UNUM America, First UNUM, Colonial Life, UNUM Limited and UNUM Japan, respectively) set up statutory reserves, carried as liabilities, to meet obligations on their various policies. These statutory reserves are amounts that, together with premiums to be received and interest on such reserves at assumed rates, are calculated to be sufficient to meet the policy and contract obligations of UNUM's insurance subsidiaries. Pursuant to federal insurance laws of Canada, UNUM America has established regulatory reserves to meet the obligations of policies written in its Canadian branch. Statutory, GAAP and regulatory reserves are based on UNUM's insurance subsidiaries' experience as adjusted to provide for possible adverse deviations. These estimates are periodically reviewed and compared to actual experience. The assumptions are revised when it is determined that future expected experience differs from the assumed estimates. I. Employees At December 31, 1996, UNUM had approximately 6,700 full-time employees. UNUM does not have collective bargaining agreements with employees. J. Competition The principal competitive factors affecting UNUM's business are reputation, financial strength, quality of service, risk management expertise, distribution, product design, and price. There is competition among insurance companies for the types of group and individual insurance products sold by UNUM. At the end of 1996, there were more than 1,700 legal reserve life insurance companies in the United States and Canada and life assurance offices in the United Kingdom. These companies may offer insurance products similar to those marketed by UNUM. Group insurance is highly competitive because of the large number of insurance companies and other entities offering these products. K. Regulation UNUM's insurance subsidiaries are subject to regulation and supervision in the jurisdictions in which they do business. Although the extent of such regulation varies, U.S. state, Canadian, United Kingdom and Japanese insurance laws generally establish supervisory agencies, such as state insurance departments, the Office of the Superintendent of Financial Institutions ("OSFI"), The Department of Trade and Industry ("DTI") and the Ministry of Finance ("MOF"), respectively, with broad administrative powers. These powers relate chiefly to the granting and revocation of the licenses to transact business, and establishing reserve requirements and the form and content of required financial statements. Such powers also include the licensing of agents in the U.S. and the approval of policy forms in the U.S. and Japan. UNUM's insurance operations and subsidiaries must meet the standards and tests for its investments promulgated by insurance laws and regulations of Maine, New York, South Carolina, Canada, the United Kingdom and Japan, as applicable. 8 UNUM's United States domiciled insurance subsidiaries are required to file quarterly and annual statements with the various insurance departments in state jurisdictions in which they do business. These statements comply with the rules of the National Association of Insurance Commissioners ("NAIC"). UNUM's insurance subsidiaries are examined periodically by examiners from Maine, New York and South Carolina, and from other states (on an "association" or "zone" basis) in which they are licensed to do business. UNUM's insurance branch operation in Canada is periodically examined by Canadian insurance regulatory authorities and is required to file annual reports that comply with the insurance laws of Canada and with the rules of the OSFI of the Canadian Federal government and each of the provinces. UNUM's United Kingdom subsidiary is required to file financial statements annually with the DTI, in accordance with United Kingdom laws and regulations. UNUM Japan is required to file financial statements annually with the MOF, in accordance with Japanese laws and regulations. UNUM's insurance subsidiaries operate under insurance laws, which require that they establish and carry, as liabilities, actuarial reserves to meet their obligations on their disability, life, accident and health policies, and annuities. These reserves are verified periodically by various regulators. UNUM's reinsurance underwriting manager, D&H, is a licensed reinsurance intermediary in New York. It is subject to regulation in New York and other states where it does business. Duncanson & Holt Underwriters, Ltd., a subsidiary of D&H, is a corporate member of Lloyd's of London and is subject to rules applicable to such members. The laws of the State of Maine require periodic registration and reporting by insurance companies domiciled within its jurisdiction, which control or are controlled by other corporations or persons. This constitutes, by definition, a holding company system. UNUM America is domiciled in Maine and is subject to these laws. New York, which is the domiciliary state of First UNUM, and South Carolina, which is the domiciliary state of Colonial, have similar laws. Accordingly, the UNUM insurance subsidiaries are registered as members of the UNUM holding company system in the states of Maine, New York and South Carolina. The statutes of these states require periodic disclosure concerning the ultimate controlling person and intercorporate transactions within the holding company system, some of which require prior approval. Effective December 31, 1991, UNUM America merged with two of UNUM Corporation's wholly-owned Maine life insurance subsidiaries, UNUM Life Insurance Company ("UNUM Life") and UNUM Pension and Insurance Company ("UPIC"), with UNUM America remaining as the surviving corporation. In connection with the merger of UNUM Life and UPIC into UNUM America, UNUM Life ceased to maintain its licensing status in the State of New York effective December 31, 1991, with all future New York business being transacted by First UNUM. As a condition of New York regulatory approval, UNUM America agreed to maintain a security deposit in the State of New York equal to 102% of outstanding statutory liabilities to New York policyholders, insureds and claimants of UNUM Life. The security deposit consists of certain cash and invested assets. An initial deposit was made in February 1992 and, at December 31, 1996, the required deposit was $313.5 million. UNUM America has the ability to withdraw assets from this account and to substitute other assets at its discretion. The balance of the security deposit will be reviewed and adjusted at least annually based upon the outstanding liabilities described above. L. Participation Fund Account Participating policies issued prior to November 14, 1986, by the former Union Mutual Life Insurance Company ("Union Mutual") will remain participating as long as they remain in force. A Participation Fund Account ("PFA") has been established for the sole benefit of all of Union Mutual's individual participating life and annuity policies and contracts. At December 31, 1996, the PFA had $354.0 million in assets, which were held by UNUM America. UNUM agreed to pay certain expenses associated with the PFA and at December 31, 1996, the reserve for the present value of such expenses was $13.9 million. PFA assets, investment earnings and income from operations are not available to UNUM America or UNUM during the operation or upon the termination of the PFA. In the unlikely event that the assets of the PFA are not adequate to provide for policyholder benefits (exclusive of dividends, which are not guaranteed), UNUM America would be required to provide for any shortfall, and such amounts, if any, would reduce earnings of UNUM America and UNUM. 9 All operating data of the individual participating life and annuity contracts has been excluded from the Consolidated Statements of Income and all other operating data included in this report unless otherwise noted. The assets and liabilities associated with the participating business are included in UNUM's Consolidated Balance Sheets. Item 2--Properties UNUM owns home office property consisting of six office buildings and four service buildings located throughout the Portland, Maine, area. UNUM also owns an office building in the United Kingdom, which is the home office of UNUM Limited. The home office of the Colonial Companies, located in Columbia, South Carolina, is also owned by UNUM. In addition, UNUM leases, on periods principally from three to six years, office space for use by its home office, affiliates, and sales forces. Item 3--Legal Proceedings In the normal course of its business operations, UNUM is involved in litigation from time to time with claimants, beneficiaries and others, and a number of lawsuits were pending at December 31, 1996. In some instances, these proceedings include claims for punitive damages and similar types of relief in unspecified or substantial amounts, in addition to amounts for alleged contractual liability or other compensatory damages. In the opinion of management, the ultimate liability, if any, arising from this litigation is not expected to have a material adverse effect on the consolidated financial position or the consolidated operating results of UNUM. On December 29, 1993, UNUM filed a suit in the United States District Court for the District of Maine, seeking a federal income tax refund. The suit is based on a claim for a deduction in certain prior tax years, for $652 million in cash and stock distributed to policyholders in connection with the 1986 conversion of Union Mutual Life Insurance Company to a stock company. UNUM has fully paid, and provided for in prior years' financial statements, the tax at issue in this litigation. On May 23, 1996, the District Court issued its decision that the distribution in question was not a deductible expenditure. UNUM believes its claims are meritorious, and has appealed the decision to the United States Court of Appeals for the First Circuit. The ultimate recovery, if any, cannot be determined at this time. Item 4--Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of shareholders, through solicitation of proxies or otherwise, during the fourth quarter of 1996. PART II Item 5--Market for the Registrant's Common Equity and Related Stockholder Matters The principal markets in which UNUM's common stock is traded are the New York Stock Exchange and the Pacific Stock Exchange. UNUM's ticker symbol is "UNM." As of December 31, 1996, there were 23,303 shareholders of record of common stock. Information concerning restrictions on the ability of UNUM's subsidiaries to transfer funds to UNUM in the form of cash dividends is described in Item 8 (Note 13). The market price (as quoted by the New York Stock Exchange) and cash dividends paid, per share of UNUM's common stock, by calendar quarter for the past two years were as follows:
1996 1995 --------------------------------------------------- ------------------------------------------------ 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q ---------- ---------- ---------- ---------- ---------- ---------- ---------- --------- High ............... $73.500 $66.000 $63.000 $61.875 $56.500 $54.000 $48.000 $46.000 Low ............... $61.000 $56.750 $55.500 $54.750 $50.625 $45.375 $39.875 $37.750 Close ............... $72.250 $64.125 $62.250 $59.500 $55.000 $52.750 $46.875 $45.250 Dividend Paid ...... $ 0.275 $ 0.275 $ 0.275 $ 0.265 $ 0.265 $ 0.265 $ 0.265 $ 0.240
10 Item 6--Selected Financial Data The following should be read in conjunction with UNUM's Consolidated Financial Statements and related notes reported in Item 8. UNUM CORPORATION AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA (Dollars in millions, except per common share data)
Year Ended December 31, ---------------------------------------------------- 1996 1995 1994 1993 ----------- ----------- ----------- ---------------- Income Statement Data Revenues: Premiums and other income (expense): Disability Insurance Segment ...... $1,917.7 $1,879.9 $1,716.2 $ 1,547.9 Special Risk Insurance Segment ... 755.4 702.3 607.1 559.4 Colonial Products Segment ......... 498.2 475.1 441.3 407.4 Retirement Products Segment ...... 65.8 34.1 31.4 42.5 Corporate ........................ -- 0.1 0.8 -- -------- -------- -------- --------- Total premiums and other income ... 3,237.1 3,091.5 2,796.8 2,557.2 -------- -------- -------- --------- Net investment income (expense): (a) Disability Insurance Segment ...... 468.5 592.9 400.3 369.8 Special Risk Insurance Segment ... 56.5 48.4 40.7 34.8 Colonial Products Segment ......... 47.3 52.2 32.6 41.4 Retirement Products Segment ...... 217.2 323.7 338.0 387.6 Corporate ........................ 16.1 14.2 4.2 6.2 -------- -------- -------- --------- Total net investment income ...... 805.6 1,031.4 815.8 839.8 -------- -------- -------- --------- Total revenues ..................... 4,042.7 4,122.9 3,612.6 3,397.0 -------- -------- -------- --------- Benefits and expenses: Disability Insurance Segment ...... 2,170.9 2,255.8 2,060.3 1,603.6 Special Risk Insurance Segment ... 732.7 690.4 581.9 555.3 Colonial Products Segment ......... 453.1 439.6 411.2 378.4 Retirement Products Segment ...... 281.6 312.3 327.4 375.8 Corporate ........................ 62.8 42.9 33.2 23.6 -------- -------- -------- --------- Total benefits and expenses ...... 3,701.1 3,741.0 3,414.0 2,936.7 -------- -------- -------- --------- Income (loss) before income taxes and cumulative effects of accounting changes: Disability Insurance Segment ...... 215.3 217.0 56.2 314.1 Special Risk Insurance Segment ... 79.2 60.3 65.9 38.9 Colonial Products Segment ......... 92.4 87.7 62.7 70.4 Retirement Products Segment ...... 1.4 45.5 42.0 54.3 Corporate ........................ (46.7) (28.6) (28.2) (17.4) -------- -------- -------- --------- Total income before income taxes and cumulative effects of accounting changes ........................... 341.6 381.9 198.6 460.3 -------- -------- -------- --------- Income taxes (credit) ............... 103.6 100.8 43.9 148.3 -------- -------- -------- --------- Cumulative effects of accounting changes ........................... -- -- -- (12.1)(b) -------- -------- -------- --------- Net income ........................ $ 238.0 $ 281.1 $ 154.7 $ 299.9 ======== ======== ======== ========= Per common share: Net income ........................ $ 3.26 $ 3.87 $ 2.09 $ 3.81(b) Dividends paid ..................... $ 1.09 $ 1.035 $ 0.92 $ 0.765 ======== ======== ======== ========= Year Ended December 31, -------------------------------------------------------------------- 1992 1991 1990 1989 1988 1987 ----------- ----------- ----------- ---------- --------- ----------- Income Statement Data Revenues: Premiums and other income (expense): Disability Insurance Segment ...... $1,339.8 $1,214.6 $1,004.7 $ 803.8 $ 681.7 $ 630.8 Special Risk Insurance Segment ... 432.8 368.5 347.0 306.2 176.3 165.7 Colonial Products Segment ......... 371.9 325.4 281.1 241.0 216.7 192.1 Retirement Products Segment ...... 52.5 64.4 92.8 130.2 180.0 238.5 Corporate ........................ 0.8 -- (0.1) 0.2 -- 0.9 -------- -------- -------- ------- -------- ------- Total premiums and other income ... 2,197.8 1,972.9 1,725.5 1,481.4 1,254.7 1,228.0 -------- -------- -------- ------- -------- ------- Net investment income (expense): (a) Disability Insurance Segment ...... 370.5 333.8 285.4 239.4 193.1 167.8 Special Risk Insurance Segment ... 32.2 26.5 23.4 24.5 12.5 12.1 Colonial Products Segment ......... 35.4 38.5 25.2 26.7 22.3 19.0 Retirement Products Segment ...... 408.7 411.3 426.1 424.0 413.2 418.2 Corporate ........................ 3.9 1.5 (9.0) 5.9 20.3 19.1 -------- -------- -------- ------- -------- ------- Total net investment income ...... 850.7 811.6 751.1 720.5 661.4 636.2 -------- -------- -------- ------- -------- ------- Total revenues ..................... 3,048.5 2,784.5 2,476.6 2,201.9 1,916.1 1,864.2 -------- -------- -------- ------- -------- ------- Benefits and expenses: Disability Insurance Segment ...... 1,446.6 1,306.4 1,093.7 878.8 756.0 701.4 Special Risk Insurance Segment ... 418.7 355.2 342.2 312.9 180.4 172.0 Colonial Products Segment ......... 346.8 306.4 259.6 225.5 201.1 178.6 Retirement Products Segment ...... 427.5 484.4 491.6 535.9 580.1 685.0 Corporate ........................ 10.4 12.5 10.8 12.3 9.5 15.7 -------- -------- -------- ------- -------- ------- Total benefits and expenses ...... 2,650.0 2,464.9 2,197.9 1,965.4 1,727.1 1,752.7 -------- -------- -------- ------- -------- ------- Income (loss) before income taxes and cumulative effects of accounting changes: Disability Insurance Segment ...... 263.7 242.0 196.4 164.4 118.8 97.2 Special Risk Insurance Segment ... 46.3 39.8 28.2 17.8 8.4 5.8 Colonial Products Segment ......... 60.5 57.5 46.7 42.2 37.9 32.5 Retirement Products Segment ...... 33.7 (8.7) 27.3 18.3 13.1 (28.3) Corporate ........................ (5.7) (11.0) (19.9) (6.2) 10.8 4.3 -------- -------- -------- ------- -------- ------- Total income before income taxes and cumulative effects of accounting changes ........................... 398.5 319.6 278.7 236.5 189.0 111.5 -------- -------- -------- ------- -------- ------- Income taxes (credit) ............... 107.3 74.3 60.9 51.1 30.1 (4.7) -------- -------- -------- ------- -------- ------- Cumulative effects of accounting changes ........................... -- -- -- -- -- -- -------- -------- -------- ------- -------- ------- Net income ........................ $ 291.2 $ 245.3 $ 217.8 $ 185.4 $ 158.9 $ 116.2 ======== ======== ======== ======= ======== ======= Per common share: Net income ........................ $ 3.71 $ 3.15 $ 2.73 $ 2.03 $ 1.57 $ 1.06 Dividends paid ..................... $ 0.625 $ 0.49 $ 0.375 $ 0.285 $ 0.23 $ 0.20 ======== ======== ======== ======= ======== =======
- -------- (a) Includes investment income and net realized investment gains. (b) Effective January 1, 1993, UNUM adopted Financial Accounting Standard No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," which decreased net income by $32.1 million, or $0.40 per share, and Financial Accounting Standard No. 109, "Accounting for Income Taxes," which increased net income by $20.0 million, or $0.25 per share. 11 UNUM CORPORATION AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA (Dollars and shares in millions) December 31, --------------------------------------------------- Balance Sheet Data 1996 1995 1994 1993 ------------ ------------ ------------ ------------ Assets ............... $15,467.5 $14,787.8 $13,127.2 $12,437.3 Long-term debt ......... $ 409.2 $ 457.3 $ 182.1 $ 128.6 Stockholders' equity ... $ 2,263.1 $ 2,302.9 $ 1,915.4 $ 2,102.7 Shares outstanding ... 71.8 73.0 72.4 76.0 Weighted average shares outstanding during the year .................. 73.0 72.7 74.2 78.8
December 31, ---------------------------------------------------------------------------- Balance Sheet Data 1992 1991 1990 1989 1988 1987 ------------ ------------ ------------ ------------ ------------ ----------- Assets ............... $11,959.8 $11,310.9 $10,063.4 $ 9,045.7 $ 8,592.3 $ 7,783.0 Long-term debt ......... $ 77.2 $ 51.5 $ 77.2 $ 1.5 $ 1.5 $ 1.7 Stockholders' equity ... $ 2,010.9 $ 1,755.5 $ 1,490.1 $ 1,445.0 $ 1,512.3 $ 1,463.8 Shares outstanding ... 79.1 78.2 77.4 82.0 96.8 104.2 Weighted average shares outstanding during the year .................. 78.5 77.8 79.9 91.4 101.3 109.1
12 Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations This management's discussion and analysis reviews the consolidated financial condition of UNUM at December 31, 1996, the consolidated results of operations for the past three years and, where appropriate, factors that may affect future financial performance are identified and discussed. Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements, Notes to Consolidated Financial Statements, and Selected Consolidated Financial Data. To more clearly reflect UNUM's management of its businesses and to more appropriately group its product portfolios, UNUM began reporting its operations, effective January 1, 1995, principally in four business segments: Disability Insurance, Special Risk Insurance, Colonial Products and Retirement Products. Corporate includes transactions that are generally non-insurance related. For comparative purposes, 1994 information was previously restated to reflect the new reporting segments. CONSOLIDATED OVERVIEW
(Dollars and shares in millions, except per common share amounts, and percentage increase (decrease) over prior year) 1996 1995 1994 - --------------------------------------------- ----------------------------- ------------------------- ----------- Income Data Revenues Premiums ................................. $3,120.4 3.4% $3,018.2 10.9% $2,721.3 Investment income ........................ 802.2 (0.5) 806.3 4.7 770.2 Net realized investment gains ............ 3.4 nm 225.1 nm 45.6 Fees and other income ..................... 116.7 59.2 73.3 (2.9) 75.5 -------- --------- -------- ------ -------- Total revenues ........................... 4,042.7 (1.9) 4,122.9 14.1 3,612.6 Benefits and expenses ..................... 3,701.1 (1.1) 3,741.0 9.6 3,414.0 -------- --------- -------- ------ -------- Income before income taxes .................. 341.6 (10.6) 381.9 92.3 198.6 Income taxes .............................. 103.6 2.8 100.8 nm 43.9 -------- --------- -------- ------ -------- Net income .............................. $ 238.0 (15.3)% $ 281.1 81.7% $ 154.7 ======== ========= ======== ====== ======== Net income per common share ............... $ 3.26 $ 3.87 $ 2.09 ======== ======== ======== Summary of income (loss) before income taxes Disability Insurance Segment ............... $ 215.3 (0.8)% $ 217.0 nm% $ 56.2 Special Risk Insurance Segment ............ 79.2 31.3 60.3 (8.5) 65.9 Colonial Products Segment .................. 92.4 5.4 87.7 39.9 62.7 Retirement Products Segment ............... 1.4 (96.9) 45.5 8.3 42.0 Corporate ................................. (46.7) 63.3 (28.6) 1.4 (28.2) -------- --------- -------- ------ -------- Total income before income taxes ......... $ 341.6 (10.6)% $ 381.9 92.3% $ 198.6 ======== ========= ======== ====== ======== Balance Sheet Data Assets .................................... $15,467.5 $14,787.8 $13,127.2 Notes Payable .............................. $ 526.9 $ 583.8 $ 428.7 Stockholders' equity ........................ $2,263.1 $2,302.9 $1,915.4 Shares outstanding ........................ 71.8 73.0 72.4 Weighted average shares outstanding during the year ........................... 73.0 72.7 74.2
- -------- nm = not meaningful or in excess of 100% 13 CONSOLIDATED OVERVIEW In 1996, net income decreased by $43.1 million to $238.0 million, or $3.26 per share, from $281.1 million, or $3.87 per share, in 1995. Net income was $154.7 million, or $2.09 per share, for the year ended December 31, 1994. A comparison of net income is impacted by the inclusion of realized investment gains, which were significantly higher in 1995, and several special items that occurred in 1996, 1995 and 1994. This management's discussion and analysis discusses the results of operations on a pretax operating income basis, which is defined as income (loss) before income taxes exclusive of realized investment gains (losses) and certain special items. Special items are excluded from pretax operating income as management considers them to be unusual, and also believes a discussion of the results on a pretax operating income basis provides a better understanding of the results of operations. The following table summarizes pretax operating income (loss) for the four business segments and Corporate for the years ended December 31, 1996, 1995 and 1994, and is followed by a discussion of the special items for those periods and a reconciliation of income (loss) before income taxes to pretax operating income (loss).
(Dollars in millions and percentage increase (decrease) over prior year) 1996 1995 1994 - ---------------------------------------------- ------------------------ -------------------- --------- Summary of pretax operating income (loss) Disability Insurance Segment ............... $278.4 28.2% $217.2 (1.7)% $220.9 Special Risk Insurance Segment ............ 90.2 50.8 59.8 (9.0) 65.7 Colonial Products Segment .................. 92.7 20.7 76.8 25.9 61.0 Retirement Products Segment ............... 13.6 (37.3) 21.7 (45.5) 39.8 Corporate ................................. (37.5) 29.8 (28.9) 4.7 (27.6) ------ ------ ------ ---- ------ Total pretax operating income ............ $437.4 26.2% $346.6 (3.7)% $ 359.8 ====== ====== ====== ==== ======
UNUM reported increased pretax operating income for the year ended December 31, 1996, as compared with the same period in 1995. The increase was primarily attributable to improved claims experience and management's continued focus on risk management programs, both of which lowered the benefit ratios for certain product lines. In particular, group long term disability ("group LTD") and UNUM Limited, reported in the Disability Insurance segment, and the group life business, reported in the Special Risk Insurance segment, were favorably affected by lower benefit ratios. Increased investment income also favorably affected pretax operating income in the Disability Insurance and Special Risk Insurance segments. Partially offsetting these favorable items were increased operating expenses in the Disability Insurance segment, in the group life business reported in the Special Risk Insurance segment and in Corporate. In addition, certain other disability products were negatively affected by higher benefit ratios. The decrease in pretax operating income in 1995 was primarily attributable to higher benefit ratios at UNUM Limited and in the group LTD and group life businesses, increased interest expense, and lower interest spread margins on the tax sheltered annuity business. Partially offsetting these items were increased investment income, a lower benefit ratio in the individual disability business, and lower expenses. Realized Investment Gains During the second quarter of 1995, UNUM sold virtually all of the common stock portfolio of its United States subsidiaries, primarily due to consideration of statutory capital requirements associated with investment in common stocks and to increase future investment income. The sale of the common stock portfolio contributed to significantly higher pretax realized investment gains for the year ended December 31, 1995, as compared with 1996 and 1994. UNUM reinvested the proceeds from the sale of the common stock portfolio primarily in investment grade fixed income assets, which decreased the required amount of statutory capital for regulatory purposes and increased investment income. Dependent on capital considerations and market conditions, UNUM may invest in equity securities in the future. Special Items in 1996 Individual Disability Reinsurance Fees During the fourth quarter of 1996, UNUM executed a definitive reinsurance agreement between UNUM Life Insurance Company of America ("UNUM America") and Centre Life Reinsurance Limited ("Centre Re"), a 14 Bermuda based reinsurance specialist, for reinsurance coverage of the active life reserves of UNUM America's existing United States non-cancellable individual disability block of business. As a result, UNUM recognized a pretax charge of $49.7 million in the Disability Insurance segment, which represents the present value of the anticipated minimum amount of fees to be paid to Centre Re under the agreement. For additional information see the Disability Insurance segment discussion. Intangible Asset Write-offs and Future Loss Reserves In connection with the merger of Commercial Life Insurance Company ("Commercial Life") into UNUM America, the sale of UNUM America's tax sheltered annuity business, as well as UNUM's continued efforts to strengthen its focus on its core products, the company initiated a review of certain products, which resulted in the recognition of pretax charges totaling $39.4 million during third quarter 1996. These charges reduced income before income taxes by $13.1 million in the Disability Insurance segment, $11.3 million in the Special Risk Insurance segment, and $15.0 million in the Retirement Products segment, for the year ended December 31, 1996. The charges include the write-off of certain intangible assets, primarily deferred acquisition costs, totaling $17.0 million. These intangible assets have been deemed unrecoverable primarily due to the expectation of continued losses in the Association Group disability business. Additionally, in conjunction with the completion of a review of UNUM's discontinued product portfolio, a $22.4 million charge was taken to establish a reserve for the present value of expected future losses on certain discontinued products. Future losses for these products will be charged to the reserve at the time the losses are realized. The products incorporated in the charge consist of certain discontinued special risk, retirement and medical products. UNUM is pursuing the sale of some of these discontinued product lines. Commercial Life Merger and Integration Costs During the third quarter of 1996, actions related to the merger of Commercial Life into UNUM America resulted in a $10.1 million increase in operating expenses for Corporate. The $10.1 million charge consisted of $2.9 million of direct costs incurred and the recording of a $7.2 million restructuring charge to recognize $2.8 million of future severance costs for 120 employees and $4.4 million of lease exit costs, primarily related to the merger. Special Items in 1995 Disability Reserve Increase from Portfolio Rate Adjustment Reserves for certain disability products are discounted using an interest rate which is a composite yield of assets identified with each product. As a result of the sale of the common stock portfolio, which had partially supported these disability reserves, and the subsequent reinvestment of the proceeds primarily in investment grade fixed income assets at yields below the average portfolio yield, certain reserve discount rates were lowered during second quarter 1995. For the year ended December 31, 1995, the effect of lowering these discount rates was an increase to the reserve liabilities and benefits to policyholders reported in the Disability Insurance segment of $128.6 million. Group LTD IBNR Increase During the second quarter of 1995, UNUM increased the group LTD reserves for incurred but not reported ("IBNR") claims and benefits to policyholders reported in the Disability Insurance segment by $38.4 million. IBNR reserves, which are established to fund anticipated case reserves for claims which have been incurred but not reported to UNUM, are actuarially established based on various factors, including incidence levels and claims severity. The increased IBNR reserves were based on management's judgment that claims incurred but not yet reported would reflect increased levels of claims incidence and severity. Association Group Disability Reserve Strengthening In 1995, the Association Group disability business was negatively affected by unfavorable claims experience, which management attributed to certain geographical and occupational segments, particularly dentists and physicians. During the fourth quarter of 1995, UNUM increased reserves for unpaid claims related to the Association Group disability business by $15.0 million reported in the Disability Insurance segment. These increased reserves were based on management's expectations of slower than expected claim recoveries. 15 Other Charges To strengthen its focus on its core products, UNUM recognized a charge in the third quarter of 1995 for costs associated with the sale of its dental business reported in the Special Risk Insurance segment. The charge, which primarily consisted of the write-off of deferred acquisition costs, reduced income before income taxes by $2.8 million. During the second quarter of 1995, UNUM recorded an additional charge for costs associated with the previously announced decision to discontinue the individual disability non-cancellable product and organizational changes within UNUM America, which increased operating expenses by $5.0 million. This charge reduced income before income taxes by $2.9 million in the Disability Insurance segment, $1.1 million in the Special Risk Insurance segment, and $1.0 million in the Retirement Products segment for the year ended December 31, 1995. Special Items in 1994 Individual Disability Reserve Strengthening Throughout 1994, UNUM's individual disability business experienced a higher incidence of new claims and a disproportionate number of large claims, which management attributed to certain geographic and occupational segments of the business, particularly physicians. During the third quarter of 1994, management concluded that the deterioration of claims experience was not a temporary fluctuation in certain segments of the business, but was indicative of expected claim trends for the future. As a result, in third quarter 1994, UNUM increased reserves for existing claims by $83.3 million and strengthened reserves for estimated future losses by $109.1 million, resulting in an increase to benefits to policyholders reported in the Disability Insurance segment of $192.4 million. These increased reserves reflected management's expectations of morbidity trends for the existing non-cancellable individual disability business. It is not possible to predict whether morbidity trends will be consistent with UNUM's assumptions; however, as of December 31, 1996, management believes that the strengthened reserve levels continue to be adequate. Restructuring Charges In the fourth quarter of 1994, UNUM recorded a pretax charge of $14.4 million related to the decision to discontinue the individual disability non-cancellable product and the acceleration of organizational changes within UNUM America, which increased operating expenses in the Disability Insurance segment for the year ended December 31, 1994. The charge consisted of $9.2 million for severance costs for 379 employees and $5.2 million for exit costs of certain leased facilities and equipment. 16 Reconciliation of Income (Loss) Before Income Taxes to Pretax Operating Income (Loss) The following table reconciles income (loss) before income taxes to pretax operating income (loss) for the four business segments and Corporate for the years ended December 31, 1996, 1995 and 1994:
Disability Special Risk Colonial Retirement Consolidated (Dollars in millions) Insurance Insurance Products Products Corporate UNUM - -------------------------------------------- ------------- --------------- ----------- ---------- --------- ------------ Year Ended December 31, 1996: Income (loss) before income taxes ......... $ 215.3 $ 79.2 $ 92.4 $ 1.4 $ (46.7) $ 341.6 Exclude realized investment (gains) losses 0.3 (0.3) 0.3 (2.8) (0.9) (3.4) ------- ---- ------ ------ -------- ------- 215.6 78.9 92.7 (1.4) (47.6) 338.2 Special items: ID reinsurance fees ..................... 49.7 -- -- -- -- 49.7 Write-offs and future loss reserves ...... 13.1 11.3 -- 15.0 -- 39.4 Merger and integration costs ............ -- -- -- -- 10.1 10.1 ------- ---- ------ ------ -------- ------- Pretax operating income (loss) ............ $ 278.4 $ 90.2 $ 92.7 $ 13.6 $ (37.5) $ 437.4 ======= ==== ====== ======= ======== ======= Year Ended December 31, 1995: Income (loss) before income taxes ......... $ 217.0 $ 60.3 $ 87.7 $ 45.5 $ (28.6) $ 381.9 Exclude realized investment gains ......... (184.7) (4.4) (10.9) (24.8) (0.3) (225.1) ------- ---- ------ ------ -------- ------- 32.3 55.9 76.8 20.7 (28.9) 156.8 Special items: Disability reserve increases ............ 128.6 -- -- -- -- 128.6 Group LTD IBNR increase .................. 38.4 -- -- -- -- 38.4 Association Group reserves ............... 15.0 -- -- -- -- 15.0 Other charges ........................... 2.9 3.9 -- 1.0 -- 7.8 ------- ---- ------ ------ -------- ------- Pretax operating income (loss) ............ $ 217.2 $ 59.8 $ 76.8 $ 21.7 $ (28.9) $ 346.6 ======= ==== ====== ======= ======== ======= Year Ended December 31, 1994: Income (loss) before income taxes ......... $ 56.2 $ 65.9 $ 62.7 $ 42.0 $ (28.2) $ 198.6 Exclude realized investment (gains) losses (42.1) (0.2) (1.7) (2.2) 0.6 (45.6) ------- ---- ------ ------ -------- ------- 14.1 65.7 61.0 39.8 (27.6) 153.0 Special items: ID reserve strengthening .................. 192.4 -- -- -- -- 192.4 Restructuring charges ..................... 14.4 -- -- -- -- 14.4 ------- ---- ------ ------ -------- ------- Pretax operating income (loss) ............ $ 220.9 $ 65.7 $ 61.0 $ 39.8 $ (27.6) $ 359.8 ======= ==== ====== ======= ======== =======
Pretax Operating Income (Loss) by Segment The following sections discuss the results of the four business segments and Corporate for the years ended December 31, 1996, 1995 and 1994. These business segment discussions are based on pretax operating income (loss), which excludes realized investment gains (losses) and the special items noted above. 17 DISABILITY INSURANCE SEGMENT
(Dollars in millions and percentage increase (decrease) over prior year) 1996 1995 1994 - ---------------------------------------------- ------------------------- --------------------------- ----------- Revenues Premiums Group LTD ................................. $1,094.6 0.6% $ 1,088.6 14.0% $ 955.0 Group STD ................................. 158.1 19.0 132.9 23.5 107.6 UNUM Limited .............................. 132.7 6.0 125.2 (11.2) 141.0 Individual disability ..................... 420.8 (0.5) 423.0 3.3 409.5 Other disability insurance .................. 83.7 (2.2) 85.6 5.9 80.8 -------- ------ --------- -------- ------- Total premiums ........................... 1,889.9 1.9 1,855.3 9.5 1,693.9 Investment income 468.8 14.8 408.2 14.0 358.2 Net realized investment gains (losses) ...... (0.3) nm 184.7 nm 42.1 Fees and other income ........................ 27.8 13.0 24.6 10.3 22.3 -------- ------ --------- -------- ------- Total revenues ........................... 2,386.2 (3.5) 2,472.8 16.8 2,116.5 Benefits and expenses Benefits to policyholders .................. 1,514.9 (11.5) 1,711.2 8.8 1,572.1 Operating expenses ........................... 511.0 21.3 421.3 1.5 415.0 Commissions ................................. 184.2 (4.8) 193.5 (0.9) 195.3 Increase in deferred policy acquisition costs (39.2) (44.2) (70.2) (42.5) (122.1) -------- ------ --------- -------- ------- Total benefits and expenses ............... 2,170.9 (3.8) 2,255.8 9.5 2,060.3 -------- ------ --------- -------- ------- Income before income taxes .................. 215.3 (0.8) 217.0 nm 56.2 Exclude realized investment (gains) losses 0.3 (184.7) (42.1) Special items (a) ........................... 62.8 184.9 206.8 -------- --------- ------- Pretax operating income (a) .................. $ 278.4 28.2% $ 217.2 (1.7)% $ 220.9 ======== ====== ========= ======== ======= Sales (annualized new premiums) Group LTD ................................. $ 218.7 $ 197.9 $ 215.4 Group STD ................................. $ 74.0 $ 52.4 $ 47.8 UNUM Limited .............................. $ 14.3 $ 14.2 $ 15.5 Individual disability ..................... $ 26.4 $ 35.6 $ 74.0 Persistency (premiums) Group LTD ................................. 83.6% 82.8% 84.0% Group STD ................................. 84.5% 84.8% 83.8% UNUM Limited .............................. 85.6% 89.1% 89.9% Individual disability ..................... 92.5% 91.8% 92.4% Benefit ratio (% of premiums) ............... 80.2% 92.2% 92.8% Operating expense ratio (% of premiums) ........................... 27.0% 22.7% 24.5%
- -------- nm = not meaningful or in excess of 100% (a) For the definition of pretax operating income and a detailed description of special items see the Consolidated Overview. 18 The Disability Insurance segment includes disability products offered through: UNUM Life Insurance Company of America ("UNUM America") and First UNUM Life Insurance Company ("First UNUM") in North America; UNUM Limited in the United Kingdom; and UNUM Japan Accident Insurance Company Limited ("UNUM Japan"). The products included in this segment are group LTD, group short term disability ("group STD"), individual disability, Association Group disability, disability reinsurance operations and long term care insurance. Summary The Disability Insurance segment's pretax operating income increased in 1996, as compared with 1995. The increase was primarily attributable to increased investment income and lower benefit ratios in group LTD and at UNUM Limited, partially offset by increased operating expenses for the segment and higher benefit ratios in certain other disability businesses including individual disability, disability reinsurance operations and Association Group disability. On October 23, 1996, UNUM announced the execution of a definitive reinsurance agreement between UNUM America and Centre Life Reinsurance Limited ("Centre Re"), a Bermuda based reinsurance specialist, for reinsurance coverage of the active life reserves of UNUM America's existing United States non-cancellable individual disability ("ID") block of business. This agreement does not reinsure any claims incurred prior to January 1, 1996. The agreement follows UNUM's announcement in late 1994 that it would no longer market the non-cancellable form of ID coverage in the United States. The agreement is a finite reinsurance arrangement that transfers liabilities to Centre Re based on the level of statutory reserves. At December 31, 1996, active life reserves of $427 million and reserves established for claims in 1996 of $137 million were ceded to Centre Re. Under the agreement, Centre Re has an obligation to fund a defined risk layer, while UNUM will retain the earnings risk related to potential adverse claims experience up to a certain threshold. This threshold amount represents the existence of an experience layer with a value of $195 million at December 31, 1996. UNUM has recorded the value of the experience layer on its Consolidated Balance Sheet as a deposit asset. UNUM funded its obligation under the agreement by transferring assets totaling approximately $403 million into a trust account in late December 1996. The assets transferred were equal to the experience layer plus reserves, determined under generally accepted accounting principles, net of related deferred acquisition costs. Future net cash flows of the block will be transferred to/from the trust account and, together with changes in reserve levels, will determine the value of UNUM's deposit asset. Changes in the deposit asset will flow through UNUM's results of operations. The agreement generated slightly more than $200 million of statutory capital, which will be available to repurchase UNUM common stock. Increased investment income in the Disability Insurance segment for 1996 and 1995 was primarily a result of the reinvestment of the proceeds from the sale of the common stock portfolio into investment grade fixed income assets. During second quarter 1995, UNUM sold virtually all of the common stock portfolio of its United States subsidiaries, primarily due to consideration of statutory capital requirements associated with investment in common stocks and to increase future investment income. As a result of the sale of the common stock portfolio and the subsequent reinvestment of the proceeds, certain reserve discount rates were lowered during the second quarter 1995. The discount rate used to determine group LTD reserves was reduced to 8.00% at June 30, 1995, as compared with 9.18% at December 31, 1994. Since that time the reserve discount rates for certain disability products have continued to decline. Management expects further declines, since current cash flows are invested in high quality assets at current yields, which are below the composite yield of the existing assets purchased in prior years. The group LTD discount rate was 7.88% and 7.94% at December 31, 1996, and 1995, respectively. The impact of increased investment income was partially offset by the effects of these lower discount rates for certain disability products in 1996 and 1995. UNUM periodically adjusts prices on both existing and new business in an effort to mitigate the impact of the current interest rate environment. Reserves for unpaid claims are estimates based on UNUM's historical experience and other actuarial assumptions that consider the effects of current developments, anticipated trends, risk management programs and renewal actions. Many factors affect actuarial calculations of claim reserves, including but not limited to interest rates and current and anticipated incidence rates, recovery rates, and economic and societal conditions. Management continuously monitors claim trends and responds by periodically adjusting prices on selected new and inforce business, refining underwriting guidelines, and strengthening risk management programs. In addition, reserve estimates and assumptions are periodically reviewed and updated with any resulting adjustments to reserves 19 reflected in benefits to policyholders of the current operating period. Given the complexity of the reserving process, the ultimate liability may be more or less than such estimates indicate. Deferrals of policy acquisition costs decreased in 1996 and 1995 primarily due to lower sales of the traditional, fixed price, non-cancellable individual disability product, as it was discontinued in each state during 1996 and 1995 following regulatory approval of the Lifelong Disability Protection product. Pretax operating income decreased slightly in 1995, as compared with 1994, primarily attributable to higher benefit ratios at UNUM Limited and in group LTD, and the inclusion of the results of UNUM Japan's operations in the Disability Insurance segment effective January 1, 1995. Partially offsetting these decreases were increased investment income, a lower benefit ratio in the individual disability business, and decreased operating expenses for the segment. Claim block acquisitions, which generated one-time premium in the Disability Insurance segment in 1996, 1995 and 1994, are summarized in the table below. Management intends to pursue additional claim block acquisitions in the future. Additionally, premium for individual disability includes the recapture of reinsurance premium totaling $10.6 million in 1996. Year Ended December 31, ----------------------------- (Dollars in millions) 1996 1995 1994 - ----------------------------------------- -------- -------- ------- Group LTD .............................. $10.0 $63.8 $17.4 UNUM Limited ........................... 1.3 -- 40.2 Long Term Care Insurance ............... -- 4.9 14.7 Disability Reinsurance Operations ...... -- 3.6 -- ------ ------ ------ Total ................................. $11.3 $72.3 $72.3 ====== ====== ====== Group Long Term Disability During 1996, pretax operating income for group LTD was favorably affected by increased investment income and a lower benefit ratio, partially offset by increased operating expenses primarily from continued investment in benefit management practices and product distribution. The lower benefit ratio was primarily the result of lower claims incidence and higher claim recoveries, which management primarily attributes to the continued success of its risk management programs. Excluding the effects of claim block acquisitions, group LTD reported premium growth of 5.8% in 1996, reflecting increased new sales and selected price increases. Group LTD experienced improved sales and persistency in 1996, as compared with 1995, when prices were significantly increased in certain segments of the business resulting in a high level of case terminations for 1995. In general, case terminations from price increases have occurred in less profitable segments of the business. Management continues to take actions to increase premium and sales growth, including a focus on improving premium persistency and strengthening the product distribution channel. During 1995 and 1994, management implemented and strengthened various risk management programs to address the unfavorable claims experience in group LTD during those periods. In addition to the selected price increases on new and inforce business, more stringent underwriting practices, and the reduction of benefit options for certain segments of the business, management established special claims units for both its group LTD and individual disability businesses to address specific aspects of disability claims, including complex and fraudulent claims. Additionally, management implemented new group LTD contract provisions that provide risk management features and claimant rehabilitation incentives. Management continually reviews the benefits management process to identify and strengthen risk management policies and procedures. UNUM Limited For the year ended December 31, 1996, UNUM Limited's pretax operating income was favorably affected by a lower benefit ratio and increased investment income, as compared with the corresponding period in 1995. The lower benefit ratio was primarily the result of a focus on strengthening risk management programs and improved new claims experience. Management believes that the level of future earnings for UNUM Limited will be a function of various factors, including but not limited to, the effectiveness of these continuing risk management actions over 20 time. Additionally, UNUM Limited incurred increased operating expenses in 1996, which were primarily the result of increased investments in information systems technology and risk management programs. Due to the relative size of UNUM Limited's block of business, operating results can exhibit claims variability. In general, UNUM Limited's earnings expressed in British pound sterling are affected by fluctuations in the exchange rates used in the translation of earnings into U.S. dollars. The weighted average exchange rate was approximately $1.56, $1.58 and $1.53 for the years ended December 31, 1996, 1995 and 1994, respectively. At December 31, 1996, the spot rate was approximately $1.71. Individual Disability As a result of the merger of Commercial Life into UNUM America, which was effective December 31, 1996, UNUM now reports the operations of the Association Group disability business with the individual disability business. Current and prior period information for individual disability has been restated to reflect this change. For the year ended December 31, 1996, pretax operating income for individual disability was favorably affected by increased investment income, partially offset by a higher benefit ratio as compared with the same period in 1995. The higher benefit ratio was primarily attributable to a decrease in premium growth and the inclusion of the Association Group disability business, which was affected by unfavorable claims experience. Premium growth continued to decline as a result of the transition to the guaranteed renewable Lifelong Disability Protection ("LDP") product as a result of management's decision in late 1994 to discontinue sales of the traditional, fixed price, non- cancellable product in the United States. Following the approval of the LDP product, sales of the non-cancellable individual disability product have been discontinued in the United States. Group Short Term Disability Group STD's contribution to the Disability Insurance segment's pretax operating income continued to increase in 1996, primarily due to strong premium growth, reflecting management's continuing efforts to cross-sell the group STD products with group LTD and group life products. Partially offsetting the effects of strong premium growth were higher operating expenses primarily relating to investments in risk management programs and the inclusion of certain office relocation expenses in 1996. Disability Reinsurance Operations Pretax operating income for the disability reinsurance operations was adversely affected by unfavorable claims experience and decreased premium, for the year ended December 31, 1996, as compared with the same period in 1995. Management continues to focus on improving risk management programs and strengthening underwriting standards to address this claims experience. 21 SPECIAL RISK INSURANCE SEGMENT
(Dollars in millions and percentage increase (decrease) over prior year) 1996 1995 1994 - ---------------------------------------------- ------------------------ ------------------------ --------- Revenues Premiums Group life insurance ........................ $439.6 14.2% $384.8 12.1% $ 343.3 Other special risk products ............... 277.5 (0.1) 277.8 26.4 219.8 ------ ------ ------ --------- ------- Total premiums ........................... 717.1 8.2 662.6 17.7 563.1 Investment income ........................... 56.2 27.7 44.0 8.6 40.5 Net realized investment gains ............... 0.3 (93.2) 4.4 nm 0.2 Fees and other income ........................ 38.3 (3.5) 39.7 (9.8) 44.0 ------ ------ ------ --------- ------- Total revenues ........................... 811.9 8.2 750.7 15.9 647.8 Benefits and expenses Benefits to policyholders .................. 506.5 2.9 492.3 24.8 394.4 Operating expenses ........................... 184.8 20.7 153.1 4.8 146.1 Commissions ................................. 67.0 10.0 60.9 11.7 54.5 Increase in deferred policy acquisition costs (25.6) 61.0 (15.9) 20.5 (13.2) Interest expense ........................... -- nm -- (100.0) 0.1 ------ ------ ------ --------- ------- Total benefits and expenses ............... 732.7 6.1 690.4 18.6 581.9 ------ ------ ------ --------- ------- Income before income taxes .................. 79.2 31.3 60.3 (8.5) 65.9 Exclude realized investment gains ............ (0.3) (4.4) (0.2) Special items (a) ........................... 11.3 3.9 -- ------ ------ ------- Pretax operating income (a) .................. $ 90.2 50.8% $ 59.8 (9.0)% $ 65.7 ====== ====== ====== ========= ======= Sales (annualized new premiums) Group life insurance ........................ $150.0 $106.1 $ 90.8 Persistency (premiums) Group life insurance ........................ 85.6% 83.0% 84.8% Benefit ratio (% of premiums) ............... 70.6% 74.3% 70.0% Operating expense ratio (% of premiums) ................................. 25.8% 23.1% 25.9%
- -------- nm = not meaningful or in excess of 100% (a) For the definition of pretax operating income and a detailed description of special items see the Consolidated Overview. The Special Risk Insurance segment includes group life products sold by UNUM America and First UNUM, special risk accident insurance previously sold by Commercial Life, which has been merged with UNUM America, and other special risk insurance products. The segment also includes non-disability reinsurance operations, which represent UNUM's participation in various reinsurance pools, and the reinsurance underwriting management operations of Duncanson & Holt, Inc. For the year ended December 31, 1996, as compared with 1995, the Special Risk Insurance segment reported an increase in pretax operating income. The increase was primarily due to an improved benefit ratio in the group life business, increased investment income, and premium growth driven by strong sales. These favorable factors were partially offset by a higher operating expense ratio in group life, a higher benefit ratio in certain reinsurance pools, and increased expenses in the reinsurance underwriting management operations. Due to the nature of the risks underwritten and the relative size of the blocks of businesses, several of the Special Risk Insurance segment's products can exhibit claims variability. The improved benefit ratio for group life was primarily attributable to favorable claims experience, coupled with pricing and risk management actions implemented in 1995. Solid sales results, improved persistency trends, 22 and continued renewal efforts contributed to the group life premium growth of 14.2%. Claim block acquisitions generated one-time premiums for group life and reinsurance operations of $3.6 million and $16.3 million, respectively, for 1996, and $1.3 million and $38.3 million, respectively, for 1995. The decrease in pretax operating income for 1995, as compared with 1994, was primarily attributable to increased claims in the group life and special risk accident insurance businesses, combined with reduced fee income from the reinsurance underwriting management operations. Partially offsetting these decreases were continued premium growth, and favorable claims experience in certain reinsurance pools. COLONIAL PRODUCTS SEGMENT
(Dollars in millions and percentage increase (decrease) over prior year) 1996 1995 1994 - ---------------------------------------------- ----------------------- ----------------------- -------- Revenues Premiums .................................... $493.7 4.4% $472.7 7.7% $439.1 Investment income ........................... 47.6 15.3 41.3 33.7 30.9 Net realized investment gains (losses) ...... (0.3) nm 10.9 nm 1.7 Fees and other income ........................ 4.5 87.5 2.4 9.1 2.2 ------ ----- ------ ----- ------ Total revenues ........................... 545.5 3.5 527.3 11.3 473.9 Benefits and expenses Benefits to policyholders .................. 239.3 1.8 235.1 6.3 221.1 Interest credited ........................... 7.5 15.4 6.5 30.0 5.0 Operating expenses ........................... 122.6 6.9 114.7 7.1 107.1 Commissions ................................. 107.8 (1.0) 108.9 12.6 96.7 Increase in deferred policy acquisition costs (24.1) (5.9) (25.6) 36.9 (18.7) ------ ----- ------ ----- ------ Total benefits and expenses ............... 453.1 3.1 439.6 6.9 411.2 ------ ----- ------ ----- ------ Income before income taxes .................. 92.4 5.4 87.7 39.9 62.7 Exclude realized investment (gains) losses 0.3 (10.9) (1.7) ------ ------ ------ Pretax operating income (a) .................. $ 92.7 20.7% $ 76.8 25.9% $ 61.0 ====== ===== ====== ===== ====== Sales (annualized first month's premiums) ................................. $213.6 $200.4 $183.1 Benefit ratio (% of premiums) ............... 48.5% 49.7% 50.4% Operating expense ratio (% of premiums) ................................. 24.8% 24.3% 24.4%
- -------- nm = not meaningful or in excess of 100% (a) For the definition of pretax operating income see the Consolidated Overview. The Colonial Products segment includes Colonial Life & Accident Insurance Company ("Colonial") and affiliates. Colonial offers payroll-deducted, voluntary employee benefits to employees at their worksites. Accident and sickness, cancer and life insurance products are marketed by Colonial primarily through independent sales representatives. The Colonial Products segment reported increased pretax operating income for the year ended December 31, 1996, as compared with 1995. The increase in pretax operating income was primarily attributable to favorable benefit ratios in the life, and accident and sickness product lines, and increased investment income, partially offset by an increased operating expense ratio. During 1996, Colonial entered into an agreement to reinsure a majority of the mortality risk on new and inforce universal life business. The reinsurance agreement negatively affects reported premium growth and related expense ratios while positively affecting reported benefit ratios. Colonial's pretax operating income increased in 1995 as compared to 1994, primarily because of increased investment income and an improved benefit ratio. 23 Colonial's benefit ratio improved again in 1996 to 48.5%, as compared with 49.7% in 1995 and 50.4% in 1994, primarily driven by the effect of the universal life reinsurance agreement, continued favorable claims experience, and improved incidence rates in the life, and accident and sickness product lines. Investment income increased during 1996, primarily because of increased cash flows resulting from a product mix shift and a change in asset mix to higher yielding securities. Investment income increased during 1995, primarily because of increased cash flows and additional income realized from the reinvestment of the proceeds from the second quarter 1995 sale of Colonial's equity portfolio into investment grade fixed income assets. The expense ratio increased in 1996 primarily due to the impact of the universal life reinsurance agreement. Excluding the impact of the universal life reinsurance agreement, the expense ratio declined slightly compared to 1995 as a result of continuing expense management efforts. During 1996, Colonial experienced slower growth in sales and premium as compared with 1995, reflecting the effects of weaker sales growth during the third and fourth quarters of the year. Management is focusing on increasing sales and premium at Colonial by enhancing collaborative sales across the UNUM enterprise, introducing several new products and developing alternative distribution channels. RETIREMENT PRODUCTS SEGMENT
(Dollars in millions and percentage increase (decrease) over prior year) 1996 1995 1994 - ---------------------------------------------- --------------------------- --------------------------- --------- Revenues Premiums .................................... $ 19.7 (28.6)% $ 27.6 9.5% $ 25.2 Investment income ........................... 214.4 (28.3) 298.9 (11.0) 335.8 Net realized investment gains ............... 2.8 (88.7) 24.8 nm 2.2 Fees and other income ........................ 46.1 nm 6.5 4.8 6.2 ------ ---------- ------- --------- ------- Total revenues ........................... 283.0 (20.9) 357.8 (3.1) 369.4 Benefits and expenses Benefits to policyholders .................. 64.0 17.6 54.4 5.8 51.4 Interest credited ........................... 193.1 (12.6) 220.9 (7.1) 237.7 Operating expenses ........................... 22.1 (33.8) 33.4 10.6 30.2 Commissions ................................. 5.2 (21.2) 6.6 (29.8) 9.4 Increase in deferred policy acquisition costs (2.8) (6.7) (3.0) nm (1.3) ------ ---------- ------- --------- ------- Total benefits and expenses ............... 281.6 (9.8) 312.3 (4.6) 327.4 ------ ---------- ------- --------- ------- Income before income taxes .................. 1.4 (96.9) 45.5 8.3 42.0 Exclude realized investment gains ............ (2.8) (24.8) (2.2) Special items (a) ........................... 15.0 1.0 -- ------ ------- ------- Pretax operating income (a) .................. $ 13.6 (37.3)% $ 21.7 (45.5)% $ 39.8 ====== ========== ======= ========= ======= Invested assets under management for tax sheltered annuities, at end of period .................................... $ 305.3 $3,074.3 $3,065.0 ====== ======= =======
- -------- nm = not meaningful or in excess of 100% (a) For the definition of pretax operating income and a detailed description of special items see the Consolidated Overview. The Retirement Products segment includes tax sheltered annuities ("TSA") in UNUM America and First UNUM, guaranteed investment contracts ("GICs"), deposit administration accounts ("DAs"), 401(k) plans, individual life and group medical insurance, all of which are no longer actively marketed by UNUM. 24 On October 1, 1996, UNUM America and First UNUM closed the sale of their respective TSA businesses to The Lincoln National Life Insurance Company and Lincoln Life & Annuity Company of New York ("Lincoln"), both subsidiaries of Lincoln National Corporation. The sale involved approximately 1,700 group contractholders and assets under management of approximately $3.3 billion. The purchase price (ceding commission) paid upon closing was approximately $71 million, and the transaction generated statutory capital of approximately $160 million. The contracts have initially been reinsured on an indemnity basis. Upon consent of the TSA contractholders and/or participants, the contracts will be considered reinsured on an assumption basis, legally releasing UNUM America and First UNUM from future contractual obligation to the respective contractholders and/or participants. The sale resulted in a deferred pretax gain of $80.8 million, which will be recognized in income as a special item in proportion to contractholder and/or participant consents for assumption reinsurance, the majority of which management believes will occur during 1997. Through March 1, 1997, consent for assumption reinsurance has been provided by TSA contractholders and/or participants owning approximately 60% of assets under management. Fees and other income reported by the TSA business increased in 1996, reflecting a $38.2 million reimbursement of interest credited from Lincoln under the reinsurance agreement. UNUM will continue to report the amount of interest credited to TSA contracts for which the consent to transfer from indemnity reinsurance to assumption reinsurance has not been received, with an equivalent amount being reported in fees and other income for the reimbursement from Lincoln. The group TSA businesses accounted for $13.5 million, $16.4 million and $31.6 million of the Retirement Products segment's pretax operating income in 1996, 1995 and 1994, respectively. For the year ended December 31, 1996, the Retirement Products segment reported decreased pretax operating income as compared with the same period in 1995. The decrease was primarily due to reduced earnings from the runoff of GICs, DAs and 401(k) plans during the year and lower interest spread margins on tax sheltered annuities through October 1, 1996, the effective date of the TSA sale. For 1995, the decrease in pretax operating income was primarily attributable to lower interest spread margins on tax sheltered annuities, as compared with the unusually favorable levels experienced during 1994. During 1996, investment income declined reflecting the transfer of $2,690 million of assets to Lincoln on October 1, 1996, to effect the sale of the TSA business, and the shifting of assets to lower yielding, highly liquid, instruments during the year in anticipation of the transfer. During 1995, investment income decreased primarily due to investments in lower yielding tax-exempt securities and a reduced average investment yield caused by the low interest rate environment. In addition, the reduced asset base under management for GICs, DAs and 401(k) plans has resulted in lower investment income and reduced amounts of interest credited during 1996 and 1995. Management expects continued decreases in the amounts of investment income and interest credited as the related GICs, DAs and 401(k) contracts mature or terminate. CORPORATE
(Dollars in millions) 1996 1995 1994 - -------------------------------------------------- ---------------- ---------------- --------- Loss before income taxes ........................ $ (46.7) $ (28.6) $ (28.2) Exclude realized investment (gains) losses ...... (0.9) (0.3) 0.6 Special items (a) .............................. 10.1 -- -- ----- ----- ------- Pretax operating loss (a) ........................ $ (37.5) $ (28.9) $ (27.6) ===== ===== =======
- -------- (a) For the definition of pretax operating loss and a detailed description of special items see the Consolidated Overview. Corporate includes transactions that are generally non-insurance related. The increased pretax operating loss in Corporate for the year ended December 31, 1996, as compared with 1995, was primarily the result of increased international development costs and interest expense on corporate borrowings, partially offset by increased investment income. The increased pretax operating loss in 1995, compared with 1994, was primarily attributable to increased interest expense, partially offset by reduced operating expenses. Effective January 1, 1995, the operations of UNUM Japan are reported in the Disability Insurance segment. Costs related to UNUM's investment in Japan prior to January 1, 1995, were reported as operating expenses in Corporate. 25 INCOME TAXES Effective tax rates, which reflect income tax expense as a percentage of income before income taxes, were 30.3%, 26.4% and 22.1% for 1996, 1995 and 1994, respectively. Reported income tax expense was below the federal statutory tax rate of 35% primarily due to tax savings from investments in tax-exempt securities. The increase in the effective tax rate over the three year period was primarily due to reduced tax-exempt income, both in amount and as a percentage of income before income taxes. Beginning in late 1996, UNUM commenced a plan to increase purchases of tax-exempt bonds and mortgages. INVESTMENTS UNUM's long term investment strategy is to invest primarily in investment grade bonds and commercial mortgages. UNUM evaluates total expected return after consideration of associated expenses and losses, within criteria established for each product line. Product line investment strategies are developed to complement business risks by meeting the liquidity and solvency requirements of each product. UNUM purchases assets with maturities, expected cash flows and prepayment conditions that are consistent with these strategies. The nature and quality of the types of investments comply with policies established by management, which are more stringent overall than the statutes and regulations imposed by the jurisdictions in which UNUM's insurance subsidiaries are licensed. UNUM's investments are reported in the consolidated financial statements at net realizable value or net of applicable allowances for probable losses. Allowances for real estate held for sale and mortgages are established based on a review of specific assets as well as the overall portfolio, considering the carrying value of the underlying assets. If a decline in fair value is considered to be other than temporary or if a long-lived asset is deemed permanently impaired, the investment is reduced to estimated net realizable value and the reduction is recorded as a realized investment loss. UNUM discontinues the accrual of investment income on invested assets when it is determined that collectability is doubtful. Management monitors the risk associated with the invested asset portfolio and regularly reviews and adjusts the allowance for probable losses. UNUM's invested assets were $8.7 billion and $11.7 billion at December 31, 1996, and 1995, respectively. The decrease from 1995 reflects asset transfers that occurred in the fourth quarter of 1996, as discussed below. The composition of UNUM's invested assets at December 31, 1996, was 79.6% fixed maturities, 13.0% mortgage loans, 2.8% real estate and 4.6% other invested assets. In late December 1996, UNUM transferred approximately $403 million in cash into a trust account held for the benefit of Centre Life Reinsurance Limited ("Centre Re"), in accordance with the reinsurance agreement between UNUM America and Centre Re, which became effective December 31, 1996 (see Note 6 in Item 8). On October 1, 1996, UNUM transferred approximately $2,690 million of assets into a trust account held for the benefit of Lincoln to effect the sale of the TSA business (see Note 5 in Item 8). The assets transferred consisted of approximately $1,826 million of short-term investments, $589 million of fixed maturities and $275 million of cash. During the second quarter of 1995, UNUM sold virtually all of the common stock portfolio of its United States subsidiaries, primarily due to consideration of statutory capital requirements associated with investment in common stocks and to increase future investment income. UNUM reinvested the proceeds from the sale of the common stock portfolio primarily in investment grade fixed income assets. Dependent on capital considerations and market conditions, UNUM may invest in equity securities in the future. Gross realized investment gains were $40.2 million, $287.0 million and $117.0 million, and gross realized investment losses were $36.8 million, $61.9 million and $71.4 million for the years ended December 31, 1996, 1995 and 1994, respectively. Fixed Maturities UNUM's fixed maturity portfolio is concentrated in high quality intermediate term bonds, which management believes are well diversified by company and industry sector. At December 31, 1996, over 80% of the bond portfolio was rated "A" or better. Fixed maturity ratings are obtained from external rating agencies or are determined by UNUM internally using similar methods if external ratings are not available. The bond portfolio is primarily composed of taxable corporate bonds. In late 1996, UNUM commenced a plan to increase purchases of tax-exempt bonds and mortgages due to after-tax yield considerations. Dependent on market conditions and tax considerations, these tax-exempt securities can provide attractive after-tax yields as compared with similarly rated taxable securities. 26 The table below summarizes fixed maturity holdings by credit quality as of December 31, 1996, and 1995. Bond Credit Quality Ratings 1996 1995 - ----------------------------- ---------- ---------- AAA ........................ 10.6% 12.0% AA ........................ 12.2 12.4 A ........................... 57.3 57.1 BAA ........................ 18.4 17.0 Below BAA .................. 1.5 1.5 ------ ------ Total ..................... 100.0% 100.0% ====== ====== Bond credit quality ratings are based on the capacity of the borrower to meet interest and principal payments as they come due. Capacity is considered extremely strong for AAA rated issues; AA very strong; A strong; and BAA adequate. Bonds rated below BAA are considered to have a vulnerability to default. At December 31, 1996, and 1995, the fixed maturity portfolio included $102.0 million and $139.4 million, respectively, of below investment grade bonds (below "BAA") recorded at fair value. These bonds had an associated amortized cost of $101.7 million and $133.8 million, respectively. Virtually all of the below investment grade bonds were purchased at investment grade, but were subsequently downgraded. Management does not expect any risks or uncertainties associated with below investment grade bonds to have a significant affect on UNUM's consolidated financial position or results of operations. The amount of fixed maturities delinquent 60 days or more was zero at December 31, 1996, and 1995. In November 1995, the Financial Accounting Standards Board issued "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," which provided a one-time opportunity to reassess the appropriateness of the classifications of securities described in Financial Accounting Standard ("FAS") No. 115, and to reclassify fixed maturities from the held to maturity category without calling into question the intent to hold other debt securities to maturity in the future. On December 31, 1995, UNUM reassessed its fixed maturity portfolio, and as allowed under the implementation guidance, reclassified fixed maturities with an amortized cost of $6,082.8 million and a related unrealized gain of $393.0 million from the held to maturity category to available for sale. The unrealized gain on the total available for sale fixed maturity portfolio was $551.9 million at December 31, 1995. In connection with the reclassification of the held to maturity fixed maturities to available for sale, on December 31, 1995, UNUM adjusted its unpaid claims by $261.2 million to reflect the changes that would have been necessary if the unrealized gains and losses related to fixed maturities classified as available for sale had been realized. At December 31, 1996, the unrealized gain on available for sale fixed maturities was $286.0 million and the related unpaid claims adjustment was $168.7 million. Mortgages At December 31, 1996, and 1995, UNUM's mortgage loans were $1,132.1 million and $1,163.4 million, respectively. UNUM invests new funds in commercial properties in targeted geographical areas that meet UNUM's underwriting standards. Management uses a comprehensive rating system to evaluate the investment and credit risk of each mortgage loan and to identify specific properties for inspection and reevaluation. Management establishes allowances for mortgage loans based on a review of individual loans and the overall loan portfolio, considering the value of the underlying collateral. Management believes that its mortgage loan portfolio is well diversified geographically and among property types, as summarized in Item 1 F. Investments. UNUM's incidence of new problem mortgage loans and foreclosure activity has remained very low in 1996, reflecting improvements in overall economic activity and improving real estate markets in the geographic areas where UNUM has mortgage loans. Management expects a modest level of delinquencies and problem loans in the future. The percentage of mortgage loans delinquent 60 days or more on a contract delinquency basis was 0.5% and 0.2% at December 31, 1996, and 1995, respectively. Effective January 1, 1995, UNUM adopted FAS 114, "Accounting by Creditors for Impairment of a Loan," and FAS 118, "Accounting by Creditors for Impairment of a Loan-- Income Recognition and Disclosures," which defined the principles to measure and record a loan when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The adoption of FAS 114 and FAS 118 did not have a material affect on UNUM's results of operations or financial position. 27 At December 31, 1996, and 1995, impaired loans totaled $50.4 million and $50.1 million, respectively. Included in the $50.4 million of impaired loans at December 31, 1996, were $38.9 million of loans which had a related allowance for probable losses of $5.7 million, and a loan of $11.5 million which had no related allowance for probable losses. Interest lost on impaired loans in 1996, 1995 and 1994, was not material. Realized investment losses related to impaired mortgage loans amounted to $1.0 million, $9.2 million and $8.5 million for 1996, 1995 and 1994, respectively. Impaired mortgage loans as of December 31, 1996, are not expected to have a significant impact on UNUM's results of operations, liquidity, or capital resources. Mortgage loans that were restructured prior to the adoption of FAS 114 are defined by UNUM as loans whose terms have been modified to interest rates less than market at the time of restructure and are currently expected to perform pursuant to such modified terms. UNUM modifies loans to protect its investment and only when it is anticipated that the borrower will be able to meet the modified terms. As of December 31, 1996, restructured mortgage loans totaled $54.8 million, as compared with $59.9 million at December 31, 1995. Interest lost on restructured loans was not material in 1996, 1995 or 1994. Real Estate At December 31, 1996, investment real estate amounted to $248.1 million, compared with $222.2 million at December 31, 1995. UNUM purchases investment real estate in selected markets when certain investment criteria are met. Investment real estate is intended to be held long-term and is carried at cost less accumulated depreciation. If investment real estate is determined to be permanently impaired, the carrying amount of the asset is reduced to fair value. Occasionally, investment real estate is reclassified and revalued as real estate held for sale when it no longer meets UNUM's investment criteria. At December 31, 1996, and 1995, real estate held for sale amounted to $9.4 million and $35.5 million, respectively. Real estate acquired through foreclosure is valued at fair value at the date of foreclosure and may be classified as investment real estate, if it meets UNUM's investment criteria. Real estate held for sale is included in other assets in the Consolidated Balance Sheets and is valued net of a valuation allowance which reduces the carrying value to the lower of fair value less estimated costs to sell, or cost. This valuation allowance is periodically adjusted based on subsequent changes in UNUM's estimate of fair value less costs to sell. Additions to the allowance for probable losses related to real estate held for sale resulted in a realized investment gain of $0.4 million and realized investment losses of $6.3 million and $0.8 million for the years ended December 31, 1996, 1995 and 1994, respectively. Additions to the allowance represent charges to net realized investment gains less recoveries. Current and anticipated real estate acquired through foreclosure is not expected to have a significant affect on UNUM's results of operations, liquidity, or capital resources. Effective January 1, 1996, UNUM adopted FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long- lived assets and certain identifiable intangibles to be disposed of. FAS 121 applies to both real estate held for investment and real estate held for sale. The adoption of FAS 121 did not have a material affect on UNUM's results of operations or financial position. LIQUIDITY AND CAPITAL RESOURCES UNUM's businesses produce positive cash flows that are invested primarily in intermediate, fixed maturity investments intended to reflect the anticipated cash obligations of insurance benefit payments and insurance contract maturities and to optimize investment returns at appropriate risk levels. Unexpected cash requirements and liquidity needs can be met through UNUM's investment portfolio of fixed maturities classified as available for sale, equity securities, cash and short-term investments. From time to time, dividend payments, which may be subject to approval by insurance regulatory authorities, are made from UNUM's affiliates and insurance subsidiaries to UNUM Corporation. These dividends, along with other funds, are used to service the needs of UNUM Corporation including: debt service, common stock dividends, stock repurchase, administrative costs and corporate development. Net statutory operating income, which excludes realized investment gains net of tax, is one of the major determinants of an insurance company's dividend capacity to its parent in the following fiscal year. Statutory accounting rules and practices, which differ in certain respects 28 from generally accepted accounting principles, are mandated by regulators in an insurance company's state of domicile. In 1996, UNUM's United States insurance subsidiaries reported net statutory operating income of approximately $167 million, compared with approximately $143 million in 1995. The amount available under current law for payment of dividends during 1997 to UNUM Corporation from all U.S. domiciled insurance subsidiaries without state insurance regulatory approval is approximately $153 million, as compared with approximately $135 million for 1996. UNUM Corporation also has the ability to draw a dividend from its United Kingdom-based affiliate, UNUM Limited, subject to certain U.S. tax consequences. In connection with the closing of the TSA sale on October 1, 1996, as described in the Retirement Products segment, UNUM America paid an extraordinary dividend of $123 million to UNUM Corporation during the fourth quarter of 1996. As a result of the reinsurance of the individual disability business, discussed in the Disability Insurance segment, UNUM America and First UNUM intend to pay extraordinary dividends to UNUM Corporation during 1997, subject to regulatory approval and certain capital considerations. Cash flow requirements are also supported by a committed revolving credit facility totaling $500 million. On October 29, 1996, a new committed revolving credit facility became effective, expiring on October 1, 2001, which replaced a previously existing facility of the same amount. UNUM's commercial paper program is supported by the revolving credit facility and is available for general liquidity needs, capital expansion, acquisitions and stock repurchase. The committed revolving credit facility contains certain covenants that, among other provisions, require maintenance of certain levels of stockholders' equity and limits on debt levels. On July 16, 1996, UNUM filed an omnibus shelf registration with the Securities and Exchange Commission, which became effective August 2, 1996, relating to $500 million of securities (including debt securities, preferred stock, common stock and other securities). On August 15, 1996, UNUM filed a prospectus supplement to establish a $250 million medium-term note program under the shelf registration. At December 31, 1996, UNUM had short-term and long-term debt totaling $117.7 million and $409.2 million, respectively. At December 31, 1996, approximately $439 million was available for additional financing under the existing revolving credit facility and $500 million of investment grade debt instruments was available for issuance under the shelf registration. Contingent upon market conditions and corporate needs, management may refinance short-term notes payable for longer term securities. In the normal course of business, UNUM enters into letters of credit, primarily to satisfy capital requirements related to certain subsidiary transactions. UNUM had outstanding letters of credit of $56.7 million and $12.3 million at December 31, 1996, and 1995, respectively. Effective October 23, 1996, UNUM's Board of Directors approved an expansion of the Company's stock repurchase program to 6.0 million shares by authorizing an additional 3.7 million shares. At December 31, 1996, approximately 4.5 million shares of common stock remained authorized for repurchase. During 1996, UNUM acquired approximately 1.9 million shares of its common stock in the open market at an aggregate cost of $119.1 million. UNUM did not acquire any shares in the open market in 1995. During 1994, UNUM repurchased 3.9 million shares in the open market at an aggregate cost of $183.3 million. UNUM was committed at December 31, 1996, to purchase fixed maturities and other invested assets in the amount of $104.3 million. Independent of the cash flows of UNUM Corporation, management anticipates that the operating cash flows of the subsidiaries of UNUM Corporation will be sufficient to meet benefit obligations, planned investment commitments and operational needs of those companies. RATINGS Standard & Poor's Corporation ("Standard & Poor's"), Moody's Investors Service ("Moody's") and A.M. Best Company ("A.M. Best") are among the third parties that provide UNUM independent assessments of its overall financial position. Ratings from these agencies for financial strength and claims paying ability are available for the individual United States domiciled insurance company subsidiaries rather than on a consolidated basis, since the financial information used to develop the ratings is based on statutory accounting practices in the United States. Debt ratings for UNUM Corporation are based on consolidated financial information prepared using generally accepted accounting principles. 29 The table below reflects the debt ratings for UNUM Corporation and the claims paying ability and financial strength ratings for UNUM's United States domiciled insurance company subsidiaries at March 7, 1997:
Standard & Poor's Moody's A.M. Best ----------------- ---------------------- ------------ UNUM Corporation Ratings: Senior Debt (MTN program) A+ A1 (Strong) (Upper Medium Grade) Commercial Paper A-1 P-1 (Strong) (Superior Ability) Subordinated Debt (MIDS) A A2 (Strong) (Upper Medium Grade) Claims Paying United States Subsidiaries' Ratings: Ability Rating Financial Strength Rating UNUM America AA Aa2 A++ (Excellent) (Excellent) (Superior) First UNUM AA Aa2 A+ (Excellent) (Excellent) (Superior) Colonial AA Aa3 A+ (Excellent) (Excellent) (Superior)
At March 7, 1997, the unsold portion of the shelf registration related to preferred stock carried a rating of "(P)"a1" " (Upper-Medium Quality) from Moody's. INSURANCE REGULATION The Risk-Based Capital standards for life insurance companies, as prescribed by the National Association of Insurance Commissioners, are based on a formula that establishes capital requirements relating to existing asset default risk, insurance risk, interest rate (asset/liability mismatch) risk, and business risk. A company's Total Adjusted Capital (statutory capital, surplus and Asset Valuation Reserve plus certain other adjustments) is compared to the Authorized Control Level ("ACL") of Risk-Based Capital produced by the formula. Subject to certain trend tests to determine the change in the ACL ratio from year to year, companies with Total Adjusted Capital above 200% of ACL are assumed to be adequately capitalized. Companies below 200% of ACL are identified as requiring various levels of regulatory action ranging from increased information requirements for companies between 150% and 200% of ACL, to mandatory control by the domiciliary insurance department for companies below 70% of ACL. At December 31, 1996, the ACL ratios for UNUM America, First UNUM, and Colonial were 406%, 467%, and 389%, respectively. This compares with ACL ratios at December 31, 1995, of 382%, 382%, and 436%, respectively. For 1996, UNUM America's ACL ratio reflects the merger of Commercial Life into UNUM America as of December 31, 1996. At December 31, 1995, Commercial Life had an ACL ratio of 329% that is not included in the UNUM America 1995 ACL ratio. DERIVATIVE FINANCIAL INSTRUMENTS UNUM periodically uses common derivative financial instruments such as options, futures and forward exchange contracts to hedge certain risks associated with anticipated purchases and sales of investments and certain payments denominated in foreign currencies, primarily British pound sterling, Canadian dollar and Japanese yen. These derivative financial instruments are used to protect UNUM from the effect of market fluctuations in interest and exchange rates between the contract date and the date on which the hedged transaction occurs. In using these instruments, UNUM is subject to the off-balance-sheet risk that the counterparties of the transactions will fail to perform as contracted. UNUM manages this risk by only entering into contracts with highly rated institutions and listed exchanges. UNUM does not hold derivative financial instruments for the purpose of trading. At December 31, 1996, UNUM had open interest rate futures contracts with notional amounts of $178.2 million to hedge anticipated sales of investments in 1997. These contracts had a related net unrealized gain of $1.6 million. At December 31, 1995, UNUM had no open derivative financial instruments. 30 LITIGATION In the normal course of its business operations, UNUM is involved in litigation from time to time with claimants, beneficiaries and others, and a number of lawsuits were pending at December 31, 1996. In some instances, these proceedings include claims for punitive damages and similar types of relief in unspecified or substantial amounts, in addition to amounts for alleged contractual liability or other compensatory damages. In the opinion of management, the ultimate liability, if any, arising from this litigation is not expected to have a material adverse effect on the consolidated financial position or the consolidated operating results of UNUM. On December 29, 1993, UNUM filed suit in the United States District Court for the District of Maine, seeking a federal income tax refund. The suit is based on a claim for a deduction in certain prior tax years, for $652 million in cash and stock distributed to policyholders in connection with the 1986 conversion of Union Mutual Life Insurance Company to a stock company. UNUM has fully paid, and provided for in prior years' financial statements, the tax at issue in this litigation. On May 23, 1996, the District Court issued its decision that the distribution in question was not a deductible expenditure. UNUM believes its claims are meritorious, and has appealed the decision to the United States Court of Appeals for the First Circuit. The ultimate recovery, if any, cannot be determined at this time. EFFECT OF INFLATION Inflation is one of the factors that has increased the need for insurance. Many policyholders who once had adequate insurance programs at lower coverage levels have increased their disability insurance coverage to provide the same relative financial benefits and protection. Changing interest rates, which are traditionally linked to changes in inflation, affect UNUM's level of discounted reserves. While rising interest rates are beneficial when the company is investing current cash flows, they can also reduce the fair value of existing fixed rate long-term investments. In addition, lower interest rates can lead to early payoffs and refinancing of some of UNUM's fixed rate investments. Management generally invests in fixed rate instruments that are structured to limit the exposure to such reinvestment risk. ACCOUNTING CHANGES Effective January 1, 1996, UNUM adopted Financial Accounting Standard ("FAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. The adoption of FAS 121 did not have a material effect on UNUM's results of operations or financial position. Effective January 1, 1996, UNUM adopted FAS 123, "Accounting for Stock-Based Compensation." FAS 123 established financial accounting and reporting standards for stock-based employee compensation plans. The statement defines a new method of accounting for employee stock compensation plans using a fair value based method, under which compensation cost is measured and recognized in results of operations. Alternatively, FAS 123 allows an entity to retain the accounting for employee stock compensation plans defined under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." UNUM retained the accounting defined under APB No. 25, and as required, will disclose in a footnote the pro forma effects of stock- based compensation using the fair value based method defined under FAS 123. Refer to Note 9 in Item 8 for the related disclosures. Effective January 1, 1995, UNUM adopted FAS 114, "Accounting by Creditors for Impairment of a Loan," and FAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures," which defined the principles to measure and record a loan when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The adoption of FAS 114 and FAS 118 did not have a material effect on UNUM's results of operations or financial position. Effective January 1, 1994, UNUM adopted FAS 115, "Accounting for Certain Investments in Debt and Equity Securities," which specified the accounting and reporting for certain investments in equity securities and for all investments in debt securities. In November 1995, the Financial Accounting Standards Board ("FASB") issued "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," which provided a one-time opportunity to reassess the appropriateness of the classifications of securities described in FAS 115, and to reclassify fixed maturities from the held to maturity category without calling into question the 31 intent to hold other debt securities to maturity in the future. On December 31, 1995, UNUM reassessed its fixed maturity portfolio and, as allowed under the implementation guidance, reclassified fixed maturities with an amortized cost of $6,082.8 million and a related unrealized gain of $393.0 million from the held to maturity category to available for sale. In connection with the reclassification of the held to maturity fixed maturities to available for sale, on December 31, 1995, UNUM adjusted its unpaid claims by $261.2 million to reflect the changes that would have been necessary if the unrealized gains and losses related to fixed maturities classified as available for sale had been realized. NEW ACCOUNTING PRONOUNCEMENTS In June 1996, the FASB issued FAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which establishes accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. The statement provides guidance for recognition or derecognition of assets and liabilities, focusing on the concepts of control and extinguishment. UNUM is required to adopt FAS 125 effective January 1, 1997. The adoption of FAS 125 is not expected to have a material effect on UNUM's results of operations or financial position. In March 1997, the FASB issued FAS No. 128, "Earnings Per Share," which is intended to simplify the computation and presentation of earnings per share ("EPS"). FAS 128 supersedes Accounting Principles Board ("APB") Opinion No. 15, "Earnings Per Share." FAS 128 will eliminate the concept of "primary" EPS and require dual presentation of "basic" and "diluted" EPS. Diluted EPS under FAS 128 is similar to "fully diluted" EPS as defined by APB 15. UNUM is required to adopt FAS 128 effective December 31, 1997. As stated in Note 1 in Item 8, under the caption "Earnings Per Share," the assumed exercise of UNUM's outstanding stock options does not result in a material dilution of earnings per share. In March 1997, the FASB issued FAS No. 129, "Disclosures of Information About Capital Structure," which clarifies disclosure requirements related to the type, and nature, of securities contained in an entity's capital structure. UNUM is required to adopt FAS 129 effective December 31, 1997. 32 Item 8--Financial Statements and Supplementary Data
INDEX Page - ------------------------------------------------------------------------------------------ ------ Report of Independent Accountants ...................................................... 34 Consolidated Financial Statements: Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 35 Consolidated Balance Sheets as of December 31, 1996, and 1995 ........................ 36 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 ........................................................................ 38 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 39 1994 Notes to Consolidated Financial Statements ............................................. 40
33 REPORT OF INDEPENDENT ACCOUNTANTS To the Directors and Stockholders UNUM Corporation We have audited the consolidated financial statements of UNUM Corporation and subsidiaries as listed in Item 8 and the financial statement schedules as listed in Item 14(a) of this Form 10-K. These consolidated financial statements and financial statement schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of UNUM Corporation and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. /s/COOPERS & LYBRAND L.L.P. Portland, Maine February 5, 1997, except for Note 5 for which the date is March 1, 1997, and Note 18 for which the date is March 14, 1997 34 UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, -------------------------------------- (Dollars in millions, except per common share data) 1996 1995 1994 - ----------------------------------------------------- ----------- ----------- ---------- Revenues Premiums $3,120.4 $3,018.2 $2,721.3 Investment income ................................. 802.2 806.3 770.2 Net realized investment gains ..................... 3.4 225.1 45.6 Fees and other income .............................. 116.7 73.3 75.5 -------- -------- -------- Total revenues .................................... 4,042.7 4,122.9 3,612.6 Benefits and expenses Benefits to policyholders ........................... 2,324.7 2,493.0 2,239.0 Interest credited ................................. 200.6 227.4 242.7 Operating expenses ................................. 862.6 728.2 713.0 Commissions ....................................... 364.2 369.9 355.9 Increase in deferred policy acquisition costs ...... (91.7) (114.7) (155.3) Interest expense .................................... 40.7 37.2 18.7 -------- -------- -------- Total benefits and expenses ..................... 3,701.1 3,741.0 3,414.0 -------- -------- -------- Income before income taxes ........................ 341.6 381.9 198.6 Income taxes Current ............................................. 122.3 98.6 30.4 Deferred .......................................... (18.7) 2.2 13.5 -------- -------- -------- Total income taxes .............................. 103.6 100.8 43.9 -------- -------- -------- Net income .......................................... $ 238.0 $ 281.1 $ 154.7 ======== ======== ======== Net income per common share ........................ $ 3.26 $ 3.87 $ 2.09 ======== ======== ========
See notes to consolidated financial statements. 35 UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, -------------------------- (Dollars in millions) 1996 1995 - --------------------------------------------------------- ------------ ----------- ASSETS Investments Fixed maturities available for sale--at fair value (amortized cost: 1996--$6,656.7; 1995--$8,583.5) ...... $6,942.7 $9,135.4 Equity securities available for sale--at fair value (cost: 1996--$23.8; 1995--$21.1) ..................... 31.3 25.2 Mortgage loans ....................................... 1,132.1 1,163.4 Real estate, net ....................................... 248.1 222.2 Policy loans .......................................... 232.9 219.2 Other long-term investments ........................... 14.2 30.4 Short-term investments ................................. 123.4 896.7 --------- --------- Total investments .................................... 8,724.7 11,692.5 Cash ................................................... 77.0 42.5 Accrued investment income .............................. 166.1 208.5 Premiums due .......................................... 252.4 224.3 Deferred policy acquisition costs ..................... 844.2 1,142.3 Property and equipment, net ........................... 181.0 153.7 Reinsurance receivables ................................. 1,113.8 420.9 Deposit assets .......................................... 2,846.6 -- Other assets .......................................... 518.0 370.9 Separate account assets ................................. 743.7 532.2 --------- --------- Total assets .......................................... $15,467.5 $14,787.8 ========= =========
See notes to consolidated financial statements. 36 UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, -------------------------- (Dollars in millions) 1996 1995 - --------------------------------------------------------------- ------------ ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Future policy benefits ....................................... $1,881.1 $1,718.7 Unpaid claims and claim expenses ........................... 5,289.3 4,856.4 Other policyholder funds .................................... 3,533.6 3,840.3 Income taxes Current ................................................... 61.3 20.7 Deferred ................................................... 341.8 392.0 Notes payable ................................................ 526.9 583.8 Other liabilities .......................................... 826.7 540.8 Separate account liabilities ................................. 743.7 532.2 -------- -------- Total liabilities .......................................... 13,204.4 12,484.9 Stockholders' equity Preferred stock, par value $0.10 per share, authorized 10,000,000 shares, none issued Common stock, par value $0.10 per share, authorized 120,000,000 shares, issued 99,987,958 shares ............... 10.0 10.0 Additional paid-in capital ................................. 1,103.4 1,088.2 Unrealized gains on available for sale securities, net ...... 82.3 213.1 Unrealized foreign currency translation adjustment ......... (1.2) (23.1) Retained earnings .......................................... 1,871.4 1,713.2 -------- -------- 3,065.9 3,001.4 Less: Treasury stock, at cost (1996--28,165,594 shares; 1995--26,980,331 shares) .................................... 792.2 691.6 Restricted stock deferred compensation ..................... 10.6 6.9 -------- -------- Total stockholders' equity ................................. 2,263.1 2,302.9 -------- -------- Total liabilities and stockholders' equity .................. $15,467.5 $14,787.8 ======== ========
See notes to consolidated financial statements. 37 UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unrealized Gains (Losses) Unrealized Common On Available Foreign Restricted Stock Additional for Sale Currency Stock (Dollars in millions, $0.10 Par Paid-in Securities, Translation Retained Treasury Deferred except per common share data) Value Capital Net Adjustment Earnings Stock Compensation Total - -------------------------------- --------- ----------- ------------- ----------- -------- -------- ------------ ----- Balance at January 1, 1994 .... $10.0 $1,078.4 $ 149.1 $ (24.1) $1,420.8 $ (529.8) $ (1.7) $2,102.7 1994 Transactions: Net income ................... 154.7 154.7 Unrealized losses on available for sale securities, net .... (99.5) (99.5) Unrealized foreign currency translation adjustment ....... 0.4 0.4 Dividends to stockholders ($0.92 per common share) ..... (68.3) (68.3) Treasury stock acquired ....... (183.3) (183.3) Employee stock option and other transactions .......... 2.1 6.5 0.1 8.7 ----- --------- ------- -------- -------- -------- ------ -------- Balance at December 31, 1994 .. 10.0 1,080.5 49.6 (23.7) 1,507.2 (706.6) (1.6) 1,915.4 1995 Transactions: Net income ................... 281.1 281.1 Unrealized gains on available for sale securities, net .... 163.5 163.5 Unrealized foreign currency translation adjustment ....... 0.6 0.6 Dividends to stockholders ($1.035 per common share) .... (75.1) (75.1) Employee stock option and other transactions .......... 7.7 15.0 (5.3) 17.4 ----- --------- ------- -------- -------- -------- ------ -------- Balance at December 31, 1995 .. 10.0 1,088.2 213.1 (23.1) 1,713.2 (691.6) (6.9) 2,302.9 1996 Transactions: Net income ................... 238.0 238.0 Unrealized losses on available for sale securities, net .... (130.8) (130.8) Unrealized foreign currency translation adjustment ....... 21.9 21.9 Dividends to stockholders ($1.09 per common share) ..... (79.8) (79.8) Treasury stock acquired ....... (119.1) (119.1) Employee stock option and other transactions ................ 15.2 18.5 (3.7) 30.0 ----- --------- ------- -------- -------- -------- ------ -------- Balance at December 31, 1996 .. $10.0 $1,103.4 $ 82.3 $ (1.2) $1,871.4 $ (792.2) $(10.6) $2,263.1 ====== ========= ======= ======= ======== ======== ====== ========
See notes to consolidated financial statements. 38 UNUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ----------------------------------------- (Dollars in millions) 1996 1995 1994 - ----------------------------------------------------------------- ------------- ------------- --------- Operating activities: Net income ...................................................... $ 238.0 $ 281.1 $ 154.7 Adjustments to reconcile net income to net cash provided by operating activities: Increase in future policy benefits and unpaid claims and claim expenses ................................................ 630.1 905.3 720.1 Increase in amounts receivable under reinsurance agreements . (686.7) (61.0) (18.6) Increase (decrease) in income tax liability .................. 20.4 (3.5) (3.3) (Increase) decrease in deferred policy acquisition costs ...... 299.2 (114.9) (155.4) Increase in deposit assets .................................... (432.1) -- -- Deferred gain on sale of tax sheltered annuities ............... 80.8 -- -- Charge for individual disability reinsurance fees ............ 49.7 -- -- Realized investment (gains) losses ........................... 4.0 (242.0) (59.0) Other ......................................................... 76.4 (8.9) 62.3 --------- --------- ------- Net cash provided by operating activities .................. 279.8 756.1 700.8 --------- --------- ------- Investing activities: Maturities of fixed maturities held to maturity ............... -- 835.7 754.8 Maturities of fixed maturities available for sale ............... 775.2 99.3 41.2 Sales of fixed maturities held to maturity ..................... -- 2.8 46.8 Sales of fixed maturities available for sale .................. 2,514.4 577.3 407.6 Sales of equity securities available for sale .................. -- 836.7 314.1 Sales and maturities of other investments ..................... 269.5 312.0 414.9 Purchases of fixed maturities held to maturity .................. -- (230.2) (795.2) Purchases of fixed maturities available for sale ............... (1,890.9) (1,971.9) (943.9) Purchases of equity securities available for sale ............... -- (131.3) (216.6) Purchases of other investments ................................. (263.0) (322.4) (211.5) Net increase in short-term investments ........................ (1,051.9) (604.8) (221.7) Net additions to property and equipment ........................ (54.3) (28.9) (29.9) --------- --------- ------- Net cash provided by (used in) investing activities ......... 299.0 (625.7) (439.4) --------- --------- ------- Financing activities: Deposits and interest credited to investment contracts ......... 597.1 669.6 608.6 Maturities and withdrawals from investment contracts ............ (903.8) (888.1) (800.5) Dividends to stockholders ....................................... (79.8) (75.1) (68.3) Treasury stock acquired ....................................... (119.1) -- (183.3) Proceeds from notes payable .................................... -- 291.5 54.7 Repayment of notes payable .................................... (15.0) (1.3) (1.2) Net increase (decrease) in short-term debt ..................... (42.3) (135.1) 136.6 Other ......................................................... 18.9 13.8 7.2 --------- --------- ------- Net cash used in financing activities ........................ (544.0) (124.7) (246.2) --------- --------- ------- Effect of exchange rate changes on cash ........................ (0.3) 0.7 0.1 --------- --------- ------- Net increase in cash .......................................... 34.5 6.4 15.3 Cash at beginning of year ....................................... 42.5 36.1 20.8 --------- --------- ------- Cash at end of year ............................................. $ 77.0 $ 42.5 $ 36.1 ========= ========= ======= Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes ................................................... $ 76.4 $ 82.6 $ 48.8 Interest ...................................................... $ 40.8 $ 44.7 $ 20.4
Supplemental disclosure of noncash operating and investing activities: In conjunction with the sale of UNUM's tax sheltered annuity business, as discussed in Note 5, fixed maturities available for sale of $588.6 million and short-term investments of $1,825.9 million were transferred to the buyer on October 1, 1996. Upon transfer, there was a corresponding increase in UNUM's deposit assets. See notes to consolidated financial statements. 39 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements of UNUM Corporation and subsidiaries ("UNUM") have been prepared on the basis of generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements include the accounts of UNUM Corporation and subsidiaries. Significant intercompany accounts and transactions have been eliminated. Reclassification Certain 1995 and 1994 amounts have been reclassified in 1996 for comparative purposes. Investments Investments are reported as follows: [bullet] Fixed maturities available for sale (certain bonds and redeemable preferred stocks)--at fair value. [bullet] Equity securities available for sale (common stocks and non-redeemable preferred stocks)--at fair value. [bullet] Mortgage loans--at amortized cost less an allowance for probable losses. [bullet] Real estate--at cost less accumulated depreciation. [bullet] Policy loans--at unpaid principal balance. [bullet] Other long-term investments--at cost plus UNUM's equity in undistributed net earnings since acquisition. [bullet] Short-term investments--are considered available for sale and are carried at cost which approximates fair value. Fixed maturities and equity securities are classified as available for sale as they may be sold in response to changes in interest rates, resultant prepayment risk, liquidity and capital needs, or other similar economic factors. Unrealized gains and losses related to securities classified as available for sale are excluded from net income and reported in a separate component of stockholders' equity, net of applicable deferred taxes and related adjustments to unpaid claims and claim expenses. The unrealized gains and losses are determined based on estimated market values at the balance sheet date and are not necessarily the amounts which would be realized upon sale of the securities or representative of future market values. Changing interest rates affect the level of unrealized gains and losses related to securities classified as available for sale. While rising interest rates are beneficial when investing current cash flows, they can also reduce the fair value of existing fixed rate long-term investments. In addition, lower interest rates can lead to early payoffs and refinancing of some of UNUM's fixed rate investments. Management generally invests in fixed rate instruments that are structured to limit the exposure to such reinvestment risk. Realized investment gains and losses, which are determined on the basis of specific identification and include adjustments for allowances for probable losses, are reported separately in the Consolidated Statements of Income. If a decline in fair value of an invested asset is considered to be other than temporary or if a long-lived asset is deemed to be permanently impaired, the investment is reduced to its net realizable value and the reduction is accounted for as a realized investment loss. 40 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) UNUM discontinues the accrual of investment income on invested assets when it is determined that collectability is doubtful. UNUM recognizes investment income on impaired loans when the income is received. Real estate held for sale is included in other assets in the Consolidated Balance Sheets and is valued net of a valuation allowance which reduces the carrying value to the lower of fair value less estimated costs to sell, or cost. This valuation allowance is periodically adjusted based on subsequent changes in UNUM's estimate of fair value less costs to sell. Purchases and sales of short-term financial instruments are part of investing activities and not necessarily a part of the cash management program. Therefore, short-term financial instruments are classified as investments in the Consolidated Balance Sheets and are included as investing activities in the Consolidated Statements of Cash Flows. Derivative Financial Instruments Gains or losses on hedges of existing assets or liabilities are deferred and included in the carrying amounts of those assets or liabilities. Gains or losses related to qualifying hedges of firm commitments or anticipated transactions are also deferred and recognized in the carrying amount of the underlying asset or liability when the hedged transaction occurs. Recognition of Premium Revenues and Related Expenses Group insurance premiums are recognized as income over the period to which the premiums relate. Individual disability premiums are recognized as income when due. Benefits and expenses are associated with earned premiums to result in recognition of profits over the life of the contracts. This association is accomplished by recording a provision for future policy benefits and unpaid claims and claim expenses, and by amortizing deferred policy acquisition costs. For retirement and universal life products, premium and other policy fee revenue consist of charges for the cost of insurance, policy administration and surrenders assessed during the period. Charges related to services to be performed in the future are deferred until earned. The amounts received in excess of premium and fees are recorded as deposits and included in other policyholder funds in the Consolidated Balance Sheets. Benefits and expenses include benefit claims in excess of related account balances, interest credited at various rates, and amortization of deferred policy acquisition costs. Deferred Policy Acquisition Costs The costs of acquiring new business that vary with and are related primarily to the production of new business have been deferred to the extent such costs are deemed recoverable from future profits. Such costs include commissions, certain costs of policy issue and underwriting, and certain variable field office expenses. For individual disability, group disability, and group life and health business, the costs are amortized in proportion to expected future premiums. For universal life products, the costs are amortized in proportion to estimated gross profits from interest margins, mortality and other elements of performance under the contracts. Amortization is adjusted periodically to reflect differences between actual experience and original assumptions, with any resulting changes reflected in current operating results. The amounts deferred and amortized were as follows:
Year Ended December 31, ------------------------------------- (Dollars in millions) 1996 1995 1994 - -------------------------------------------------------- ---------- ---------- ----------- Deferred ............................................. $ 305.6 $ 308.3 $ 308.1 Less amortized ....................................... (213.9) (193.6) (152.8) ------- ------- ------- Increase in deferred policy acquisition costs ...... $ 91.7 $ 114.7 $ 155.3 ======= ======= =======
41 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Reserves for Future Policy Benefits Reserves for future policy benefits are calculated by the net-level premium method, and are based on UNUM's expected morbidity, mortality and interest rate assumptions at the time a policy is issued. These reserves represent the portion of premiums received, accumulated with interest and held to provide for claims that have not yet been incurred. The reserve assumptions are periodically reviewed and compared to actual experience and are revised if it is determined that future expected experience is different from the reserve assumptions. Reserves for group insurance policies consist primarily of unearned premiums. The interest rates used in the calculation of reserves for future policy benefits at December 31, 1996, and 1995, principally ranged from: 1996 1995 --------------- -------------- Individual disability ............... 6.0% to 9.5% 5.5% to 9.5% Individual life ..................... 5.0% to 9.0% 5.0% to 9.0% Individual accident and health ...... 5.0% to 9.0% 5.0% to 9.0% Individual and group annuities ...... 5.0% to 9.0% 5.0% to 9.0% Certain reserve calculations are based on interest rates within these ranges graded down over periods from 15 to 20 years. Reserves for Unpaid Claims and Claim Expenses Unpaid claims and claim expense reserves represent the amount estimated to fund claims that have been reported but not settled and claims incurred but not reported. Reserves for unpaid claims are estimated based on UNUM's historical experience and other actuarial assumptions that consider the effects of current developments, anticipated trends, risk management programs and renewal actions. Many factors affect actuarial calculations of claim reserves, including but not limited to interest rates and current and anticipated incidence rates, recovery rates, and economic and societal conditions. Reserve estimates and assumptions are periodically reviewed and updated with any resulting adjustments to reserves reflected in current operating results. Given the complexity of the reserving process, the ultimate liability may be more or less than such estimates indicate. The interest rates used in the calculation of disability claims reserves at December 31, 1996, and 1995, were principally as follows:
1996 1995 ----------------- ---------------- Group long term disability (North America) ......... 7.88% 7.94% Group long term disability (United Kingdom) ...... 9.46% 9.67% Individual disability .............................. 6.75% to 9.46% 6.75% to 9.67%
The interest rate used to discount the disability reserves is a composite of the yields on assets specifically identified with each block of business. Management expects the reserve discount rate for certain disability products will further decline, since current cash flows are invested in high quality assets at current yields, which are below the composite yield of the existing assets purchased in prior years. UNUM periodically adjusts prices on both existing and new business in an effort to mitigate the impact of the current interest rate environment. For other accident and health business, reserves are based on projections of historical claims run-out patterns. 42 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Activity in the liability for unpaid claims and claim expenses is summarized as follows:
(Dollars in millions) 1996 1995 1994 - ------------------------------------------------------- ------------------- ------------------ ------------------ Balance at January 1 ................................. $4,856.4 $3,853.9 $3,341.5 Less reinsurance recoverables ..................... (115.4) (82.7) (68.0) Effect of unrealized gains on fixed maturities ...... (261.2) -- -- ---- ----- ----- Net Balance at January 1 ........................... 4,479.8 3,771.2 3,273.5 Incurred related to: Current year ....................................... 1,673.9 1,825.0 1,609.3 Prior years ....................................... 366.0 507.0 436.0 ---- ----- ----- Total incurred ....................................... 2,039.9 2,332.0 2,045.3 Paid related to: Current year ....................................... 532.8 523.9 517.6 Prior years ....................................... 1,214.5 1,099.5 1,030.0 ---- ----- ----- Total paid .......................................... 1,747.3 1,623.4 1,547.6 Net Balance at December 31 ........................... 4,772.4 4,479.8 3,771.2 Plus reinsurance recoverables ..................... 346.8 115.4 82.7 Effect of unrealized gains on fixed maturities ...... 170.1 261.2 -- ---- ----- ----- Balance at December 31 .............................. $5,289.3 $4,856.4 $3,853.9 ==== ===== =====
The components of the increase in unpaid claims and claims expenses incurred and related to prior years were as follows:
(Dollars in millions) 1996 1995 1994 - ----------------------------------------------------- --------- --------- -------- Interest accrued on reserves ..................... $292.9 $270.0 $267.0 Changes in reserve estimates and assumptions ...... 36.2 239.0 154.0 Changes in foreign exchange rates .................. 36.9 (2.0) 15.0 ------- ------ ------- Increase in incurrals related to prior years ...... $366.0 $507.0 $436.0 ======= ====== =======
The increases in incurrals related to prior years were primarily the result of interest accrued on reserves, changes in reserve estimates and assumptions of interest rates, morbidity, mortality and expense costs, and changes in foreign exchange rates, primarily related to the disability reserves of UNUM's United Kingdom-based affiliate, UNUM Limited. Due to the long-term claims payment pattern of some of UNUM's businesses, certain reserves, particularly disability, are discounted for interest. The effects of changes in reserve estimates and assumptions were more significant in 1995 and 1994, primarily as a result of increased reserves from lower discount rates for certain disability products following the sale of the common stock portfolio in 1995, and adjustments to strengthen certain disability reserves in 1995 and 1994. Beginning in 1995, as explained in Note 2, unpaid claims are adjusted to reflect changes that would have been necessary if the unrealized gains and losses related to fixed maturities classified as available for sale had been realized. Where applicable, UNUM has reflected those adjustments in the liability balances with corresponding credits or charges, net of related deferred taxes, reported as a component of unrealized gains on available for sale securities in stockholders' equity. 43 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Changes in Accounting Estimates During 1995, UNUM sold virtually all of the common stock portfolio of its United States subsidiaries. The sale of the common stock portfolio, which partially supported certain disability reserves, and the reinvestment of the proceeds primarily in investment grade fixed income assets at yields below the average portfolio yield, resulted in lower reserve discount rates for certain disability products reported in the Disability Insurance segment. This change in accounting estimate to lower certain discount rates resulted in an increase of $128.6 million to benefits to policyholders in the Consolidated Statement of Income, and a decrease to net income of $83.6 million, or $1.15 per share. During 1995, UNUM increased the group long term disability reserves for incurred but not reported ("IBNR") claims, as reported in the Disability Insurance segment. The increased IBNR reserves were based on management's judgment that claims incurred but not yet reported would reflect increased levels of claims incidence and severity. This change in accounting estimate resulted in an increase to benefits to policyholders in the Consolidated Statement of Income of $38.4 million, and a decrease to net income of $25.0 million, or $0.34 per share. During 1995, UNUM increased reserves for unpaid claims related to the Association Group disability business by $15.0 million to reflect management's expectations of slower than expected claim recoveries. This change in accounting estimate, which was reflected in the Disability Insurance segment, decreased net income by $9.8 million, or $0.14 per share. During 1994, UNUM increased reserves for existing claims by $83.3 million and strengthened reserves for estimated future losses by $109.1 million. These increased reserves reflected management's expectations of morbidity trends for the existing non-cancellable individual disability business, reported in the Disability Insurance segment. This change in accounting estimate resulted in an increase to benefits to policyholders in the Consolidated Statement of Income of $192.4 million, and a decrease to net income of $125.1 million, or $1.69 per share. Other Policyholder Funds Other policyholder funds are liabilities for investment-type contracts and represent customer deposits plus interest credited to those deposits at various rates. Liabilities for Restructuring Activities Liabilities for restructuring activities are recorded when management, prior to the balance sheet date, commits to execute an exit plan that will result in the incurral of costs that have no future economic benefit, or approves a plan of termination and communicates sufficient detail of the plan to employees. Liabilities for restructuring activities are included in other liabilities in the Consolidated Balance Sheets. Separate Accounts Certain assets from tax sheltered annuity ("TSA") contracts and UNUM's defined benefit plans are in separate accounts that are pooled investment funds of securities. Investment income and realized gains and losses on these accounts accrue directly to the contractholders. Assets, carried at market value, and liabilities of the separate accounts are shown separately in the Consolidated Balance Sheets. The assets of the separate accounts are legally segregated and are not subject to claims that arise out of any other business of UNUM. On October 1, 1996, UNUM America and First UNUM closed the sale of their respective TSA businesses to The Lincoln National Life Insurance Company and Lincoln Life & Annuity Company of New York ("Lincoln"), both subsidiaries of Lincoln National Corporation (see Note 5). For legal considerations, the separate account's TSA-related assets were not transferred on October 1, 1996. TSA-related assets will be transferred only upon receipt of a contractholder and/or participant's consent for assumption reinsurance. Beginning in 1997, the assets of UNUM's defined benefit plan are no longer held in the separate accounts (see Note 8). 44 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Accounting for Participating Individual Life Insurance Participating policies issued by the former Union Mutual Life Insurance Company ("Union Mutual") prior to UNUM's conversion to a stock life insurance company on November 14, 1986, will remain participating as long as they remain in force. A Participation Fund Account ("PFA") was established for the sole benefit of all of Union Mutual's individual participating life and annuity policies and contracts. The assets of the PFA are to provide for the benefit, dividend and certain expense obligations of the participating individual life insurance policies and annuity contracts. This line of business participates in the experience of the PFA and its operations have been excluded from the Consolidated Statements of Income. The PFA represented approximately 2.3% and 2.5% of consolidated assets and 2.7% and 2.8% of consolidated liabilities at December 31, 1996, and 1995, respectively. Income Taxes The provision for income taxes includes amounts currently payable and deferred income taxes, which result from differences between financial reporting and tax bases of assets and liabilities, and are measured using enacted tax rates and laws. Deferred U.S. income taxes have not been provided on accumulated earnings of UNUM's foreign subsidiaries. These earnings could generate additional U.S. tax if remitted to UNUM Corporation. A valuation allowance is established for deferred tax assets when it is more likely than not that an amount will not be realized. Foreign Currency Translation Foreign subsidiaries' balance sheet and income statement accounts expressed in local functional currencies are translated into U.S. dollars using ending and quarterly average exchange rates, respectively. The resulting translation adjustments are reported in a separate component of stockholders' equity. Earnings Per Share The weighted average number of shares outstanding used to calculate earnings per share was approximately 72,969,000, 72,677,000 and 74,158,000 in 1996, 1995 and 1994, respectively. The assumed exercise of outstanding stock options does not result in a material dilution of earnings per share. Reinsurance UNUM, through its life insurance subsidiaries, is involved in both the cession and assumption of reinsurance with other companies. Risks are reinsured with other companies to reduce UNUM's exposure to large losses and permit recovery of a portion of direct losses. UNUM remains liable to the insured for the payment of policy benefits if the reinsurers cannot meet their obligations under the reinsurance agreements. Deferred policy acquisition costs, premiums, benefits and expenses are stated net of reinsurance ceded to other companies. UNUM evaluates the financial condition of its reinsurers and monitors concentrations of credit risk to minimize exposure to significant losses from reinsurer insolvencies. Letters of Credit In the normal course of business, UNUM enters into letters of credit, primarily to satisfy capital requirements related to certain subsidiary transactions. UNUM had outstanding letters of credit of $56.7 million and $12.3 million at December 31, 1996, and 1995, respectively. New Accounting Pronouncements In June 1996, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standard ("FAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which establishes accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. The statement provides guidance for recognition or derecognition of assets and 45 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) liabilities, focusing on the concepts of control and extinguishment. UNUM is required to adopt FAS 125 effective January 1, 1997. The adoption of FAS 125 is not expected to have a material effect on UNUM's results of operations or financial position. In March 1997, the FASB issued FAS No. 128, "Earnings Per Share," which is intended to simplify the computation and presentation of earnings per share ("EPS"). FAS 128 supersedes Accounting Principles Board ("APB") Opinion No. 15, "Earnings Per Share." FAS 128 will eliminate the concept of "primary" EPS and require dual presentation of "basic" and "diluted" EPS. Diluted EPS under FAS 128 is similar to "fully diluted" EPS as defined by APB 15. UNUM is required to adopt FAS 128 effective December 31, 1997. As stated in Note 1, under the caption "Earnings Per Share," the assumed exercise of UNUM's outstanding stock options does not result in a material dilution of earnings per share. In March 1997, the FASB issued FAS No. 129, "Disclosures of Information About Capital Structure," which clarifies disclosure requirements related to the type, and nature, of securities contained in an entity's capital structure. UNUM is required to adopt FAS 129 effective December 31, 1997. NOTE 2. INVESTMENTS In November 1995, the FASB issued "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," which provided a one-time opportunity to reassess the appropriateness of the classifications of securities described in FAS 115, and to reclassify fixed maturities from the held to maturity category without calling into question the intent to hold other debt securities to maturity in the future. On December 31, 1995, UNUM reassessed its fixed maturity portfolio and as allowed under the implementation guidance, reclassified fixed maturities with an amortized cost of $6,082.8 million and a related unrealized gain of $393.0 million from the held to maturity category to available for sale. The unrealized gain on the total available for sale fixed maturity portfolio was $551.9 million at December 31, 1995. In connection with the reclassification of the held to maturity fixed maturities to available for sale, on December 31, 1995, UNUM adjusted its unpaid claims by $261.2 million to reflect the changes that would have been necessary if the unrealized gains and losses related to fixed maturities classified as available for sale had been realized. At December 31, 1996, the unrealized gain on available for sale fixed maturities was $286.0 million and the related unpaid claims adjustment was $168.7 million. The following tables summarize the components of investment income, net realized investment gains, and changes in unrealized investment gains on available for sale securities: 46 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 2. INVESTMENTS (Continued) Investment Income
Year Ended December 31, ---------------------------------- (Dollars in millions) 1996 1995 1994 - ------------------------------------------------------ --------- --------- ---------- Fixed maturities: Available for sale ................................. $642.2 $182.2 $ 87.9 Held to maturity ................................. -- 488.0 548.1 Equity securities available for sale ............... -- 5.3 10.4 Mortgage loans .................................... 112.1 119.9 137.4 Real estate ....................................... 20.0 15.2 15.8 Policy loans ....................................... 10.2 8.6 10.2 Other long-term investments ........................ 7.3 1.6 0.9 Short-term investments .............................. 51.2 27.1 8.5 ------ ------ ------ Gross investment income ........................... 843.0 847.9 819.2 Less investment expenses ........................... (16.3) (17.0) (23.9) Less investment income on participating individual life insurance policies and annuity contracts ...... (24.5) (24.6) (25.1) ------ ------ ------ Investment income ................................. $802.2 $806.3 $770.2 ====== ====== ======
Net Realized Investment Gains
Year Ended December 31, ---------------------------------- (Dollars in millions) 1996 1995 1994 - ---------------------------------------------- --------- --------- ---------- Gross realized investment gains: Fixed maturities: Available for sale ........................ $ 22.0 $ 14.2 $ 10.2 Held to maturity ........................... -- 0.1 0.2 Equity securities available for sale ...... -- 253.3 93.1 Mortgage loans, real estate and other ...... 18.2 19.4 13.5 ------ ------ ------ Gross realized investment gains ............ 40.2 287.0 117.0 ------ ------ ------ Gross realized investment losses: Fixed maturities: Available for sale ........................ (29.2) (12.8) (28.8) Held to maturity ........................... -- (0.7) (6.8) Equity securities available for sale ...... -- (18.7) (12.2) Mortgage loans, real estate and other ...... (7.6) (29.7) (23.6) ------ ------ ------ Gross realized investment losses ......... (36.8) (61.9) (71.4) ------ ------ ------ Net realized investment gains ............ $ 3.4 $225.1 $ 45.6 ====== ====== ======
47 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 2. INVESTMENTS (Continued) Change in Unrealized Gains on Available For Sale Securities
Year Ended December 31, -------------------------------------------- (Dollars in millions) 1996 1995 1994 - -------------------------------------------------------- ----------- ---------- ----------------- Fixed maturities available for sale .................. $ (265.9) $ 612.7 $ (60.8) Equity securities available for sale .................. 3.4 (131.6) (86.0) Unpaid claims adjustment .............................. 92.5 (261.2) -- Deferred taxes ....................................... 39.2 (56.4) 47.3 -------- ------- ------- Total change in unrealized gains on available for sale securities, as included in stockholders' equity ...... $ (130.8) $ 163.5 $ (99.5) ======== ======= =======
Fixed Maturities The amortized cost and fair values of fixed maturities available for sale at December 31, 1996, were as follows:
Gross Gross Amortized Unrealized Unrealized Fair (Dollars in millions) Cost Gains Losses Value - ------------------------------------ ------------ ------------- ------------- ---------- U.S. Government .................. $ 57.0 $ 3.6 $ -- $ 60.6 States and municipalities ......... 550.2 14.9 (0.8) 564.3 Foreign governments ............... 379.9 32.6 (0.7) 411.8 Public utilities .................. 1,354.7 60.4 (4.2) 1,410.9 Corporate bonds .................. 4,299.7 197.5 (17.1) 4,480.1 Redeemable preferred stocks ...... 3.6 -- (0.7) 2.9 Mortgage-backed securities ...... 11.6 0.5 -- 12.1 -------- ------ ------ -------- Total ........................... $6,656.7 $309.5 $(23.5) $6,942.7 ======== ====== ====== ========
The amortized cost and fair values of fixed maturities available for sale at December 31, 1995, were as follows:
Gross Gross Amortized Unrealized Unrealized Fair (Dollars in millions) Cost Gains Losses Value - ------------------------------------ ------------ ------------- ------------- ---------- U.S. Government .................. $ 402.6 $10.3 $ -- $ 412.9 States and municipalities ......... 670.5 23.7 (0.7) 693.5 Foreign governments ............... 229.4 26.1 (0.5) 255.0 Public utilities .................. 1,617.8 117.6 (0.6) 1,734.8 Corporate bonds .................. 5,617.9 377.3 (2.7) 5,992.5 Redeemable preferred stocks ...... 27.8 1.5 (1.2) 28.1 Mortgage-backed securities ...... 17.5 1.1 -- 18.6 -------- ------ ----- -------- Total ........................... $8,583.5 $557.6 $(5.7) $9,135.4 ======== ====== ===== ========
48 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 2. INVESTMENTS (Continued) The amortized cost and fair value of fixed maturities available for sale at December 31, 1996, by contractual maturity date, are shown below. Expected maturities will differ from contractual maturities since certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Fair (Dollars in millions) Cost Value - ------------------------------------------------------------------- ------------ ---------- Due in one year or less .......................................... $ 279.4 $ 288.9 Due after one year through five years ........................... 2,181.8 2,292.6 Due after five years through ten years ........................... 3,551.3 3,674.9 Due after ten years ............................................. 632.6 674.2 -------- -------- 6,645.1 6,930.6 Mortgage-backed securities (primarily due after 10 years) ...... 11.6 12.1 -------- -------- Total ......................................................... $6,656.7 $6,942.7 ======== ========
During 1995, UNUM sold fixed maturities of two issuers classified as held to maturity with an amortized cost of $4.0 million due to evidence of significant deterioration of the issuers' creditworthiness, as evidenced by bankruptcy filings. These sales resulted in a net realized loss of $1.2 million in 1995. During 1994, UNUM sold fixed maturities of five issuers classified as held to maturity with an amortized cost of $49.8 million due to evidence of significant deterioration of the issuers' creditworthiness. These sales resulted in a net realized loss of $3.0 million in 1994. Equity Securities The fair values, which also represent carrying amounts, and the cost of equity securities available for sale were as follows at December 31, 1996:
Fair (Dollars in millions) Cost Value - ------------------------------------------------- -------- ------- Common stocks: Industrial, miscellaneous and all other ...... $23.8 $31.3 ====== ======
Gross unrealized investment gains on equity securities available for sale totaled $7.5 million and $5.5 million, at December 31, 1996, and 1995, respectively. There were no gross unrealized investment losses at December 31, 1996, and gross unrealized investment losses totaled $1.4 million, at December 31, 1995. Mortgages Effective January 1, 1995, UNUM adopted Financial Accounting Standard ("FAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and FAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures," which defined the principles to measure and record an impaired loan. When it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of a loan agreement, the loan is deemed impaired. Once a loan is determined to be impaired, an allowance for probable losses is established for the difference between the carrying amount of the loan and its estimated value. The estimated value is based on either the present value of expected future cash flows discounted using the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral. The adoption of FAS 114 and FAS 118 did not have a material effect on UNUM's results of operations or financial position. At December 31, 1996, and 1995, impaired loans totaled $50.4 million and $50.1 million, respectively. Included in the $50.4 million were $38.9 million of loans which had a related allowance for probable losses of $5.7 million, and a loan of $11.5 million which had no related allowance for probable losses. Included in the $50.1 million of impaired loans at December 31, 1995, were $38.4 million of loans which had a related allowance for probable losses of $7.1 million, and a loan of $11.7 million which had no related allowance for probable losses. Mortgage loans that were restructured prior to the adoption of FAS 114 amounted to $54.8 million and $59.9 million at December 31, 1996, and 1995, respectively. Troubled debt restructurings represent loans that are 49 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 2. INVESTMENTS (Continued) refinanced with terms more favorable to the borrower. Interest lost on restructured loans was not material for the years ended December 31, 1996, 1995 or 1994. Real Estate and Other Effective January 1, 1996, UNUM adopted FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. FAS 121 applies to both real estate held for investment and real estate held for sale. The adoption of FAS 121 did not have a material effect on UNUM's results of operations or financial position. Real estate acquired in satisfaction of debt cumulatively amounts to $86.4 million at December 31, 1996. Real estate held for sale amounted to $9.4 million at December 31, 1996, and $35.5 million at December 31, 1995. Real estate with a depreciated cost of $7.7 million and no bonds or mortages were non-income producing for the twelve months ended December 31, 1996. Interest lost on these investments was not material in 1996, 1995 or 1994. UNUM was committed at December 31, 1996, to purchase fixed maturities and other invested assets in the amount of $104.3 million. NOTE 3. ALLOWANCE FOR PROBABLE LOSSES ON INVESTED ASSETS AND REAL ESTATE HELD FOR SALE Changes in the allowance for probable losses on invested assets and real estate held for sale were as follows:
Balance at Balance beginning at end (Dollars in millions) of year Additions Deductions of year - ------------------------------------ ------------- ------------ ------------- --------- Year Ended December 31, 1996 Mortgage loans .................. $39.2 $ 1.0 $ (2.5) $37.7 Real estate held for sale ...... 19.1 (0.4) (3.9) 14.8 ------ ----- ------ ------ Total ........................... $58.3 $ 0.6 $ (6.4) $52.5 ====== ===== ====== ====== Year Ended December 31, 1995 Mortgage loans .................. $43.2 $ 9.2 $(13.2) $39.2 Real estate held for sale ...... 13.2 6.3 (0.4) 19.1 ------ ----- ------ ------ Total ........................... $56.4 $15.5 $(13.6) $58.3 ====== ===== ====== ====== Year Ended December 31, 1994 Fixed maturities held to maturity and available for sale ......... $ 0.3 $ -- $ (0.3) $ -- Mortgage loans .................. 48.6 8.5 (13.9) 43.2 Real estate held for sale ...... 20.9 0.8 (8.5) 13.2 ------ ----- ------ ------ Total ........................... $69.8 $ 9.3 $(22.7) $56.4 ====== ===== ====== ======
Additions represent charges to net realized investment gains less recoveries, and deductions represent reserves released upon disposal or restructuring of the related asset. 50 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4. DERIVATIVE FINANCIAL INSTRUMENTS UNUM periodically uses common derivative financial instruments such as options, futures and forward exchange contracts to hedge certain risks associated with anticipated purchases and sales of investments and certain payments denominated in foreign currencies, primarily British pound sterling, Canadian dollar and Japanese yen. These derivative financial instruments are used to protect UNUM from the effect of market fluctuations in interest and exchange rates between the contract date and the date on which the hedged transaction occurs. In using these instruments, UNUM is subject to the off-balance-sheet risk that the counterparties of the transactions will fail to perform as contracted. UNUM manages this risk by only entering into contracts with highly rated institutions and listed exchanges. UNUM does not hold derivative financial instruments for the purpose of trading. At December 31, 1996, UNUM had open interest rate futures contracts with notional amounts of $178.2 million to hedge anticipated sales of investments in 1997. These contracts had a related net unrealized gain of $1.6 million. At December 31, 1995, UNUM had no open derivative financial instruments. NOTE 5. SALE OF TAX SHELTERED ANNUITY BUSINESS On October 1, 1996, UNUM Life Insurance Company of America ("UNUM America") and First UNUM Life Insurance Company ("First UNUM") closed the sale of their respective group tax-sheltered annuity ("TSA") businesses to The Lincoln National Life Insurance Company and Lincoln Life & Annuity Company of New York ("Lincoln"), both subsidiaries of Lincoln National Corporation. The sale involved approximately 1,700 group contractholders and assets under management of approximately $3.3 billion. The contracts have initially been reinsured on an indemnity basis. Upon consent of the TSA contractholders and/or participants, the contracts will be considered reinsured on an assumption basis, legally releasing UNUM America and First UNUM from future contractual obligation to the respective contractholders and/or participants. To effect the sale of the TSA business, UNUM transferred into a trust account held for the benefit of Lincoln approximately $2,690 million of assets. The assets transferred consisted of approximately $1,826 million of short- term investments, $589 million of fixed maturities, and $275 million of cash. The amount of assets in the trust will increase or decrease in conjunction with the on-going activity in participant accounts, and assets will be released from the trust to Lincoln upon consents for assumption reinsurance. UNUM has recorded a deposit asset in its Consolidated Balance Sheet representing the assets remaining in the trust, which supports the TSA contracts of those contractholders and/or participants that have not given consent for assumption reinsurance. At December 31, 1996, the deposit asset related to the TSA transaction was approximately $2,651 million. The sale resulted in a deferred pretax gain of $80.8 million, which will be recognized in income in proportion to contractholder and/or participant consents for assumption reinsurance, the majority of which management believes will occur during 1997. The purchase price (ceding commission) paid upon closing was approximately $71 million, and the transaction generated statutory capital of approximately $160 million. As of March 1, 1997, consent for assumption reinsurance has been provided by TSA contractholders and/or participants owning approximately 60% of assets under management. Historical results of the TSA business included in UNUM's Consolidated Statements of Income were as follows:
Year Ended December 31, -------------------------------- (Dollars in millions, except per common share data) 1996 1995 1994 - ------------------------------------------------------ --------- --------- -------- Revenues .......................................... $206.7 $247.6 $238.1 Net income .......................................... $ 12.8 $ 31.1 $ 29.9 Net income per common share ........................ $ 0.18 $ 0.43 $ 0.40
51 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 6. REINSURANCE UNUM, through its life insurance subsidiaries, is involved in both the cession and assumption of reinsurance with other companies. On October 23, 1996, UNUM announced the execution of a definitive reinsurance agreement between UNUM America and Centre Life Reinsurance Limited ("Centre Re"), a Bermuda based reinsurance specialist, for reinsurance coverage of the active life reserves of UNUM America's existing United States non-cancellable individual disability ("ID") block of business. This agreement does not reinsure any claims incurred prior to January 1, 1996. The agreement follows UNUM's announcement in late 1994 that it would no longer market the non-cancellable form of ID coverage in the United States. The agreement is a finite reinsurance arrangement that transfers liabilities to Centre Re based on the level of statutory reserves. At December 31, 1996, active life reserves of $427 million and reserves established for claims in 1996 of $137 million were ceded to Centre Re. Under the agreement, Centre Re has an obligation to fund a defined risk layer, while UNUM will retain the earnings risk related to potential adverse claims experience up to a certain threshold. This threshold amount represents the existence of an experience layer with a value of $195 million at December 31, 1996. UNUM has recorded the value of the experience layer on its Consolidated Balance Sheet as a deposit asset. UNUM funded its obligation under the agreement by transferring assets totaling approximately $403 million into a trust account in late December 1996. The assets transferred were equal to the experience layer plus reserves, determined under generally accepted accounting principles, net of related deferred acquisition costs. Future net cash flows of the block will be transferred to/from the trust account and, together with changes in reserve levels, will determine the value of UNUM's deposit asset. Changes in the deposit asset will flow through UNUM's results of operations. The agreement generated slightly more than $200 million of statutory capital. In fourth quarter 1996, UNUM recognized a pretax charge of $49.7 million, which represents the present value of the anticipated minimum amount of fees to be paid to Centre Re under the agreement. UNUM has the right, but no obligation, to recapture the business after five years, with certain penalties. The effect of reinsurance on premiums earned and written for the years ended December 31, 1996, 1995 and 1994 was as follows: Year Ended December 31, -------------------------------------- (Dollars in millions) 1996 1995 1994 - --------------------------- ----------- ----------- ---------- Premiums earned: Direct .................. $2,973.9 $2,842.9 $2,663.1 Assumed ............... 252.9 241.5 170.7 Ceded .................. (106.4) (66.2) (112.5) -------- -------- -------- Premiums earned ...... $3,120.4 $3,018.2 $2,721.3 ======== ======== ======== Premiums written: Direct .................. $3,008.1 $2,877.2 $2,702.7 Assumed ............... 289.3 250.4 170.9 Ceded .................. (131.0) (64.4) (112.6) -------- -------- -------- Premiums written ...... $3,166.4 $3,063.2 $2,761.0 ======== ======== ======== For the years ended December 31, 1996, 1995 and 1994, recoveries recognized under reinsurance agreements reduced benefits to policyholders by $90.8 million, $58.9 million and $53.3 million, respectively. NOTE 7. BUSINESS RESTRUCTURING AND OTHER CHARGES Business Restructuring Charges of $7.2 million, $8.4 million and $14.4 million were recorded in 1996, 1995 and 1994, respectively. The charge in 1996 was related to the merger of Commercial Life Insurance Company ("Commercial Life") into 52 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 7. BUSINESS RESTRUCTURING AND OTHER CHARGES (Continued) UNUM America, and consisted of $2.8 million of severance costs for 120 employees and $4.4 million of lease exit costs. The charges in 1995 and 1994 relate to the acceleration of organizational changes within UNUM America and the decision to discontinue the individual disability non-cancellable product. Partially offsetting the charge recorded in 1995 was a $3.4 million curtailment gain, related to workforce reductions in UNUM Corporation's noncontributory defined benefit pension plan. As of December 31, 1996, the liability carried in the Consolidated Balance Sheet for all three charges was $5.3 million. Intangible Asset Write-offs and Future Loss Reserves In connection with the merger of Commercial Life into UNUM America, the sale of the tax-sheltered annuity business (see Note 5), as well as UNUM's continued efforts to strengthen its focus on its core products, the company initiated a review of certain products, which resulted in the recognition of pretax charges totaling $39.4 million during 1996. These charges reduced income before income taxes by $13.1 million in the Disability Insurance segment, $11.3 million in the Special Risk Insurance segment, and $15.0 million in the Retirement Products segment. On an after-tax basis the charges reduced net income by $26.3 million, or $0.36 per share for 1996. The charges include the write-off of certain intangible assets, primarily deferred acquisition costs, totaling $17.0 million. These intangible assets have been deemed unrecoverable primarily due to the expectation of continued losses in the Association Group disability business. Additionally, in conjunction with the completion of a review of UNUM's discontinued product portfolio, a $22.4 million charge was taken to establish a reserve for the present value of expected future losses on certain discontinued products. Future losses for these products will be charged to the reserve at the time the losses are realized. The products incorporated in the charge consist of certain discontinued special risk, retirement and medical products. UNUM is pursuing the sale of some of these discontinued product lines. NOTE 8. EMPLOYEE BENEFIT PLANS Pension Plans At December 31, 1996, UNUM had a noncontributory defined benefit pension plan covering substantially all domestic employees, excluding employees of Colonial Companies, Inc. ("Colonial Companies") and Duncanson & Holt, Inc. ("D&H"), who were covered under separate plans through 1996. The plan provided benefits based on the employee's years of service and compensation during the highest five consecutive years out of the last ten years of employment. Plan assets, which were held in UNUM's separate accounts, consisted primarily of group annuity contracts and 224,392 shares of UNUM Corporation common stock. UNUM funds its pension plan in accordance with the requirements of the Employee Retirement Income Security Act of 1974, as amended. Effective January 1, 1997, UNUM replaced its existing pension plans with a new noncontributory defined benefit pension plan ("Lifecycle Plan") covering substantially all domestic employees, including employees of Colonial Companies and D&H. Under the Lifecycle Plan, a new benefit formula is used, resulting in benefits being earned more consistently over an employee's career, and is based on the employee's age at retirement, years of service, and earnings during the highest five of the last ten years of employment. Beginning in 1997, plan assets were transferred from UNUM's separate accounts into a trust for the exclusive benefit of plan participants. The calculation of the December 31, 1996, benefit obligations shown below is based on the Lifecycle Plan, reflecting the impacts of adding Colonial Companies and D&H employees to the plan, merging Colonial Companies' previous defined benefit plan, and changes in certain actuarial assumptions related to the new benefit formula. 53 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8. EMPLOYEE BENEFIT PLANS (Continued) Net pension cost included the following components:
Year Ended December 31, ----------------------------------- (Dollars in millions) 1996 1995 1994 - ------------------------------------------------------ --------- ---------- ---------- Service cost--benefits earned during the year ...... $ 13.5 $ 7.7 $ 9.2 Interest cost on projected benefit obligation ...... 15.1 12.3 11.6 Actual return on plan assets ........................ (57.1) (42.5) 3.3 Net amortization and deferral ..................... 36.9 28.2 (16.5) Curtailment gain .................................... -- (3.4) -- ------ ------ ------ Net pension cost ................................. $ 8.4 $ 2.3 $ 7.6 ====== ====== ======
The funded status of the plan and amounts recognized in UNUM's Consolidated Balance Sheets, as determined by the plan's actuaries, were as follows:
December 31, ------------------------ (Dollars in millions) 1996 1995 - ------------------------------------------------------------------ ---------- ----------- Actuarial present value of benefit obligation: Vested benefit obligation .................................... $ 166.9 $ 174.4 ======= ======= Accumulated benefit obligation ................................. $ 189.3 $ 178.7 ======= ======= Projected benefit obligation for service rendered to date ...... $(203.2) $(183.9) Plan assets at fair value ....................................... 267.7 192.7 ------- ------- Projected benefit obligation less than plan assets ............ 64.5 8.8 Unrecognized net gain .......................................... (54.7) (0.7) Unrecognized prior service cost ................................. (28.4) (17.0) Unamortized net obligation .................................... 1.8 2.1 ------- ------- Accrued pension cost .......................................... $ (16.8) $ (6.8) ======= =======
The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.50% and 5.00%, respectively, at December 31, 1996, and 7.25% and 4.70%, respectively, at December 31, 1995. The expected long-term rate of return on plan assets was 9.0% in 1996, 1995 and 1994. Prior year service costs are being amortized on a straight-line basis over expected employment periods for active employees. UNUM also administers certain supplemental retirement plans for eligible employees and officers and certain other pension plans. The cost of these plans was not significant for the years ended December 31, 1996, 1995 and 1994. Postretirement Health Care and Life Insurance Benefits UNUM provides certain health care and life insurance benefits for retired employees and covered dependents. Substantially all domestic employees of UNUM may become eligible for these benefits if they meet minimum age and service requirements, if they are eligible for retirement benefits and if they agree to contribute a portion of the cost. UNUM has the right to modify or terminate these benefits. The underlying plans are not currently funded. The cost of these plans was $10.3 million, $10.0 million and $8.2 million for the years ended December 31, 1996, 1995 and 1994, respectively. At December 31, 1996, and 1995 the liability associated with these plans was $80.9 million and $72.4 million, respectively. Retirement Savings Plans UNUM has several retirement savings and profit sharing plans for substantially all full-time and part-time employees who work 1,000 hours a year and have been employed for at least one year. Dependent upon which 54 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 8. EMPLOYEE BENEFIT PLANS (Continued) plan the employee participates in, eligible employees may contribute primarily up to 10% of their annual base salary, and UNUM matches a portion of each employee's contribution up to 6% of the employee's compensation. Employees may become 100% vested immediately upon becoming eligible to participate, or incrementally over a five year period. Expense for these plans amounted to $8.4 million in 1996, 1995 and 1994, respectively. Effective January 1, 1997, UNUM introduced a single retirement savings plan for all domestic employees who meet the eligibility requirement of one year of service, including all employees eligible under the former plans. Dependent upon the employee's annual earnings, eligible employees may contribute up to 15% of their annual compensation, including incentive payouts. UNUM will match 100% of the employee's contribution up to 3% of the employee's compensation, plus 50% of the employee's contribution on the next 2% of the employee's compensation, to a maximum of 4%. Employees become 100% vested immediately upon becoming eligible to participate. NOTE 9. STOCK-BASED COMPENSATION PLANS AND INCENTIVE PLANS Stock-Based Compensation Plans Effective January 1, 1996, UNUM adopted FAS No. 123, "Accounting for Stock-Based Compensation." FAS 123 established financial accounting and reporting standards for stock-based employee compensation plans. The statement defines a new method of accounting for employee stock compensation plans using a fair value based method, under which compensation cost is measured and recognized in results of operations. Alternatively, FAS 123 allows an entity to retain the accounting for employee stock compensation plans defined under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." UNUM retained the accounting defined in APB No. 25, under which no compensation expense is recognized for fixed stock option grants. As required, UNUM will disclose the pro forma effects of stock-based compensation using the fair value based method defined under FAS 123. At December 31, 1996, UNUM had four stock-based compensation plans, which are described below. Had compensation cost for options issued under UNUM's four stock-based compensation plans been determined based on the fair value at the grant dates consistent with the methods defined under FAS 123, UNUM's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
(Dollars in millions, except per common share data) 1996 1995 - ------------------------------------------------------ --------- -------- Net income: As reported ....................................... $238.0 $281.1 Pro forma .......................................... $231.9 $277.2 Earnings per common share: As reported ....................................... $ 3.26 $ 3.87 Pro forma .......................................... $ 3.18 $ 3.81
The fair value of each option granted is estimated on the date of grant using a modified Black-Scholes option- pricing model with the following assumptions:
1996 1995 ----------------- ---------------- Dividend yield ........................ 1.5% 1.9% Expected stock price volatility ...... 23.1% to 24.8% 24.8% to 25.9% Risk-free interest rate ............... 5.2% to 6.5% 5.4% to 7.9% Expected option lives ............... 4 to 8 years 4 to 8 years
55 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 9. STOCK-BASED COMPENSATION PLANS AND INCENTIVE PLANS (Continued) Because some options vest over several years and additional awards generally are made each year, the pro forma amounts above may not be representative of the effects on net income for future years. The 1987 Executive Stock Option Plan ("Option Plan") provided for granting to officers and key employees options to purchase UNUM Corporation common stock over ten years. Options were granted at the discretion of the Compensation Committee of the Board of Directors ("the Committee") and had vesting schedules of one to four years. The number of shares subject to options under the Option Plan could not exceed 2.5 million. Grants are no longer made under this plan. The 1990 Long-Term Stock Incentive Plan ("Incentive Plan") provides for granting of options to officers, non- employee directors of UNUM Corporation and key employees, to purchase UNUM Corporation common stock over ten years. Options may be granted annually at the discretion of the Committee and vest in one to five years. The Incentive Plan also provides for granting to key officers restricted stock awards whose vesting is contingent upon UNUM's achieving prescribed financial performance objectives, with the exception of 5,800 shares granted in 1996, 20,200 shares granted in 1995 and 10,000 shares granted in 1994, which will vest upon the grantee remaining in UNUM's employ for a specified period of time. Plan participants are entitled to voting rights on their respective shares at grant. The compensation cost related to restricted stock grants was not material in 1996, 1995 and 1994. The market value of the restricted shares issued under the Incentive Plan has been recorded as deferred compensation and is included as a reduction of stockholders' equity in the Consolidated Balance Sheets. The number of shares subject to issuance under the Incentive Plan cannot exceed 6.8 million, including both options and shares of restricted stock. At December 31, 1996, 1995 and 1994, 692,518 shares, 1,680,235 shares and 2,511,145 shares, respectively, were available for grant under the Incentive Plan. The 1996 Long-Term Stock Incentive Plan ("1996 Incentive Plan") provides for granting of options to officers, non-employee directors of UNUM Corporation, and key employees, to purchase UNUM Corporation common stock over ten years. The 1996 Incentive Plan also provides for granting to key officers restricted stock awards whose vesting is contingent upon achieving prescribed financial performance objectives or upon the grantee remaining in UNUM's employ for a specified period of time. Options and restricted stock may be granted annually at the discretion of the Committee. The number of shares subject to issuance cannot exceed 3.5 million. At December 31, 1996, 3,495,000 shares were available for grant under the 1996 Incentive Plan. The 1998 Goals Stock Option Plan ("1998 Option Plan") provides for granting to all eligible employees up to 150 options to purchase UNUM Corporation common stock. The options will vest to the employee nine years from the date of grant. Vesting may be accelerated to an earlier date if it is determined that UNUM has attained the 1998 Goals. Grants of 102,500 shares and 1,105,350 shares were made in 1996 and 1995, respectively. Additional grants will be made in 1997. The number of shares subject to options under this plan cannot exceed 1.5 million. For all of UNUM's stock based compensation plans, the exercise price of each option is not less than 100% of the fair market value of UNUM's stock on the date of grant. 56 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 9. STOCK-BASED COMPENSATION PLANS AND INCENTIVE PLANS (Continued) A summary of the status of UNUM's four stock-based compensation plans as of December 31, 1996, 1995 and 1994, and changes during the years then ended is presented below:
Restricted (Per share amounts are weighted-average) Options Stock - -------------------------------------------------------- ------------ ------------ Outstanding at January 1, 1994 ........................ 3,402,954 146,425 1994 Activity: Granted at $50.92 per share ........................... 884,375 -- Granted for restricted stock at $50.05 per share ...... -- 46,850 Lapse of restrictions on restricted stock ............ -- (80,800) Exercised at $24.99 per share ........................ (282,729) -- Forfeited at $46.08 per share for options ............ (151,578) (2,525) ---------- -------- Outstanding at December 31, 1994 ..................... 3,853,022 109,950 ---------- -------- 1995 Activity Granted at $41.06 per share ........................... 2,200,000 -- Granted for restricted stock at $42.99 per share ...... -- 70,950 Lapse of restrictions on restricted stock ............ -- (33,100) Exercised at $25.75 per share ........................ (541,188) -- Forfeited at $46.85 per share for options ............ (314,200) (5,600) ---------- -------- Outstanding at December 31, 1995 ..................... 5,197,634 142,200 ---------- -------- 1996 Activity Granted at $60.75 per share ........................... 1,080,690 -- Granted for restricted stock at $59.36 per share ...... -- 93,300 Exercised at $37.72 per share ........................ (637,261) -- Forfeited at $46.78 per share for options ............ (271,741) (32,600) ---------- -------- Outstanding at December 31, 1996 ..................... 5,369,322 202,900 ========== ========
The weighted-average exercise price of options outstanding at December 31, 1996, 1995 and 1994, was $45.85, $41.81 and $40.32 per share, respectively. The number and weighted-average exercise price of exercisable shares as of December 31, 1996, 1995 and 1994 was 2,381,592 shares at $41.45 per share, 2,108,060 shares at $39.13 per share, and 1,975,219 shares at $32.54 per share, respectively. The weighted-average fair value of options granted during the years ended December 31, 1996, and 1995 was $13.83 and $10.20, respectively. 57 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 9. STOCK-BASED COMPENSATION PLANS AND INCENTIVE PLANS (Continued) The following table summarizes information about stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable - --------------------------------------------------------------------------- ---------------------------------------------- Range of Number Weighted-Average Number Exercise Outstanding Remaining Weighted-Average Exercisable Weighted-Average Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price - ------------ -------------- ------------------- ------------------- -------------- ------------------ $10 to 30 487,086 3.49 $23.38 487,086 $23.38 31 to 48 2,414,512 7.35 39.43 970,009 38.78 49 to 72 2,467,724 7.81 56.57 924,497 53.76 ---------- ---------- ------ ------- ---------- ------- $10 to 72 5,369,322 7.21 $45.85 2,381,592 $41.45 ========== ==========
Between 1991 and 1994, certain officers were granted limited stock appreciation rights ("LSARs") in conjunction with their options for those years. If a change in control of UNUM Corporation, as defined in the plans, should occur, the option holder can exercise the LSAR. An LSAR is meant to compensate an officer if the associated options lose value due to a change in control by allowing the officer to receive payment for the difference between the option exercise price and the highest price paid per share in connection with the change in control. As an underlying stock option is exercised, the LSARs are automatically canceled. At December 31, 1996, 1995 and 1994, there were 398,300 LSARs, 480,825 LSARs and 590,275 LSARs outstanding, respectively. Annual Incentive Plans UNUM has several annual incentive plans for certain employees and executive officers that provide additional compensation based on achievement of predetermined annual corporate and affiliate financial and non-financial goals. In 1996, 1995 and 1994, expense for these plans was $41.7 million, $19.9 million and $7.5 million, respectively. NOTE 10. INCOME TAXES A reconciliation of income taxes computed by applying the federal income tax rate to income before income taxes and the consolidated income tax expense charged to operations follows:
Year Ended December 31, ------------------------------------------- (Dollars in millions) 1996 1995 1994 - --------------------------------------------- ---------- ----------------- ---------- Tax at federal statutory rate of 35% ...... $119.6 $ 133.7 $ 69.5 Tax-exempt income ........................ (18.8) (30.0) (32.0) Prior years' taxes ........................ (1.2) (6.6) -- State income tax ........................... 2.5 3.8 2.2 Realized investment gains .................. -- (5.0) (1.3) Other .................................... 1.5 4.9 5.5 ------ ---- ------ Income taxes .............................. $103.6 $ 100.8 $ 43.9 ====== ==== ======
58 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10. INCOME TAXES (Continued) Deferred income tax liabilities and assets consist of the following: December 31, -------------------- (Dollars in millions) 1996 1995 - ------------------------------------------------------ --------- -------- Deferred tax liabilities: Deferred policy acquisition costs .................. $210.7 $321.6 Policy reserve adjustments ........................ 106.5 -- Net unrealized gains .............................. 101.7 174.0 Value of business acquired ........................ 19.8 17.7 Invested assets .................................... 9.6 10.9 Other ............................................. 11.0 16.0 ------- ------- Gross deferred tax liabilities .................. 459.3 540.2 ------- ------- Deferred tax assets: Alternative minimum tax credit carryforwards ...... 1.1 29.0 Policy reserve adjustments ........................ -- 65.9 Net realized losses .............................. 17.4 25.1 Postretirement benefits ........................... 26.7 22.1 Deferred gains .................................... 28.5 -- Accrued liabilities .............................. 27.0 -- Other ............................................. 26.8 12.1 ------- ------- Gross deferred tax assets ........................ 127.5 154.2 Less valuation allowance ........................... 10.0 6.0 ------- ------- Net deferred tax assets ........................... 117.5 148.2 ------- ------- Net deferred tax liability ........................ $341.8 $392.0 ======= ======= Deferred income taxes relating to cumulative net unrealized gains on available for sale fixed maturity and equity securities were $101.7 million, $174.0 million and $27.1 million at December 31, 1996, 1995 and 1994, respectively. Prior to the Tax Reform Act of 1984 ("1984 Act"), half the excess of the tax basis gain from operations of a life insurance company over its taxable investment income was currently taxable. The other half was set aside in a Policyholders Surplus Account, together with certain special life insurance company deductions. The cumulative amount in the Policyholders Surplus Account as of December 31, 1983, was frozen by the 1984 Act and amounted to $31.8 million at December 31, 1996. Any direct or indirect distributions from this account would be taxed at current tax rates; however, no provision has been made for related taxes. If the amount set aside in this account were taxed at the current rate at December 31, 1996, for all life insurance subsidiaries, the tax would have amounted to $11.1 million. UNUM's Consolidated Statements of Income for 1996, 1995 and 1994, included the following amounts of foreign income and related income tax expense: Year Ended December 31, ------------------------------ (Dollars in millions) 1996 1995 1994 - ------------------------------ -------- --------- ------- Foreign income ............ $27.4 $ (1.2) $24.2 ====== ====== ====== Income tax expense (credit): Current .................. $10.4 $ 1.4 $ 0.7 Deferred .................. 1.8 (0.2) 9.7 ------ ------ ------ Total ..................... $12.2 $ 1.2 $10.4 ====== ====== ====== 59 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 10. INCOME TAXES (Continued) UNUM subsidiaries had operating loss carryforwards totaling $3.6 million as of December 31, 1996. The operating loss carryforward will expire, if not utilized, in 1999 through 2002. NOTE 11. NOTES PAYABLE Notes payable consisted of the following at December 31, 1996, and 1995:
December 31, -------------------- (Dollars in millions) 1996 1995 - --------------------------------------------------------------- --------- -------- Short-term debt: Commercial paper, with weighted average interest rates of 5.5% in 1996 and 5.9% in 1995 .............................. $60.6 $82.4 Other notes payable, with weighted average interest rates of 0.7% in 1996 and 1.0% in 1995 .............................. 8.6 29.1 Medium-term notes payable, due 1997, with interest rates ranging from 6.0% to 6.7% ................................. 48.5 15.0 ------ ------ Total short-term debt .................................... 117.7 126.5 ------ ------ Long-term debt: Medium-term notes payable, due 1998 to 2024, with interest rates ranging from 5.1% to 7.5% ........................... 242.1 290.4 Monthly income debt securities, due 2025, with interest rate of 8.8%, $172.5 million issued net of unamortized offering costs of $5.4 million in 1996 and $5.6 million in 1995 ...... 167.1 166.9 ------ ------ Total long-term debt .................................... 409.2 457.3 ------ ------ Total notes payable ....................................... $526.9 $583.8 ====== ======
At December 31, 1996, UNUM Corporation had a $500 million committed revolving credit facility that expires on October 1, 2001. UNUM's commercial paper program is supported by the revolving credit facility and is available for general liquidity needs, capital expansion, acquisitions or stock repurchase. The committed revolving credit facility contains certain covenants which, among other provisions, require maintenance of certain levels of stockholders' equity and limits on debt levels. Aggregate maturities of notes payable are as follows: 1997-$117.7 million; 1998-$68.0 million; 1999-$21.5 million; 2000-$60.0 million; thereafter-$259.7 million. NOTE 12. CAPITAL STOCK AND PREFERRED STOCK PURCHASE RIGHTS Effective October 23, 1996, UNUM's Board of Directors approved an expansion of the Company's stock repurchase program to 6.0 million shares by authorizing an additional 3.7 million shares. At December 31, 1996, approximately 4.5 million shares of common stock remained authorized for stock repurchase. During 1996, UNUM acquired approximately 1.9 million shares of its common stock in the open market at an aggregate cost of $119.1 million. UNUM did not acquire any shares in the open market in 1995. During 1994, UNUM repurchased 3.9 million shares in the open market at an aggregate cost of $183.3 million. Under UNUM's stock-based compensation plans and the plans of Colonial Companies (see Note 9), 730,561 shares, 612,138 shares and 329,579 shares were issued in 1996, 1995 and 1994, respectively. UNUM adopted a Shareholder Rights Plan on March 13, 1992. Under the Plan, each Right, under certain specific circumstances, entitles the holder to purchase one one-hundredth of a share of Series A Junior Participating 60 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 12. CAPITAL STOCK AND PREFERRED STOCK PURCHASE RIGHTS (Continued) Preferred Stock at a purchase price of $150. The Rights become exercisable at a specified time after (1) a person or group acquires 10% or more of UNUM Corporation common stock or (2) a tender or exchange offer for 10% or more of UNUM Corporation common stock. The Rights expire at the close of business on March 13, 2002, unless earlier redeemed by the Company under certain circumstances at a price of $0.01 per Right. NOTE 13. DIVIDEND RESTRICTIONS UNUM is subject to various state insurance regulatory restrictions that limit the maximum amount of dividends available from its United States domiciled insurance subsidiaries without prior approval. The amount available under current law for payment of dividends during 1997 to UNUM Corporation from all U.S. domiciled insurance subsidiaries without state insurance regulatory approval is approximately $153 million. Dividends in excess of this amount may only be paid with state insurance regulatory approval. The aggregate statutory capital and surplus of the United States domiciled insurance subsidiaries of UNUM Corporation was approximately $1,205 million and $1,149 million, at December 31, 1996, and 1995, respectively. The aggregate statutory net operating income, which excludes realized investment gains net of tax, of UNUM Corporation's United States domiciled insurance subsidiaries was approximately $167 million, $143 million and $33 million for 1996, 1995 and 1994, respectively. State insurance regulatory authorities prescribe statutory accounting practices that differ in certain respects from generally accepted accounting principles. The significant differences relate to deferred acquisition costs, deferred income taxes, non-admitted asset balances, required investment risk reserves and reserve calculation assumptions. UNUM Corporation also has the ability to draw a dividend from its United Kingdom based affiliate, UNUM Limited, subject to certain U.S. tax consequences. NOTE 14. LITIGATION In the normal course of its business operations, UNUM is involved in litigation from time to time with claimants, beneficiaries and others, and a number of lawsuits were pending at December 31, 1996. In some instances, these proceedings include claims for punitive damages and similar types of relief in unspecified or substantial amounts, in addition to amounts for alleged contractual liability or other compensatory damages. In the opinion of management, the ultimate liability, if any, arising from this litigation is not expected to have a material adverse effect on the consolidated financial position or the consolidated operating results of UNUM. On December 29, 1993, UNUM filed a suit in the United States District Court for the District of Maine, seeking a federal income tax refund. The suit is based on a claim for a deduction in certain prior tax years, for $652 million in cash and stock distributed to policyholders in connection with the 1986 conversion of Union Mutual Life Insurance Company to a stock company. UNUM has fully paid, and provided for in prior years' financial statements, the tax at issue in this litigation. On May 23, 1996, the District Court issued its decision that the distribution in question was not a deductible expenditure. UNUM believes its claims are meritorious, and has appealed the decision to the United States Court of Appeals for the First Circuit. The ultimate recovery, if any, cannot be determined at this time. NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS Fair values are based on quoted market prices, when available. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These valuation techniques require management to develop a significant number of assumptions, including discount rates and estimates of future cash flow. Derived fair value estimates cannot be substantiated by comparison to independent markets or to disclosures by other companies with similar financial instruments. These fair value disclosures do not purport to be the amount that could be realized in immediate settlement of the financial instrument. 61 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued) The following table summarizes the carrying amounts and fair values of UNUM's financial instruments at December 31, 1996, and 1995:
1996 1995 --------------------------- ------------------------ Carrying Fair Carrying Fair (Dollars in millions) Amount Value Amount Value - ----------------------------------------- ----------- ----------- ----------- ---------- Financial assets: Fixed maturities available for sale ... $6,942.7 $6,942.7 $9,135.4 $9,135.4 Equity securities available for sale .. 31.3 31.3 25.2 25.2 Mortgage loans ........................ 1,132.1 1,213.4 1,163.4 1,274.9 Policy loans ........................ 232.9 232.9 219.2 219.2 Short-term investments ............... 123.4 123.4 896.7 896.7 Cash ................................. 77.0 77.0 42.5 42.5 Accrued investment income ............ 166.1 166.1 208.5 208.5 Deposit assets ..................... 2,846.6 2,846.6 -- -- Financial liabilities: Other policyholder funds: Investment-type insurance contracts: With defined maturities ............ $ 191.0 $ 216.0 $ 400.0 $ 440.0 With no defined maturities ......... 2,901.0 2,839.0 3,031.0 2,967.0 Individual annuities and supplementary contracts not involving life contingencies ........ 76.2 76.2 81.4 81.4 Notes payable ........................ 526.9 542.5 583.8 610.8
The following methods and assumptions were used in estimating fair value disclosures for financial instruments: Fixed Maturities Available for Sale: Fair values for fixed maturities are based on quoted market prices, where available. If quoted market prices are not available, fair values are estimated using values obtained from independent pricing services or, in the case of private placements, are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality and maturity of the investments. Equity Securities Available for Sale: Fair values for equity securities available for sale are based on quoted market prices and are reported in the Consolidated Balance Sheets at these values. Mortgage Loans: Fair values for mortgage loans are estimated based on discounted cash flow analyses using interest rates currently being offered for similar mortgage loans to borrowers with similar credit ratings and maturities. Mortgage loans with similar characteristics are aggregated for purposes of the calculations. Policy Loans, Short-term Investments, Cash, Accrued Investment Income and Deposit Assets: Fair values for these instruments approximate the carrying amounts reported in the Consolidated Balance Sheets. Investment-type Insurance Contracts: Fair values for liabilities under investment-type insurance contracts with defined maturities are estimated using discounted cash flow calculations based on interest rates that would be offered currently for similar contracts with maturities consistent with those remaining for the contracts being valued. Fair values for liabilities under investment-type insurance contracts with no defined maturities are the amounts payable on demand after surrender charges at the balance sheet date. 62 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued) The estimated fair values of liabilities under all insurance contracts (investment-type and other than investment-type) are taken into consideration in UNUM's overall management of interest rate risk, which minimizes exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts. Individual Annuities and Supplementary Contracts not Involving Life Contingencies: Fair values approximate the carrying amounts reported in other policyholder funds in the Consolidated Balance Sheets. Notes Payable: Fair values of short-term borrowings approximate the carrying amount. Fair values of long-term notes are estimated using discounted cash flow analyses based on UNUM's current incremental borrowing rates for similar types of borrowing arrangements. NOTE 16. SEGMENT INFORMATION UNUM's markets for its insurance products are the United States, its principal market, Canada, the United Kingdom and the Pacific Rim. Through its affiliates, UNUM is the leading provider of group long term disability insurance, its principal product, in the United States and the United Kingdom. Products are marketed through sales personnel, independent contractors and brokers, and specialty agents. UNUM targets sales of its disability products to executive, administrative and management personnel, and other professionals such as doctors, attorneys, accountants and engineers. To more clearly reflect UNUM's management of its businesses and to more appropriately group its product portfolios, UNUM began reporting its operations, effective January 1, 1995, principally in four business segments: Disability Insurance, Special Risk Insurance, Colonial Products and Retirement Products. For comparative purposes, 1994 information was previously restated to reflect reporting in these segments. The Disability Insurance segment includes disability products offered in North America, the United Kingdom and Japan including: group long term disability, group short term disability, individual disability, Association Group disability, disability reinsurance operations and long term care insurance. The Special Risk Insurance segment includes group life, special risk accident insurance, non-disability reinsurance operations, reinsurance underwriting management operations and other special risk insurance products. The Colonial Products segment includes Colonial Companies, Inc. and subsidiaries, which offer payroll-deducted, voluntary employee benefits including accident and sickness, cancer and life insurance products to employees at their worksites. The Retirement Products segment includes tax sheltered annuities, guaranteed investment contracts, deposit administration accounts, 401(k) plans, individual life and group medical products, all of which are no longer actively marketed by UNUM. Corporate includes transactions that are generally non-insurance related. Investment income and net realized investment gains are allocated to the segments based on designation of ownership of assets identified to the products in each segment. Operating expenses are allocated to the segments based on direct association with a product whenever possible. If the expense cannot be readily associated with a particular product, the costs are allocated based on ratios of the relative time spent, extent of usage or varying volume of work performed for each segment. 63 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 16. SEGMENT INFORMATION (Continued) Summarized financial information for the four business segments and Corporate is as follows: Year Ended December 31, --------------------------------------- (Dollars in millions) 1996 1995 1994 - ------------------------------------ ----------- ----------- ----------- Revenues: Disability Insurance ............ $2,386.2 $2,472.8 $2,116.5 Special Risk Insurance ......... 811.9 750.7 647.8 Colonial Products ............... 545.5 527.3 473.9 Retirement Products ............ 283.0 357.8 369.4 Corporate ........................ 16.1 14.3 5.0 -------- -------- -------- Total revenues .................. $4,042.7 $4,122.9 $3,612.6 ======== ======== ======== Income (loss) before income taxes: Disability Insurance ............ $ 215.3 $ 217.0 $ 56.2 Special Risk Insurance ......... 79.2 60.3 65.9 Colonial Products ............... 92.4 87.7 62.7 Retirement Products ............ 1.4 45.5 42.0 Corporate ........................ (46.7) (28.6) (28.2) -------- -------- -------- Income before income taxes ...... 341.6 381.9 198.6 Income taxes ..................... 103.6 100.8 43.9 -------- -------- -------- Net income ..................... $ 238.0 $ 281.1 $ 154.7 ======== ======== ========
December 31, ----------------------------------------- (Dollars in millions) 1996 1995 1994 - --------------------------------------------------- ------------ ------------ ----------- Identifiable Assets: Disability Insurance ........................... $7,846.8 $7,280.3 $6,131.9 Special Risk Insurance ........................ 1,297.1 1,056.5 846.8 Colonial Products .............................. 1,094.1 996.5 846.2 Retirement Products ........................... 4,478.8 4,717.4 4,504.0 Corporate ....................................... 396.7 372.9 451.3 Individual Participating Life and Annuity ...... 354.0 364.2 347.0 --------- --------- --------- Total assets ................................. $15,467.5 $14,787.8 $13,127.2 ========= ========= =========
64 UNUM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of unaudited quarterly results of operations for 1996 and 1995:
1996 -------------------------------------------- (Dollars in millions, except per common share data) 4th 3rd 2nd 1st - ------------------------------------------------------ --------- --------- --------- -------- Premiums .......................................... $793.8 $796.2 $762.3 $768.1 Investment income ................................. 172.6 207.7 212.2 209.7 Net realized investment gains (losses) ............ 1.4 1.6 (3.1) 3.5 Benefits to policyholders ........................... 573.1 605.2 563.5 582.9 Net income .......................................... 48.0 44.0 73.9 72.1 Net income per common share ........................ 0.66 0.60 1.01 0.99
1995 -------------------------------------------- 4th 3rd 2nd 1st --------- --------- --------- -------- Premiums ........................... $817.0 $738.0 $729.2 $734.0 Investment income .................. 207.3 207.8 199.3 191.9 Net realized investment gains ...... 3.2 2.9 208.1 10.9 Benefits to policyholders ......... 634.8 568.7 717.7 571.8 Net income ........................ 62.1 66.7 88.9 63.4 Net income per common share ......... 0.85 0.92 1.22 0.87
NOTE 18. SUBSEQUENT EVENTS On March 14, 1997, UNUM's Board of Directors authorized a two-for-one common stock split. The split is subject to shareholder approval of a proposal to increase the number of authorized shares of common stock to 240 million from 120 million. UNUM's shareholders will vote on the proposal to increase the number of authorized shares at the Annual Meeting of Shareholders on May 9, 1997. Under the proposed split, on or about June 2, 1997, one additional share would be distributed for each share of common stock already issued, to holders of record on May 19, 1997. The financial information contained in this report has not been adjusted to reflect the impact of the proposed common stock split. On March 14, 1997, the Board of Directors also announced its intent to increase the next regularly scheduled cash dividend, payable in May, to 28.5 cents from 27.5 cents per common share on a pre-split basis. 65 Item 9--Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure have been reported on a Form 8-K during the past two years prior to the date of the most recent financial statements. PART III Item 10--Directors and Executive Officers of the Registrant A. Directors of the Registrant The information under the caption "Election of Directors" included in UNUM's proxy statement for the Annual Meeting of Shareholders on May 9, 1997, is incorporated by reference. B. Executive Officers of the Registrant The executive officers of UNUM are as follows:
Age (as of An Officer Name March 25, 1997) Position held with UNUM Since - --------------------- ------------------ ------------------------------ ------------ James F. Orr III 54 Chairman, President and 1986 Chief Executive Officer Thomas G. Brown 52 Executive Vice President 1992 Stephen B. Center 59 Executive Vice President 1972 Robert W. Crispin 50 Executive Vice President 1995 and Chief Financial Officer Peter J. Moynihan 53 Senior Vice President 1979 Kevin P. O'Connell 51 Executive Vice President 1987 Elaine D. Rosen* 44 President, UNUM America 1983 Robert E. Staton* 50 President, Colonial 1993
- -------- *Denotes an officer of a subsidiary who is not an officer of the Corporation but who is considered an "executive officer" under regulations of the Securities and Exchange Commission. The officers are elected annually and hold office until their respective successors have been chosen and qualified, or until death, resignation or removal. The UNUM Board may also appoint or delegate the appointment of officers, assistant officers and agents as it may deem necessary for such periods as the By-Laws, the UNUM Board, or the delegatee may prescribe. Mr. Orr was elected Chairman of the Board of UNUM in February 1988. In addition, he has served as President and Chief Executive Officer since September 1987. He joined UNUM in 1986. Mr. Brown was elected Executive Vice President of UNUM in January 1995. In addition, he continues to serve as Chairman of the Board and Chief Executive Officer of Duncanson & Holt, Inc. ("D&H"), a post he has held since 1987. Additionally, he served as President of D&H from 1987 until May 1996. D&H became a wholly-owned subsidiary of UNUM in July 1992. Mr. Center was elected Executive Vice President of UNUM in September 1992. Additionally, he served as President of UNUM America from September 1992 until December 1996. Previously, he served as Group Executive Vice President of UNUM America from May 1990 to August 1992. He joined UNUM America in 1963. Mr. Crispin was elected Executive Vice President of UNUM in January 1995 and additionally as Chief Financial Officer in August 1995. Prior to joining UNUM, Mr. Crispin served as Vice Chairman and Chief Investment Officer of The Travelers Insurance Companies from July 1991 to January 1995. Mr. Moynihan was elected Senior Vice President of UNUM in September 1993 and Senior Vice President of UNUM America in October 1987. He joined UNUM America in 1973. Mr. O'Connell was elected Executive Vice President of UNUM in February 1996 and Executive Vice President of UNUM America in May 1995. Previously, he served as Senior Vice President of UNUM America from November 1988 to May 1995. He joined UNUM America in 1968. 66 Ms. Rosen was elected President of UNUM America in January 1997. Previously, she served as Executive Vice President of UNUM America from May 1995 to December 1996 and as Senior Vice President of UNUM America from November 1988 to May 1995. She joined UNUM America in 1975. Mr. Staton was elected President of Colonial in January 1997. Previously he served as Chairman of Colonial from December 1993 to December 1996, and additionally as Chief Executive Officer from July 1995 to December 1996. Previously, he served as Senior Vice President from February 1990 to December 1993; General Counsel from August 1985 to November 1993; and Corporate Secretary from February 1992 to August 1993. Colonial's parent company merged with UNUM in March 1993. Item 11--Executive Compensation The information under the captions "Compensation of Directors", "Board Compensation Report on Executive Compensation", and "Executive Compensation" included in UNUM's proxy statement for the Annual Meeting of Shareholders on May 9, 1997, is incorporated by reference. Item 12--Security Ownership of Certain Beneficial Owners and Management The information under the caption "Security Ownership" included in UNUM's proxy statement for the Annual Meeting of Shareholders on May 9, 1997, is incorporated by reference. Item 13--Certain Relationships and Related Transactions The information under the captions "Executive Compensation" and "Other Agreements and Transactions" included in UNUM's proxy statement for the Annual Meeting of Shareholders on May 9, 1997, is incorporated by reference. 67 PART IV Item 14--Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Index of documents filed as part of this report: 1. The following Consolidated Financial Statements of UNUM Corporation and subsidiaries are included in Item 8. Page ------ Report of Independent Accountants ..................... 34 Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 ..................... 35 Consolidated Balance Sheets as of December 31, 1996, and 1995 ............................................. 36 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 ......... 38 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 ............... 39 Notes to Consolidated Financial Statements ............ 40 2. Financial Statement Schedules II Condensed Financial Information of UNUM Corporation (Registrant) 70 III Supplementary Insurance Information 74 IV Reinsurance 75 3. Exhibits. See Index to Exhibits on page 76 of this report. (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Registrant during the fourth quarter of 1996. Schedules and exhibits required by Article 7 of Regulation S-X other than those listed are omitted because they are not required, are not applicable, or equivalent information has been included in the financial statements, and notes thereto, or elsewhere herein. 68 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Portland, State of Maine, on March 25, 1997. UNUM Corporation By /s/ JAMES F. ORR III ------------------------------------- James F. Orr III (Chairman, President and Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Name Title Date - ----------------------------------------- ----------------------------- ---------------- /s/ JAMES F. ORR III Chairman, President and - ------------------------------------- Chief Executive Officer March 25, 1997 (James F. Orr III) /s/ ROBERT W. CRISPIN Executive Vice President - ------------------------------------- and Chief Financial Officer March 25, 1997 (Robert W. Crispin) /s/ STEPHEN D. ROBERTS Vice President and - ------------------------------------- Corporate Controller March 25, 1997 (Stephen D. Roberts) * Director March 25, 1997 - ------------------------------------- (Gayle O. Averyt) * Director March 25, 1997 - ------------------------------------- (Robert E. Dillon, Jr.) * Director March 25, 1997 - ------------------------------------- (Gwain H. Gillespie) * Director March 25, 1997 - ------------------------------------- (Ronald E. Goldsberry) * Director March 25, 1997 - ------------------------------------- (Donald W. Harward) * Director March 25, 1997 - ------------------------------------- (George J. Mitchell) * Director March 25, 1997 - ------------------------------------- (Cynthia A. Montgomery) * Director March 25, 1997 - ------------------------------------- (James L. Moody, Jr.) * Director March 25, 1997 - ------------------------------------- (Lawrence R. Pugh) * Director March 25, 1997 - ------------------------------------- (Lois Dickson Rice) * Director March 25, 1997 - ------------------------------------- (John W. Rowe) */s/ JOHN-PAUL DEROSA - ------------------------------------- (John-Paul DeRosa, as Attorney-in-fact for each of the persons indicated) (Assistant Secretary)
69 UNUM CORPORATION (Parent Company) SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME
Year Ended December 31, -------------------------------- (Dollars in millions) 1996 1995 1994 - ------------------------------------------------------------ --------- --------- -------- Revenues Dividends from subsidiaries* ........................... $259.7 $ 23.6 $102.0 Investment income ....................................... 0.3 0.4 0.1 Interest income on loans to subsidiaries* ............... 2.5 5.5 -- Fees and other income .................................... -- 0.3 0.8 ------- ------ ------- Total revenues .......................................... 262.5 29.8 102.9 Expenses Operating expenses ....................................... 4.7 2.3 8.7 Interest expense ....................................... 40.7 37.2 18.6 Interest expense on loans from subsidiaries* ............ 0.1 3.9 2.3 ------- ------ ------- Total expenses .......................................... 45.5 43.4 29.6 ------- ------ ------- Income (loss) before income taxes ........................ 217.0 (13.6) 73.3 Income tax benefit ....................................... 15.1 13.1 6.2 ------- ------ ------- Income (loss) before equity in undistributed net income of subsidiaries .................................... 232.1 (0.5) 79.5 Equity in undistributed net income of subsidiaries* ...... 5.9 281.6 75.2 ------- ------ ------- Net income ................................................ $238.0 $281.1 $154.7 ======= ====== =======
- -------- *Eliminated in consolidation See note to condensed financial statements. 70 UNUM CORPORATION (Parent Company) SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS
December 31, ------------------------ (Dollars in millions) 1996 1995 - ------------------------------------------------------------ ----------- ---------- Assets Investments Investment in subsidiaries* ........................... $2,749.8 $2,836.1 Short-term investments ................................. 0.6 0.6 -------- -------- Total investments .................................... 2,750.4 2,836.7 Amounts receivable from subsidiaries, net* ............... 15.0 6.6 Notes receivable from subsidiary* ........................ 32.5 50.0 Property and equipment, net .............................. 22.3 18.1 -------- -------- Total assets .......................................... $2,820.2 $2,911.4 ======== ======== Liabilities and Stockholders' Equity Liabilities Notes payable .......................................... $ 526.9 $ 583.8 Notes payable to subsidiary* ........................... -- 10.0 Income taxes .......................................... 16.5 4.8 Other liabilities ....................................... 13.7 9.9 -------- -------- Total liabilities .................................... 557.1 608.5 Stockholders' Equity Preferred stock, par value $0.10 per share, authorized 10,000,000 shares, none issued Common stock, par value $0.10 per share, authorized 120,000,000 shares, issued 99,987,958 shares ............ 10.0 10.0 Additional paid-in capital .............................. 1,077.2 1,065.7 Unrealized gains on available for sale securities of subsidiaries, net ....................................... 108.5 235.6 Unrealized foreign currency translation adjustment ...... (1.2) (23.1) Retained earnings (including undistributed earnings of subsidiaries of $1,401.8 million and $1,395.9 million in 1996 and 1995, respectively) .............................. 1,871.4 1,713.2 -------- -------- 3,065.9 3,001.4 Less: Treasury stock, at cost (1996--28,165,594 shares; 1995--26,980,331 shares) ................................. 792.2 691.6 Restricted stock deferred compensation .................. 10.6 6.9 -------- -------- Total stockholders' equity .............................. 2,263.1 2,302.9 -------- -------- Total liabilities and stockholders' equity ............ $2,820.2 $2,911.4 ======== ========
- -------- *Eliminated in consolidation See note to condensed financial statements. 71 UNUM CORPORATION (Parent Company) SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS
Year Ended December 31, ----------------------------------- (Dollars in millions) 1996 1995 1994 - ------------------------------------------------------------- ---------- ---------- --------- Operating activities: Net income ................................................ $ 238.0 $ 281.1 $ 154.7 Adjustments to reconcile net income to net cash provided by operating activities: Increase in income tax liability ........................ 11.7 2.1 0.4 (Increase) decrease in amounts due to/from subsidiaries* ............................................. (8.4) 11.8 (6.0) Other ................................................... 16.1 (3.1) 11.1 Equity in undistributed net income of subsidiaries* ...... (5.9) (281.6) (75.2) ------- ------- ------- Net cash provided by operating activities ............... 251.5 10.3 85.0 ------- ------- ------- Investing activities: Investment in subsidiaries, net* ........................ (13.1) (1.1) (30.6) Issuance of notes receivable from subsidiaries* ......... (32.5) (100.0) -- Repayment of notes receivable from subsidiaries* ......... 50.0 50.0 -- Net (increase) decrease in short-term investments ......... -- (0.1) 3.9 Net additions to property and equipment .................. (8.6) (5.4) (3.3) ------- ------- ------- Net cash used in investing activities .................. (4.2) (56.6) (30.0) ------- ------- ------- Financing activities: Dividends to stockholders ................................. (79.8) (75.1) (68.3) Treasury stock acquired ................................. (119.1) -- (183.3) Proceeds from notes payable .............................. -- 291.5 54.7 Repayment of notes payable .............................. (15.0) -- -- Net increase (decrease) in short-term debt ............... (42.3) (135.1) 136.7 Repayment of notes payable to subsidiaries* ............... (10.0) (50.0) -- Other ................................................... 18.9 13.0 5.9 ------- ------- ------- Net cash provided by (used in) financing activities ............................................. (247.3) 44.3 (54.3) ------- ------- ------- Net increase (decrease) in cash ........................... -- (2.0) 0.7 Cash at beginning of year ................................. -- 2.0 1.3 ------- ------- ------- Cash at end of year ....................................... $ -- $ -- $ 2.0 ======= ======= ======= Supplemental disclosures of cash flow information: Cash paid (received) during the year for: Income taxes ............................................. $ (25.8) $ (15.1) $ (6.6) Interest ................................................ $ 40.8 $ 36.2 $ 18.1 Interest to subsidiaries* .............................. $ 0.2 $ 4.0 $ 2.2
- -------- *Eliminated in consolidation See note to condensed financial statements. 72 UNUM CORPORATION (Parent Company) SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTE TO CONDENSED FINANCIAL STATEMENTS Note 1. Basis of Presentation The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes of UNUM Corporation and subsidiaries, which are included in Item 8. 73 UNUM CORPORATION AND SUBSIDIARIES SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION (Dollars in millions) (1)(2) Future policy Deferred benefits, and policy unpaid claims (3) acquisition and claim Premium Segment costs expenses revenue - ------------------------------ -------------- --------------- ----------- Year Ended December 31, 1996 Disability Insurance ...... $ 443.1 $5,526.0 $1,917.7 Special Risk Insurance ...... 125.6 615.0 755.4 Colonial Products ......... 274.6 410.8 498.2 Retirement Products ......... 0.9 618.6 65.8 Corporate .................. -- -- -- -------- ------- --------- Total ..................... $ 844.2 $7,170.4 $3,237.1 ======== ======= ========= Year Ended December 31, 1995 Disability Insurance ...... $ 758.3 $5,130.6 $1,879.9 Special Risk Insurance ...... 99.8 476.5 702.3 Colonial Products ......... 250.5 372.0 475.1 Retirement Products ......... 33.7 596.0 34.1 Corporate .................. -- -- 0.1 -------- ------- --------- Total ..................... $1,142.3 $6,575.1 $3,091.5 ======== ======= ========= Year Ended December 31, 1994 Disability Insurance ...... $ 695.6 $4,175.9 $1,716.2 Special Risk Insurance ...... 84.1 357.7 607.1 Colonial Products ......... 224.8 330.5 441.3 Retirement Products ......... 30.7 581.9 31.4 Corporate .................. -- (0.5) 0.8 -------- ------- --------- Total ..................... $1,035.2 $5,445.5 $2,796.8 ======== ======= =========
Amortization (4)(5) Benefits to of deferred (5) Net policyholders policy Other (6) investment and interest acquisition operating Premiums Segment income credited costs expenses written - ------------------------------ ---------- ------------ ----------- --------- -------- Year Ended December 31, 1996 Disability Insurance ...... $ 468.5 $1,514.9 $99.0 $557.0 $1,893.0 Special Risk Insurance ...... 56.5 506.5 42.4 183.8 220.1 Colonial Products ......... 47.3 246.8 72.5 133.8 446.5 Retirement Products ......... 217.2 257.1 -- 24.5 15.0 Corporate .................. 16.1 -- -- 62.8 -- -------- --------- ------ ------- --------- Total ..................... $ 805.6 $2,525.3 $213.9 $961.9 $2,574.6 ======== ========= ====== ======= ========= Year Ended December 31, 1995 Disability Insurance ...... $ 592.9 $1,711.2 $90.6 $454.0 $1,853.2 Special Risk Insurance ...... 48.4 492.3 35.5 162.6 223.6 Colonial Products ......... 52.2 241.6 66.7 131.3 417.5 Retirement Products ......... 323.7 275.3 0.8 36.2 23.3 Corporate .................. 14.2 -- -- 42.9 -- -------- --------- ------ ------- --------- Total ..................... $1,031.4 $2,720.4 $193.6 $827.0 $2,517.6 ======== ========= ====== ======= ========= Year Ended December 31, 1994 Disability Insurance ...... $ 400.3 $1,572.1 $70.7 $417.5 $1,705.5 Special Risk Insurance ...... 40.7 394.4 19.2 168.3 156.8 Colonial Products ......... 32.6 226.1 60.6 124.5 388.1 Retirement Products ......... 338.0 289.1 2.3 36.0 21.6 Corporate .................. 4.2 -- -- 33.2 -- -------- --------- ------ ------- --------- Total ..................... $ 815.8 $2,481.7 $152.8 $779.5 $2,272.0 ======== ========= ====== ======= =========
(1) Excludes other policyholder funds, as follows: December 31, -------------------------------------- Segment 1996 1995 1994 - ------------------------------- ----------- ----------- ---------- Disability Insurance ......... $ 5.9 $ 3.1 $ 2.1 Special Risk Insurance ...... 12.7 14.6 8.4 Colonial Products ............ 156.6 128.0 100.1 Retirement Products ......... 3,358.4 3,694.6 3,948.2 -------- -------- -------- Total ........................ $3,533.6 $3,840.3 $4,058.8 ======== ======== ======== (2) Includes unearned premiums, other policy claims and benefits payable. (3) Includes fees and other income (expense). (4) Includes investment income (expense) and net realized investment gains. (5) Investment income and net realized investment gains are allocated to the segments based on designation of ownership of assets identified to the segments. Operating expenses are allocated to the segments based on direct association with a product whenever possible. If, however, the expense cannot be readily associated with a particular product, the costs are allocated based on ratios of the relative time spent, extent of usage or varying volume of work performed for each segment. (6) Premiums written for health and disability income policies. Certain 1994 amounts have been reclassified for comparative purposes. 74 UNUM CORPORATION AND SUBSIDIARIES SCHEDULE IV--REINSURANCE
Percentage Ceded to Assumed of amount Gross other from other Net assumed (Dollars in millions) Amount companies companies Amount to net - ------------------------------------------------ ------------- ------------ ------------- ------------- ------------ Year Ended December 31, 1996 Life insurance in force ..................... $199,019.2 $11,476.5 $ -- $187,542.7 -- =========== ========== ====== =========== Premiums Life insurance and individual annuities . $ 552.0 $ 28.6 $ -- $ 523.4 -- Accident and health insurance ............ 2,406.9 77.8 252.9 2,582.0 9.8% Group annuities ........................... 15.0 -- -- 15.0 -- ----------- ---------- ------ ----------- Total premiums ........................... $ 2,973.9 $ 106.4 $252.9 $ 3,120.4 =========== ========== ====== =========== Year Ended December 31, 1995 Life insurance in force ..................... $164,478.4 $ 4,119.5 $ -- $160,358.9 -- =========== ========== ====== =========== Premiums Life insurance and individual annuities . $ 571.4 $ 19.3 $ 2.0 $ 554.1 0.4% Accident and health insurance ............ 2,248.4 46.9 239.5 2,441.0 9.8% Group annuities ........................... 23.1 -- -- 23.1 -- ----------- ---------- ------ ----------- Total premiums ........................... $ 2,842.9 $ 66.2 $241.5 $ 3,018.2 =========== ========== ====== =========== Year Ended December 31, 1994 Life insurance in force ..................... $145,425.9 $ 4,425.3 $ -- $141,000.6 -- =========== ========== ====== =========== Premiums Life insurance and individual annuities ... $ 517.9 $ 15.7 $ 1.6 $ 503.8 0.3% Accident and health insurance ............... 2,123.9 96.8 169.1 2,196.2 7.7% Group annuities ........................... 21.3 -- -- 21.3 -- ----------- ---------- ------ ----------- Total premiums ........................... $ 2,663.1 $ 112.5 $170.7 $ 2,721.3 =========== ========== ====== ===========
Certain 1994 amounts have been reclassified for comparative purposes. 75 UNUM CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS
Number Description Method of Filing - -------- ------------------------------- --------------------------------------------------------------------- 3.1 Certificate of Incorporation Filed herewith. of UNUM Corporation, as amended 3.2 By-Laws of UNUM Filed herewith. Corporation 4 Rights Agreement Filed as Exhibit 1 to the Registrant's Current Report on Form 8-K dated March 18, 1992, and incorporated herein by reference. 10.1 Deferred Compensation Plan Filed as Exhibit 10.1 to the Registrant's Annual Report on Form 10-K dated March 27, 1996, and incorporated herein by reference. 10.2 Incentive Compensation Plan Filed herewith. for Designated Executive Officers 10.3 1987 Executive Stock Filed as Exhibit 10.3 to the Registrant's Annual Report on Form Option Plan 10-K dated March 27, 1996, and incorporated herein by reference. 10.4 1990 Long-Term Stock Filed as Exhibit 10.4 to the Registrant's Annual Report on Form Incentive Plan 10-K dated March 27, 1996, and incorporated herein by reference. 10.5 1996 Long-Term Stock Filed as Exhibit 10.5 to the Registrant's Annual Report on Form Incentive Plan 10-K dated March 27, 1996, and incorporated herein by reference. 10.6 Supplementary Retirement Filed as Exhibit 10.4 to the Registrant's Registration Statement on Plan Form S-1 (Registration No. 33-6571) dated June 18, 1986, and incorporated herein by reference. 10.7 Supplemental Executive Filed as Exhibit 10.6 to the Registrant's Annual Report on Form Retirement Plan 10-K dated March 26, 1991, and incorporated herein by reference. 10.8 Form of Executive Filed as Exhibit 10.7 to the Registrant's Annual Report on Form Severance Agreement 10-K dated March 25, 1992, and incorporated herein by reference. 10.9 Employment Agreement Filed as Exhibit 10.9 to the Registrant's Annual Report on Form 10-K dated March 27, 1996, and incorporated herein by reference. 10.10 Employment Letter Filed as Exhibit 10.10 to the Registrant's Annual Report on Form 10-K dated March 27, 1996, and incorporated herein by reference. 10.11 $500 Million Revolving Filed as Exhibit 10.9 to the Registrant's Annual Report on Form Credit Agreement 10-K dated March 24, 1995, and incorporated herein by reference. 10.12 Asset Transfer and Filed as Exhibit 10.12 to the Registrant's Annual Report on Form Acquisition Agreement 10-K dated March 27, 1996, and incorporated herein by reference. 10.13 Non-Qualified 401(k) Plan Filed herewith. 12 Computation of Ratio of Filed herewith. Earnings to Fixed Charges 21 Subsidiaries of UNUM Filed herewith. Corporation 23 Consent of Independent Filed herewith. Accountants 24 Power of Attorney Filed herewith. 27 Financial Data Schedule Filed herewith.
76 (This page intentionally left blank) (This page intentionally left blank) EX-3.1 2 CERTIFICATE OF INCORPORATION OF UNUM CORPORATION Exhibit 3.1 CERTIFICATE OF INCORPORATION of UNUM CORPORATION as amended FIRST: The name of the Corporation is UNUM Corporation. SECOND: The address of the registered office of the Corporation in the state of Delaware is 1209 Orange Street, in the city of Wilmington, county of New Castle. The name of the Corporation's registered agent at that address is The Corporation Trust Center. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware as set forth in Title 8 of the Delaware Code (the "GCL"). FOURTH: A. The total number of shares of capital stock which the Corporation shall have authority to issue is 130,000,000 shares, consisting of 120,000,000 shares of Common Stock, par value $.10 per share (the "Common Stock") and 10,000,000 shares of Preferred Stock, par value $.10 per share (the "Preferred Stock"). B. Shares of Preferred Stock may be issued from time to time in one or more classes or series as may be determined from time to time by the Board of Directors of the Corporation (the "Board of Directors"), each such class or series to be distinctly designated. Except in respect of the particulars fixed by the Board of Directors for classes or series provided for by the Board of Directors as permitted hereby, all shares of Preferred Stock shall be of equal rank and shall be identical. All shares of any one series of Preferred Stock so designated by the Board of Directors shall be alike in every particular, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon shall be cumulative. The voting rights, if any, of each such class or series and the preferences and relative, participating, optional and other special rights of each such class or series and the qualifications, limitations and restrictions thereof, if any, may differ from those of any and all other classes or series at any time outstanding; and the Board of Directors of the Corporation is hereby expressly granted authority to fix, by resolutions duly adopted prior to the issuance of any shares of a particular class or series of Preferred Stock so designated by the Board of Directors, the voting powers of stock of such class or series, if any, and the designations, preferences and relative, participating, optional and other special rights and the qualifications, limitations and restrictions of such class or series, including, but without limiting the generality of the foregoing, the following: (1) The distinctive designation of, and the number of shares of Preferred Stock which shall constitute, such class or series, and such number may be increased (except where otherwise provided by the Board of Directors) or decreased (but not below the number of shares thereof then outstanding) from time to time by like action of the Board of Directors; (2) The rate and time at which, and the terms and conditions upon which, dividends, if any, on Preferred Stock of such class or series shall be paid, the extent of the preference or relation, if any, of such dividends to the dividends payable on any other class or classes, or series of the same or other classes of stock and whether such dividends shall be cumulative or non-cumulative; -2- (3) The right, if any, of the holders of Preferred Stock of such class or series to convert the same into, or exchange the same for, shares of any other class or classes or of any series of the same or any other class or classes of stock and the terms and conditions of such conversion or exchange; (4) Whether or not Preferred Stock of such class or series shall be subject to redemption, and the redemption price or prices and the time or times at which, and the terms and conditions upon which, Preferred Stock of such class or series may be redeemed; (5) The rights, if any, of the holders of Preferred Stock of such class or series upon the voluntary or involuntary liquidation of the Corporation; (6) The terms of the sinking fund or redemption or purchase account, if any, to be provided for the Preferred Stock of such class or series; and (7) The voting powers, if any, of the holders of such class or series of Preferred Stock. C. Except as otherwise provided in this Certificate of Incorporation, the Board of Directors shall have authority to authorize the issuance, from time to time without any vote or other action by the stockholders, of any or all shares of stock of the Corporation of any class or series at any time authorized, and any securities convertible into or exchangeable for any such shares, and any options, rights or warrants to purchase or acquire any such shares, in each case to such persons and on such terms (including as a dividend or distribution on or with respect to, or in connection with a split or combination of, the outstanding shares of stock of the same or any other class) as the Board of Directors from time to time in its discretion lawfully may determine; provided, however, that the consideration for the issuance of shares of stock of the Corporation having par value (unless issued as such a dividend or distribution or in connection with such a split or combination) shall not be less than such par value. Shares so issued shall be fully paid stock, and the holders of such stock shall not be liable to any further call or assessments thereon. D. Except as provided in this Certificate of Incorporation, each holder of Common Stock shall be entitled to one vote for each share of Common Stock held by him. FIFTH: The name and mailing address of the Sole Incorporator is as follows: Name Mailing Address ---- --------------- Colin C. Hampton c/o UNUM Life Insurance Company 2211 Congress Street Portland, Maine 04122 SIXTH: The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of the Board of Directors and stockholders: (1) The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. (2) The Board of Directors shall consist of not less than three nor more than fifteen directors. The exact number of directors shall be determined from time to time by resolution adopted by the affirmative vote of a majority of the Board of Directors. The Directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of Directors constituting the entire Board of Directors. -3- (3) Upon, or as soon as practicable following, the filing of this Certificate of Incorporation, Class I Directors shall be elected for a one-year term, Class II Directors for a two-year term and Class III Directors for a three-year term. At each succeeding annual meeting of stockholders, successors to the class of Directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of Directors is changed in accordance with the terms of this Certificate of Incorporation, any increase or decrease shall be apportioned among the classes so as to maintain the number of Directors in each class as nearly equal as possible, and any additional Director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of Directors shorten the term of any incumbent Director. A Director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to the Director's prior death, resignation, disqualification or removal from office. The stockholders shall not have the right to remove any one or all of the Directors except for cause and by the affirmative vote of the holders of eighty percent (80%) of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock (as hereinafter defined) voting together as a single class. Any vacancy on the Board of Directors that results from a newly created Directorship may be filled by the affirmative vote of a majority of the Board of Directors then in office, and any other vacancy occurring on the Board of Directors may be filled by a majority of the Directors then in office, although less than a quorum, or by a sole remaining Director. Any Director elected to fill a vacancy not resulting from an increase in the number of Directors shall have the same remaining term as that of his predecessor. (4) Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect Directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such Directorships shall be governed by the terms of this Certificate of Incorporation applicable thereto (including the resolutions adopted by the Board of Directors pursuant to Section B of Article FOURTH), and such Directors so elected shall not be divided into classes pursuant to Paragraph (2) of this Article SIXTH unless expressly provided by such terms. Election of Directors need not be by written ballot unless the By-Laws so provide. (5) The Board of Directors may from time to time determine whether, to what extent, at what times and places and under what conditions and regulations the accounts, books and papers of the Corporation, or any of them, shall be open to the inspection of the stockholders, and no stockholder shall have any right to inspect any account, book or document of the Corporation, except as and to the extent expressly provided by law with reference to the right of stockholders to examine the original or duplicate stock ledger, or otherwise expressly provided by law, or except as expressly authorized by resolution of the Board of Directors. (6) In addition to the powers and authority hereinbefore or by statute expressly conferred upon them, the Directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the statutes of Delaware, this Certificate of Incorporation, and any By-Laws adopted by the stockholders; provided, however, that no By-Laws hereafter adopted by the stockholders shall invalidate any prior act of the Directors which would have been valid if such By-Laws had not been adopted. (7) No action shall be taken by stockholders of the Corporation except at an annual or special meeting of stockholders of the Corporation and the right of stockholders to act by written consent in lieu of a meeting is specifically denied. -4- SEVENTH: A. The Board of Directors shall have concurrent power with the stockholders as set forth in this Certificate of Incorporation to make, alter, amend, change, add to or repeal the By-Laws of the Corporation. B. The Board of Directors may amend the By-Laws of the Corporation upon the affirmative vote of the number of directors which shall constitute, under the terms of the By-Laws, the action of the Board of Directors. Stockholders may not amend the By-Laws of the Corporation except upon the affirmative vote of at least eighty percent (80%) of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock voting together as a single class. EIGHTH: A. In addition to any affirmative vote required by law, this Certificate of Incorporation, the By-Laws of the Corporation or otherwise, except as otherwise expressly provided in Section B of this Article EIGHTH, the Corporation shall not engage, directly or indirectly, in any Business Combination (as hereinafter defined) with an Interested Stockholder (as hereinafter defined) without the affirmative vote of (i) not less than eighty percent (80%) of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock voting together as a single class, and (ii) not less than a majority of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock which are beneficially owned by persons other than such Interested Stockholder voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage or separate class vote may be specified, by law or in any agreement with any national securities exchange or otherwise. B. The provisions of Section A of this Article EIGHTH shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote, if any, as is required by law, this Certificate of Incorporation, the By-Laws of the Corporation, or otherwise, if such Business Combination shall have been approved by a majority (whether such approval is made prior to or subsequent to the acquisition of beneficial ownership of Voting Stock that caused the Interested Stockholder to become an Interested Stockholder) of the Continuing Directors (as hereinafter defined). C. For the purposes of this Certificate of Incorporation: (1) The term "Business Combination" shall mean: (a) any merger or consolidation of this Corporation or any Subsidiary (as hereinafter defined) with (i) any Interested Stockholder or (ii) any other corporation (whether or not itself an Interested Stockholder) which is or after such merger or consolidation would be an Affiliate or Associate of an Interested Stockholder; or (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) between the Corporation or any Subsidiary and any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder involving any assets or securities of the Corporation, any Subsidiary or any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder the value of which would constitute, immediately prior to such transaction, a Substantial Part (as hereinafter defined) of the assets of the Corporation; or (c) the adoption of any plan or proposal for the liquidation or dissolution of, or similar transaction involving, the Corporation proposed by or on behalf of an Interested Stockholder or any Affiliate or Associate of any Interested Stockholder; or (d) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or otherwise involving an -5- Interested Stockholder) that has the effect, directly or indirectly, of increasing the proportionate share of any class or series of Capital Stock, or any securities convertible into Capital Stock or into equity securities of any Subsidiary, that is beneficially owned by any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder; or (e) any agreement, contract or other arrangement providing for any one or more of the actions specified in the foregoing clauses (a) to (d). (2) The term "Capital Stock" shall mean all capital stock of the Corporation authorized to be issued from time to time under Article FOURTH of this Certificate of Incorporation, and the term "Voting Stock" shall mean all Capital Stock which by its terms may be voted on all matters submitted to stockholders of the Corporation generally. (3) The term "person" shall mean any individual, firm, corporation or other entity and shall include any group comprised of any person and any other person with whom such person or any Affiliate or Associate of such person has any agreement, arrangement or understanding, directly or indirectly, for the purpose of acquiring, holding, voting or disposing of Capital Stock. (4) The term "Interested Stockholder" shall mean any person (other than the Corporation or any Subsidiary and other than any profit-sharing, employee stock ownership or other employee benefit plan of the Corporation or any Subsidiary or any trustee of or fiduciary with respect to any such plan when acting in such capacity) who (without giving effect to the provisions of Article NINTH) (a) is the beneficial owner of Voting Stock representing ten percent (10%) or more of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock; or (b) is an Affiliate or Associate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner of Voting Stock representing ten percent (10%) or more of the votes entitled to be cast by the holders of all then outstanding share of Voting Stock. (5) A person shall be a "beneficial owner" of any Capital Stock (a) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; (b) which such person or any of its Affiliates or Associates has, directly or indirectly, (i) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding; or (c) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Capital Stock. For the purposes of determining whether a person is an Interested Stockholder pursuant to Paragraph 4 of this Section C, the number of shares of Capital Stock deemed to be outstanding shall include shares deemed beneficially owned by such person through application of Paragraph 5 of this Section C, but shall not include any other shares of Capital Stock that may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. (6) The terms "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 under the Act as in effect on January 8, 1985 (the term "registrant" in Rule 12b-2 meaning in this case the Corporation). (7) The term "Subsidiary" means any corporation of which a majority of any class of equity security is beneficially owned by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in Paragraph 4 of this Section C, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is beneficially owned by the Corporation. -6- (8) The term "Continuing Director" means any member of the Board of Directors, while such person is a member of the Board of Directors, who is not an Affiliate or Associate or representative of the Interested Stockholder and was a member of the Board prior to the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Continuing Director, while such successor is a member of the Board of Directors, who is not an Affiliate or Associate or representative of the Interested Stockholder and is recommended or elected to succeed the Continuing Director by a majority of Continuing Directors. (9) The term "Substantial Part" means assets having an aggregate Fair Market Value (as hereinafter defined) in excess of ten percent (10%) of the book value of the total consolidated assets of the Corporation and its Subsidiaries as of the end of the Corporation's most recent fiscal year ending prior to the time the stockholders of the Corporation would be required to approve or authorize the Business Combination involving assets constituting any such Substantial Part. (10) The term "Fair Market Value" means (a) in the case of cash, the amount of such cash; (b) in the case of stock, the highest closing sale price, during the 30-day period immediately preceding the date in question, of a share of such stock on the Composite Tape for New York Stock Exchange, Inc. Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, Inc., or, if such stock is not listed on such exchange, on the principal United States securities exchange registered under the Act on which such stock is listed, or if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock, during the 30-day period preceding the date in question, on the National Association of Securities Dealers, Inc. Automated Quotation System or any similar system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Continuing Directors in good faith; and (c) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined in good faith by a majority of the Continuing Directors. D. The Board of Directors shall have the power and duty to determine for the purposes of this Article EIGHTH, on the basis of information known to them after reasonable inquiry, (a) whether a person is an Interested Stockholder, (b) the number of shares of Capital Stock or other securities beneficially owned by any person, (c) whether a person is an Affiliate or Associate of another and (d) whether the assets that are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by this Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value in excess of the amount set forth in Paragraph 1(b) of Section C of this Article EIGHTH. Any such determination made in good faith shall be binding and conclusive on all parties. E. Nothing contained in this Article EIGHTH shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. NINTH: A. So long as any person other than the Corporation or any Subsidiary (a "Substantial Stockholder") is (without giving effect to the provisions of this Article NINTH) the beneficial owner of Voting Stock representing ten percent (10%) or more of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock, the record holders of the shares of Voting Stock beneficially owned by such Substantial Stockholder shall have limited voting rights on any matter requiring their vote. With respect to the shares of Voting Stock which would entitle such record holders in the aggregate to cast ten percent (10%) of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock, such record holders shall be entitled to cast the votes per share specified in this Certificate of Incorporation. With respect to the shares of Voting Stock which would entitle such record holders in the aggregate to cast in excess of ten percent (10%) of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock, such record holders in the aggregate shall be entitled to cast only one/one hundredth (1/100th) of the votes per share to which a holder of such shares would otherwise be entitled to cast. -7- Notwithstanding anything contained in the two preceding sentences to the contrary, in the event that, after giving effect to the two preceding sentences, the aggregate voting power of such record holders would still exceed fifteen percent (15%) of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock, the aggregate voting power of such record holders shall be further limited so that such record holders shall be entitled to cast only such number of votes that would equal (after giving effect to the provisions of this Article NINTH) fifteen percent (15%) of the votes entitled to be cast by all holders of outstanding shares of Voting Stock. The aggregate voting power of such record holders, so limited, for all shares of Voting Stock beneficially owned by the Substantial Stockholders shall be allocated proportionately among such record holders. For each such record holder, this allocation shall be accomplished by multiplying the aggregate voting power (after giving effect to the provisions of this Article NINTH) of the outstanding shares of Voting Stock beneficially owned by the Substantial Stockholder by a fraction whose numerator is the number of votes which the shares of Voting Stock owned of record by such record holder would have entitled such record holder to cast were no effect given to this Article NINTH, and whose denominator is the total number of votes which all shares of Voting Stock beneficially owned by the Substantial Stockholder would have entitled their record holders to cast were no effect given to this Article NINTH. B. Notwithstanding any other definition contained in this Certificate of Incorporation, for purposes of Section A of this Article NINTH, the term "Voting Stock" shall include the Common Stock and any class or series of Preferred Stock, if and only if the resolutions of the Board of Directors designating such class or series of Preferred Stock expressly provide that such class or series of Preferred Stock are to be included within the term "Voting Stock" for purposes of Section A of this Article NINTH. C. Except as otherwise provided in this Article NINTH, the presence in person or by proxy, of the holders of record of shares of Voting Stock entiting the holders thereof to cast a majority of the votes (after giving effect, if required, to the provisions of this Article NINTH) entitled to be cast by the holders of all outstanding shares of Voting Stock entitled to vote shall constitute a quorum at all meetings of the stockholders. D. The Board of Directors shall have the power and duty to determine for the purposes of this Article NINTH, on the basis of information known to them after reasonable inquiry, (a) whether a person is a Substantial Stockholder, (b) the number of shares of Common Stock and/or Voting Stock beneficially owned by any person, (c) whether a person is an Affiliate or Associate of another, and (d) the persons who may be deemed to be the record holders of shares beneficially owned by a Substantial Stockholder. Any such determination made in good faith shall be binding and conclusive on all parties. E. The Board of Directors shall have the right to demand that any person who is reasonably believed to be a Substantial Stockholder (or holds of record shares of Voting Stock beneficially owned by any Substantial Stockholder) supply the Corporation with complete information as to (a) the record holder(s) of all shares beneficially owned by such person who is reasonably believed to be a Substantial Stockholder, (b) the number of shares of Common Stock and/or Voting Stock beneficially owned by such person who is reasonably believed to be a Substantial Stockholder and held of record by each such record holder, and (c) any other factual matter relating to the applicability or effect of this Article NINTH, as may reasonably be requested of such person, such person shall furnish such information within ten days after the receipt of such demand. F. Nothing contained in this Article NINTH shall be construed to relieve any Substantial Stockholder from any fiduciary obligation imposed by law. -8- G. The provisions of this Article NINTH shall become null and void of no further force and effect on the fifth anniversary (the "Fifth Anniversary Date") of the date on which the amended charter of Union Mutual Life Insurance Company ("Union Mutual") reflecting the conversion of Union Mutual from a mutual to a stock life insurance company is filed with the Maine Secretary of State, the Maine Attorney General and the Superintendent of the Maine Bureau of Insurance, except that with respect to any person who is or was a Substantial Stockholder at any time before the Fifth Anniversary Date, the record holders of any shares of Voting Stock beneficially owned by such Substantial Stockholder shall have limited voting rights in accordance with the terms of Sections A through F of this Article NINTH at such times after the Fifth Anniversary Date that such Substantial Stockholder is a Substantial Stockholder, as such term is defined in Section A of this Article NINTH. TENTH: When considering a merger, consolidation, Business Combination or similar transaction, the Board of Directors, committees of the Board, individual directors and individual officers may, in considering the best interests of the Corporation and its stockholders, consider the effects of any such transaction upon the employees, customers and suppliers of the Corporation, and upon communities in which offices of the Corporation are located. ELEVENTH: Notwithstanding any other provisions of this Certificate of Incorporation or the By-Laws of the Corporation (and notwithstanding the fact that a lesser percentage or separate class vote may be specified by law, this Certificate of Incorporation or the By-Laws of the Corporation), (i) the affirmative vote of the holders of not less than eighty percent (80%) of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with, Articles SIXTH, SEVENTH, and NINTH, and (ii) the affirmative vote of the holders of (x) not less than eighty percent (80%) of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock voting together as a single class, and (y) not less than a majority of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock which are beneficially owned by persons other than Interested Stockholders, if any, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with, Articles EIGHTH and ELEVENTH; provided, however, that, with respect to Articles SIXTH, SEVENTH, EIGHTH, NINTH and ELEVENTH, such special voting requirements shall not apply to, and such special votes shall not be required for, any amendment, repeal or adoption recommended by the Board if a majority of the directors then in office are persons who would be eligible to serve as Continuing Directors. TWELFTH: Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the state of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the Corporation under the provisions of Section 291 of the GCL or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under the provisions of Section 279 of the GCL, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation. THIRTEENTH: No director shall be personally liable to the Corporation or any of its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of -9- the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit. Any repeal of modification of this Article Thirteenth by the stockholders of the Corporation shall not adversely affect any right of protection of a director of the Corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification. FOURTEENTH: Subject to the provisions of this Certificate of Incorporation, the Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or thereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF JUNIOR PARTICIPATING PREFERRED STOCK, SERIES A OF UNUM CORPORATION Pursuant to Section 151 of the General Corporation Law of the State of Delaware We, James F. Orr, III, Chairman and Chief Executive Officer, and Kevin J. Tierney, Secretary, of UNUM Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware, in accordance with the provisions of Section 103 thereof, DO HEREBY CERTIFY: That pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation, as amended, of the said Corporation, the said Board of Directors on March 13, 1992, adopted the following resolution creating a series of 1,000,000 shares of Preferred Stock designated as Junior Participating Preferred Stock, Series A: RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of its Certificate of Incorporation, as amended, a series of Preferred Stock of the Corporation be and it hereby is created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: Section 1. Designation and Amount. The shares of such series shall be designated as Junior Participating Preferred Stock, Series A (the "Series A Stock") and the number of shares constituting such series shall be 1,000,000. Section 2. Dividends and Distributions. (A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Stock with respect to dividends, the holders of shares of Series A Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the 19th day of February, May, August and November in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $5.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of common stock, par value $.10 per share, of the Corporation (the "Common Stock") or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. In the event the Corporation shall at any time after March 13, 1992 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of -2- shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $5.00 per share on the Series A Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series A Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each case the number of votes per share to which holders of shares of Series A Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series A Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) (i) If at any time dividends on any Series A Stock shall be in arrears in an amount equal to six (6) quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a "default period") which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Preferred Stock (including holders of the Series A Stock) with dividends in arrears in an amount equal to six (6) quarterly dividends thereon, voting as a class, irrespective of series, shall have the right to elect two (2) Directors. (ii) During any default period, such voting right of the holders of Series A Stock may be exercised initially at a special meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders, provided that neither -3- such voting right nor the right of the holders of any other series of Preferred Stock, if any, to increase, in certain cases, the authorized number of Directors shall be exercised unless the holders of one-third in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Preferred Stock of such voting right. At any meeting at which the holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect Directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two (2) Directors or, if such right is exercised at an annual meeting, to elect two (2) Directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Stock shall have the right to make such increase in the number of Directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect Directors in any default period and during the continuance of such period, the number of Directors shall not be increased or decreases except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series A Stock. (iii) Unless the holders of Preferred Stock shall, during an existing default period, have previously exercised their right to elect Directors, the Board of Directors may order, or any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding, irrespective of series, may request, the calling of a special meeting of the holders of Preferred Stock, which meeting shall thereupon be called by the President, a Vice President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this paragraph (C) (iii) shall be given to each holder of record of Preferred Stock by mailing a copy of such notice to him at his last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 20 days and not later than 60 days after such order or request or in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding. Notwithstanding the provisions of this paragraph (C) (iii), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of the stockholders. (iv) In any default period, the holders of Common Stock, and other classes of stock of the Corporation if applicable, shall continue to be entitled to elect the whole number of Directors until the holders of Preferred Stock shall have exercised their right to elect two (2) Directors voting as a class, after the exercise of which right (x) the Directors so elected by the holders of Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in paragraph (C) (ii) of this Section 3) be filled by vote of a majority of the remaining Directors theretofore elected by the holders of the class of stock which elected the Director whose office shall have become vacant. References in this paragraph (C) to Directors elected by the holders of a particular class of stock shall include Directors elected by such Directors to fill vacancies as provided in clause (y) of the foregoing sentence. (v) Immediately upon the expiration of a default period, (x) the right of the holders of Preferred Stock as a class to elect Directors shall cease, (y) the term of any Directors elected by the holders of Preferred Stock as a class shall terminate, and (z) the number of Directors shall be such number as may be provided for in the certificate of incorporation or by-laws irrespective of any increase made pursuant to the provisions of paragraph (C) (ii) of this Section 3 (such number being subject, however, to change thereafter in any manner provided by law or in the certificate of incorporation or bylaws). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining Directors. (D) Except as set forth herein, holders of Series A Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. -4- Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Stock outstanding shall have been paid in full, the Corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Stock, except dividends paid ratably on the Series A Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Stock; (iv) purchase or otherwise acquire for consideration any shares of Series A Stock, or any shares of stock ranking on a parity with the Series A Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. Section 6. Liquidation, Dissolution or Winding Up. (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Stock unless, prior thereto, the holders of shares of Series A Stock shall have received $250 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series A Liquidation Preference"). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 100 (as appropriately adjusted as set forth in subparagraph C below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii) immediately above being referred to as the "Adjustment Number"). Following the payment of the full amount of the Series A Liquidation Preference and the -5- Common Adjustment in respect of all outstanding shares of Series A Stock and Common Stock, respectively, holders of Series A Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to one (1) with respect to such Preferred Stock and Common Stock, on a per share basis, respectively. (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series A Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (C) In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. Redemption. The outstanding shares of Series A Stock may be redeemed at the option of the Board of Directors as a whole, but not in part, at any time, or from time to time, at a cash price per share equal to 105 percent of (i) the product of the Adjustment Number times the Average Market Value (as such term is hereinafter defined) of the Common Stock, plus (ii) all dividends which on the redemption date have accrued on the shares to be redeemed and have not been paid, or declared and a sum sufficient for the payment thereof set apart, without interest. The "Average Market Value" is the average of the closing sale prices of the Common Stock during the 30 day period immediately preceding the date before the redemption date on the Composite Tape for New York Stock Exchange Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934, as amended, on which such stock is listed, or, if such stock is not listed on any such exchange, the average of the closing sale prices with respect to a share of Common Stock during such 30-day period, as quoted on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value of the Common Stock as determined by the Board of Directors in good faith. Section 9. Ranking. The Series A Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. -6- Section 10. Amendment. The Certificate of Incorporation of the Corporation shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series A Stock, voting separately as a class. Section 11. Fractional Shares. Series A Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holders fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Stock. This Certificate of Designation, Preferences and Rights of Junior Participating Preferred Stock, Series A shall be effective at 9:05 a.m. on March 23, 1992. EX-3.2 3 BY-LAWS Exhibit 3.2 BY-LAWS OF UNUM CORPORATION (hereinafter called the "Corporation") ARTICLE I OFFICES SECTION 1. Registered Office. The registered office of the Corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. SECTION 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. Place of Meetings. Meetings of the stockholders for the election of directors or for any other purpose shall be held at such time and place, either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. SECTION 2. Annual Meetings. The Annual Meetings of Stockholders shall be held on such date and at such time as shall be designated from time to time by the Board of Directors and stated in the notice of the meetings, at which meetings the stockholders shall elect by a plurality vote the directors to be elected at such meetings, and transact such other business as may properly be brought before the meetings. Written notice of the Annual Meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. SECTION 3. Special Meetings. Unless otherwise prescribed by law or by the Certificate of Incorporation, Special Meetings of Stockholders, for any purpose or purposes, may be called by either (i) the Chairman, if there be one, or (ii) the President, 1 and shall be called by any such officer at the request in writing of a majority of the Board of Directors. Such request shall state the purpose or purposes of the proposed meeting. Written notice of a Special Meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. SECTION 4. Quorum. Except as otherwise provided by law or by the Certificate of Incorporation, the holders of a majority of the capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder entitled to vote at the meeting. The foregoing provisions shall be subject to the voting rights of holders of any Preferred Stock of the Corporation and any quorum requirements relating thereto. SECTION 5. Voting. Unless otherwise required by law, the Certificate of Incorporation or these By-Laws, any question brought before any meeting of stockholders shall be decided by a majority of the votes entitled to be cast by the holders of stock represented and entitled to vote thereat and each stockholder represented at a meeting of stockholders shall be entitled to cast one vote for each share of the capital stock entitled to vote thereat held by such stockholder. Such votes may be cast in person or by proxy but no proxy shall be voted on or after three years from its date, unless such proxy provides for a longer period. The Board of Directors, in its discretion, or the officer of the Corporation presiding at a meeting of stockholders, in his discretion, may require that any votes cast at such meeting shall be cast by written ballot. SECTION 6. Proper Business at Annual Meetings. At any annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before such meeting. To be properly brought before an annual meeting, business must be specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, or otherwise properly brought before the meeting by or at the direction of the Board of Directors, or otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a Stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to, or mailed and received at, the principal executive offices of the Corporation, not less than 60 days nor more than 90 days prior to the annual meeting; provided, however, that in 2 the event that less than 75 days' notice or prior public disclosure of the date of such meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class and number of shares of the Corporation which are beneficially owned by the stockholder and (iv) any material interest of the stockholder in such business. The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that such business was not properly brought before the meeting in accordance with these provisions, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. SECTION 7. List of Stockholders Entitled to Vote. The officer of the Corporation who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder of the Corporation who is present. SECTION 8. Stock Ledger. The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 7 of this Article II or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. ARTICLE III DIRECTORS SECTION 1. Number and Election of Directors. The number of directors constituting the Board of Directors shall be fixed from time to time by the Board of Directors in the manner prescribed in the Certificate of Incorporation. Except as provided in Section 3 of this Article, the directors to be elected at each Annual Meeting of Stockholders shall be elected by a plurality of the votes cast at such Annual Meeting of Stockholders, and each director so elected shall hold office until the third Annual Meeting 3 following such election and until his successor is duly elected and qualified, or until his earlier resignation, retirement or removal. No person elected or re-elected a director shall serve as a director of the Corporation beyond the day of its annual meeting occurring soonest after such person's seventy-second birthday anniversary. Any director may resign at any time upon notice to the Corporation. Directors need not be stockholders. SECTION 2. Nomination Procedures. Only persons who are nominated in accordance with the following procedures shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors, by any nominating committee or person appointed by the Board of Directors or by any stockholder of the Corporation entitled to vote for the election of Directors at the meeting. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to, or mailed and received at, the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 75 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of the Corporation which are beneficially owned by the person and (iv) any other information relating to the person that is required to be disclosed in solicitations of proxies for election of Directors pursuant to Rule 14(a) under the Securities Exchange Act of 1934, as amended (the "Act"), and any other applicable laws or rules or regulations of any governmental authority or of any national securities exchange or similar body overseeing any trading market on which shares of the corporation are traded, and (b) as to the stockholder giving the notice (i) the name and record address of stockholder and (ii) the class and number of shares of the Corporation which are beneficially owned by the stockholder. No person shall be eligible for election as a Director of the Corporation unless nominated in accordance with the procedures set forth herein. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. SECTION 3. Vacancies. Subject to the provisions of the Certificate of Incorporation, vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and qualified, or until their earlier resignation or removal. 4 SECTION 4. Duties and Powers. The business of the Corporation shall be managed by or under the direction of the Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. SECTION 5. Meetings. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the state of Delaware. Regular meetings of the Board of Directors may be held without notice at such time and at such place as may from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called by the Chairman, if there be one, the President, or any three directors. Notice thereof stating the place, date and hour of the meeting shall be given to each director either by mail not less than forty-eight (48) hours before the date of the meeting, by telephone or telegram on twenty-four (24) hours' notice, or on much shorter notice as the person or person calling such meeting may deem necessary or appropriate in the circumstances. SECTION 6. Quorum. Except as may be otherwise specifically provided by law, the Certificate of Incorporation or these By-Laws, at all meetings of the Board of Directors, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. SECTION 7. Actions of Board. Unless otherwise provided by the Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all the members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. SECTION 8. Meetings by Means of Conference Telephone. Unless otherwise provided by the Certificate of Incorporation or these By-Laws, members of the Board of Directors of the Corporation, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 8 shall constitute presence in person at such meeting. SECTION 9. Committees. The Board of Directors may, by resolution passed by a majority of the entire Board of Directors, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of 5 Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of any such committee. In the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. Any committee, to the extent allowed by law and provided in the resolution establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation. Each committee shall keep regular minutes and report to the Board of Directors when required. SECTION 10. Compensation. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors and/or a stated retainer as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. SECTION 11. Interested Directors. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose if (i) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof or the shareholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. 6 ARTICLE IV OFFICERS SECTION 1. General. The officers of the Corporation shall be chosen by the Board of Directors and shall be a President, a Secretary and a Treasurer. The Board of Directors, in its discretion, may also choose a Chairman of the Board of Directors (who must be a director) and one or more Vice-Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any number of offices may be held by the same person, unless otherwise prohibited by law, the Certificate of Incorporation or these By-Laws. The officers of the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman of the Board of Directors, need such officers be directors of the Corporation. SECTION 2. Election. The Board of Directors shall elect the officers of the Corporation who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors; and all officers of the Corporation shall hold office until their successors are chosen and qualified, or until their earlier resignation or removal. Any officer elected by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. SECTION 3. Voting Securities Owned by the Corporation. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the President or any Vice- President and any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and power incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons. SECTION 4. Chairman of the Board of Directors. The Chairman of the Board of Directors, if there be one, shall preside at all meetings of the stockholders and of the Board of Directors. Except where by law the signature of the President is required, the Chairman of the Board of Directors shall possess the same power as the President to sign all contracts, certificates and other instruments of the Corporation which may be authorized by the Board of Directors. During the absence or disability of the President, the Chairman of the Board of Directors shall exercise all the powers and discharge all the duties of the President. The Chairman of the Board of Directors shall also perform such 7 other duties and may exercise such other powers as from time to time may be assigned to him by these By-Laws or by the Board of Directors. SECTION 5. President. The President shall, subject to the control of the Board of Directors and, if there be one, the Chairman of the Board of Directors, have general supervision of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall execute all bonds, mortgages, contracts and other instruments of the Corporation requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except that the other officers of the Corporation may sign and execute documents when so authorized by these By-Laws, the Board of Directors or the President. In the absence or disability of the Chairman of the Board of Directors, or if there be none, the President shall preside at all meetings of the stockholders and the Board of Directors. The President shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by these By-Laws or by the Board of Directors. SECTION 6. Vice-Presidents. At the request of the President or in his absence or in the event of his inability or refusal to act (and if there be no Chairman of the Board of Directors), the Vice-President or the Vice-Presidents if there is more than one (in the order designated by the Board of Directors) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Each Vice- President shall perform such other duties and have such other powers as the Board of Directors from time to time may prescribe. If there be no Chairman of the Board of Directors and no Vice-President, the Board of Directors shall designate the officer of the Corporation who, in the absence of the President or in the event of the inability or refusal of the President to act, shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. SECTION 7. Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of stockholders and record all the proceedings thereat in a book or books to be kept for that purpose; the Secretary shall also perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision he shall be. If the Secretary shall be unable or shall refuse to cause to be given notice of all meetings of the stockholders and special meetings of the Board of Directors, and if there be no Assistant Secretary, then either the Board of Directors or the President may choose another officer to cause such notice to be given. The Secretary shall have custody of the seal of the Corporation and the Secretary or any Assistant Secretary, if there be one, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary or by the signature of any such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to 8 attest the affixing by his signature. The Secretary shall see that all books, reports, statements, certificates and other documents and records required by law to be kept or filed are properly kept or filed, as the case may be. SECTION 8. Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. SECTION 9. Assistant Secretaries. Except as may be otherwise provided in these By-Laws, Assistant Secretaries, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, any Vice-President, if there be one, or the Secretary, and in the absence of the Secretary or in the event of his disability or refusal to act, shall perform the duties of the Secretary, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Secretary. SECTION 10. Assistant Treasurers. Assistant Treasurers, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, any Vice-President, if there be one, or the Treasurer, and in the absence of the Treasurer or in the event of his disability or refusal to act, shall perform the duties of the Treasurer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Treasurer. If required by the Board of Directors, an Assistant Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. SECTION 11. Other Officers. Such other officers as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any 9 other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers. ARTICLE V STOCK SECTION 1. Form of Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate signed, in the name of the Corporation (i) by the Chairman of the Board of Directors, the President or a Vice-President and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by him in the Corporation. SECTION 2. Signatures. Where a certificate is countersigned by (i) a transfer agent other than the Corporation or its employee, or (ii) a registrar other than the Corporation or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. SECTION 3. Lost Certificates. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as the Board of Directors shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. SECTION 4. Transfers. Stock of the Corporation shall be transferable in the manner prescribed by law and in these By-Laws. Transfers of stock shall be made on the books of the Corporation only by the person named in the certificate or by his attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be cancelled before a new certificate shall be issued. SECTION 5. Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty days nor less than ten days before the date of such meeting, nor more than sixty days prior to 10 any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 6. Beneficial Owners. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. SECTION 7. Restrictions on Transfer. The Board of Directors may impose restrictions on transfer of securities of the Corporation pursuant to the Rights Agreement dated as of March 13, 1992 by and between the Corporation and First Chicago Trust Company of New York, as and to the extent required by such Rights Agreement, as amended from time to time. ARTICLE VI NOTICES SECTION 1. Notices. Whenever written notice is required by law, the Certificate of Incorporation or these By-Laws, to be given to any director, member of a committee or stockholder, such notice may be given by mail, addressed to such director, member of a committee or stockholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Written notice may also be given personally or by telegram, telex or cable. SECTION 2. Waivers of Notice. Whenever any notice is required by law, the Certificate of Incorporation or these By-Laws, to be given to any director, member of a committee or stockholder, a waiver thereof in writing, signed, by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE VII GENERAL PROVISIONS SECTION 1. Dividends. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, and may be paid in cash, in 11 property, or in shares of the capital stock. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for any proper purpose, and the Board of Directors may modify or abolish any such reserve. SECTION 2. Disbursements. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. SECTION 3. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. SECTION 4. Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE VIII INDEMNIFICATION SECTION 1. Indemnification in Actions, Suits, or Proceedings Other Than Those by or in the Right of the Corporation. Subject to Section 3 of this Article VIII, the Corporation shall indemnify each person who is or was, or is threatened to be made, a party to or witness in any threatened, pending or completed action, suit, proceeding or claim, whether civil, criminal, administrative or investigative (other than one by or in the right of the Corporation), by reason of the fact that he is or was a director, officer or employee of the Corporation or of Union Mutual Life Insurance Company, a Maine mutual insurance company (the "Mutual Company"), or is or was serving at the request of the Corporation or the Mutual Company as a director, officer, employee or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorney's fees and expenses), judgments, fines, penalties, and amounts paid in settlement, incurred by him in connection with defending, investigating, preparing to defend, or being or preparing to be a witness in, such action, suit, proceeding or claim, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. SECTION 2. Indemnification in Actions, Suits or Proceedings by or in the Right of the Corporation. Subject to Section 3 of this Article VIII, the Corporation shall indemnify each person who is or was, or is threatened to be made, a party to or witness in 12 any threatened, pending or completed action, suit, proceeding or claim by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer or employee of the Corporation or of the Mutual Company or is or was serving at the request of the Corporation or the Mutual Company as a director, officer, employee or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorney's fees and expenses), and, if and to the extent permitted by applicable law, judgments, penalties and amounts paid in settlement, incurred by him in connection with defending, investigating, preparing to defend, or being or preparing to be a witness in, such action, suit, proceeding or claim, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation; provided, however, that no indemnification shall be made in respect of any such claim or any issue or matter in any such action, suit or proceeding as to which such person shall have been adjudged to be liable to the Corporation unless (and only to the extent that) the Court of Chancery or the court in which such claim, action, suit or proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnification for such expenses and amounts which the Court of Chancery or such other court shall deem proper. SECTION 3. Authorization of Indemnification. (a) Any indemnification under this Article VIII (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the person seeking indemnification is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 1 or 2 of this Article VIII, as the case may be. Such determination (and determinations under Sections 5 and 6 of this Article VIII) shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to the action, suit, proceeding or claim with respect to which indemnification is sought ("disinterested directors"), or (ii) if such a quorum is not obtainable, or if a quorum of disinterested directors so directs, in a written opinion of independent legal counsel chosen by the Board of Directors, or (iii) by the stockholders; provided, however, that if a Change in Control (as defined in this Section 3) has occurred and the person seeking indemnification so requests, such determination (and determination under Sections 5 and 6 of this Article VIII) shall be made in a written opinion rendered by independent legal counsel chosen by the person seeking indemnification and not reasonably objected to by the Board of Directors (whose fees and expenses shall be paid by the Corporation). To the extent, however, that a director, officer, employee or trustee or former director, officer, employee or trustee has been successful on the merits or otherwise in defense of any action, suit, proceeding or claim described above, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorney's fees and expenses) incurred by him in connection therewith, without the necessity of authorization in the specific case. (b) For purposes of the proviso to the second sentence of Section 3(a), "independent legal counsel" shall mean legal counsel other than an attorney, or a firm having associated 13 with it an attorney, who has been retained by or who has performed services for the Corporation, the Mutual Company or the person seeking indemnification within the previous three years. (c) A "Change in Control" shall mean a change in control of the Corporation of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Act, whether or not the Corporation is then subject to such reporting requirement; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in sections 13(d) and 14(d) of the Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Corporation representing 35% or more of the combined voting power of the Corporation's then outstanding securities without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such acquisition, or (ii) the Corporation is a party to a merger, consolidation, sale of assets or other reorganization, or proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter, or (iii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period) cease for any reason to constitute at least a majority of the Board of Directors. SECTION 4. Good Faith Defined, Etc. (a) For purposes of any determination under Section 3 of this Article VIII, a person shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe his conduct was unlawful, if such person relied on the records or books of account of the Corporation, the Mutual Company or another enterprise, or on information supplied to him by the officers of the Corporation, the Mutual Company or another enterprise, or on information or records given or reports made to the Corporation, the Mutual Company or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation, the Mutual Company or another enterprise. The term "another enterprise" as used in this Section 4(a) shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation or the Mutual Company as a director, officer, employee or trustee. (b) The termination of any action, suit, proceeding or claim by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the 14 Corporation, or, with respect to any criminal action or proceeding, that he had no reasonable cause to believe that his conduct was unlawful. (c) References in this Article VIII to "penalties" include any excise taxes assessed on a person with respect to an employee benefit plan; references in this Article VIII to "serving at the request of the Corporation or the Mutual Company" include any service as a director, officer or employee or former director, officer or employee of the Corporation or the Mutual Company which imposes duties on, or involves services by, such person with respect to an employee benefit plan or its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the participants or beneficiaries of such an employee benefit plan shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation. (d) The provisions of this Section 4 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Section 1 or 2 of this Article VIII, as the case may be. SECTION 5. Right to Indemnification Upon Application; Procedure Upon Application; Etc. Except as otherwise provided in the proviso to Section 2 of this Article VIII: (a) any indemnification under Section 1 or 2 of this Article VIII shall be made no later than 45 days after receipt by the Corporation of the written request of the director, officer, employee or trustee or former director, officer, employee or trustee unless a determination is made within said 45-day period in accordance with Section 3 of this Article VIII that such person has not met the applicable standard of conduct set forth in Section 1 or 2 of this Article VIII. (b) The right to indemnification under Section 1 or 2 of this Article VIII or advances under Section 6 of this Article VIII shall be enforceable by the director, officer, employee or trustee or former director, officer, employee or trustee in any court of competent jurisdiction. Following a Change in Control, the burden of proving that indemnification is not appropriate shall be on the Corporation. Neither the absence of any prior determination that indemnification is proper in the circumstances, nor a prior determination that indemnification is not proper in the circumstances, shall be a defense to the action or create a presumption that the director, officer, employee or trustee or former director, officer, employee or trustee has not met the applicable standard of conduct. The expenses (including attorney's fees and expenses) incurred by the director, officer, employee or trustee or former director, officer, employee or trustee in connection with successfully establishing his right to indemnification, in whole or in part, in any such action (or in any action or claim brought by him to recover under any insurance policy or policies referred to in Section 9 of this Article VIII) shall also be indemnified by the Corporation. 15 (c) If any person is entitled under any provision of this Article VIII to indemnification by the Corporation for some or a portion of expenses, judgments, fines, penalties or amounts paid in settlement incurred by him, but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify such person for the portion of such expenses, judgments, fines, penalties and amounts to which he is entitled. SECTION 6. Expenses Payable in Advance. Expenses (including attorney's fees and expenses) incurred by a director, officer, employee or trustee or a former director, officer, employee or trustee in defending, investigating, preparing to defend, or being or preparing to be a witness in, a threatened or pending action, suit, proceeding or claim against him, whether civil or criminal, may be paid by the Corporation in advance of the final disposition of such action, suit, proceeding or claim upon receipt by the Corporation of a written request therefor and a written undertaking by or on behalf of the director, officer, employee or trustee or former director, officer, employee or trustee to repay such amounts if it shall be determined in accordance with Section 3 of this Article VIII that he is not entitled to be indemnified by the Corporation; provided, however, that if he seeks to enforce his rights in a court of competent jurisdiction pursuant to Section 5(b) of this Article VIII, said undertaking to repay shall not be applicable or enforceable unless and until there is a final court determination that he is not entitled to indemnification as to which all rights of approval have been exhausted or have expired. SECTION 7. Certain Persons Not Entitled to Indemnification. Notwithstanding any other provision of this Article VIII, no person shall be entitled to indemnification under this Article VIII or to advances under Section 6 of this Article VIII with respect to any action, suit, proceeding or claim brought or made by him against the Corporation or the Mutual Company, other than an action, suit, proceeding or claim seeking, or defending such person's right to, indemnification and/or expense advances pursuant to this Article VIII or otherwise. SECTION 8. Non-Exclusivity and Survival of Indemnification. The provisions of this Article VIII shall not be deemed exclusive of any other rights to which the person seeking indemnification or expense advances may be entitled under any agreement, contract, or vote of stockholders or disinterested directors, or pursuant to the direction (howsoever embodied) of any court of competent jurisdiction, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Except as otherwise provided in Section 7 of this Article VIII, but notwithstanding any other provision of this Article VIII, it is the policy of the Corporation that indemnification of and expense advances to the persons specified in Sections 1 and 2 of this Article VIII shall be made to the fullest extent permitted by law, and, accordingly, in the event of any change in law, by legislation or otherwise, permitting greater indemnification of and/or expense advances to any such person, the provisions of this Article VIII shall be construed so as to require such greater indemnification and/or expense advances. The provisions of this Article VIII shall not be deemed to preclude the indemnification of any person who is not specified in Section 1 or 16 2 of this Article VIII but whom the Corporation has the power to indemnify under the provisions of the General Corporation Law of the State of Delaware or otherwise. The provisions of this Article VIII shall continue as to a person who has ceased to be a director, officer, employee or trustee and shall inure to the benefit of the heirs, executors and administrators of such person. SECTION 9. Insurance. The Corporation may purchase and maintain at its expense insurance on behalf of any person who is or was a director, officer or employee of the Corporation or the Mutual Company or is or was serving at the request of the Corporation or the Mutual Company as a director, officer, employee or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability or expense asserted against or incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power or the obligation to indemnify him against such liability or expense under the provisions of this Article VIII or the provisions of Section 145 of the General Corporation Law of the State of Delaware. The Company shall not be obligated under this Article VIII to make any payment in connection with any claim made against any person if and to the extent that such person has actually received payment therefor under any insurance policy or policies. SECTION 10. Successors; Meaning of "Corporation". This Article VIII shall be binding upon and enforceable against any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Corporation. For purposes of this Article VIII, but subject to the provisions of any agreement relating to any merger or consolidation of the kind referred to in clause (i) below or of any agreement relating to the acquisition of any corporation of the kind referred to in clause (ii) below, references to "the Corporation" shall include (i) any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger with the Corporation which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers and employees, so that any person who is or was a director, officer or employee of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions of this Article VIII with respect to the Corporation as he would have with respect to such constituent corporation if its separate existence had continued; and (ii) any corporation of which at least a majority of the voting power (as represented by its outstanding stock having voting power generally in the election of directors) is owned directly or indirectly by the Corporation. SECTION 11. Severability. The provisions of this Article VIII shall be severable in the event that any provision hereof (including any provision within a single section, subsection, clause, paragraph or sentence) is held invalid, void or otherwise unenforceable on any ground by any court of competent jurisdiction. In the event of any 17 such holding, the remaining provisions of this Article VIII shall continue in effect and be enforceable to the fullest extent permitted by law. ARTICLE IX AMENDMENTS SECTION 1. Power to Amend. The Board of Directors shall have concurrent power with the stockholders as set forth in the By-Laws and the Certificate of Incorporation to make, alter, amend, change, add to or repeal the By-Laws. SECTION 2. Required Vote. The Board of Directors may amend the By-Laws upon the affirmative vote of the number of directors which shall constitute, under the terms of the By-Laws, the action of the Board of Directors. Stockholders may not amend the By-Laws except upon the affirmative vote of at least eighty percent (80%) of the votes entitled to be cast by the holders of all outstanding shares of Voting Stock (as such term is defined in the Certificate of Incorporation) voting together as a single class. 18 EX-10.2 4 INCENTIVE COMPENSATION PLAN Exhibit 10.2 THE UNUM CORPORATION INCENTIVE COMPENSATION PLAN FOR DESIGNATED EXECUTIVE OFFICERS 1. PURPOSE OF THE PLAN The purpose of the UNUM Corporation ("UNUM" or the "Corporation") Incentive Compensation Plan for Designated Executive Officers (the "Plan") is to provide a means of rewarding certain executive officers of the Corporation and its subsidiaries with compensation which, when coupled with a base salary, produces a competitive level of total compensation that reflects their contributions to the overall long term enhancement of the value of the Corporation in a manner which permits such compensation to be deductible for federal income tax purposes. 2. ADMINISTRATION OF THE PLAN The administration of this Plan shall be vested in the Compensation Committee of the Board (the "Committee") which shall make all determinations necessary under this Plan. All members of the Committee shall qualify as "outside directors" (as that term is defined in Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder or as may from time to time be in effect (the "Regulations")). 3. PARTICIPATION IN THE PLAN All executive officers, as defined by rules of the Securities and Exchange Commission, shall be eligible to participate in the Plan. Within the period specified in the Regulations within which a performance goal is required to be established to qualify as a pre-established performance goal (the "Designation Period"), the Committee may designate one or more such executive officers of the Corporation (each, a "Participant") who shall participate in the Plan for the Performance Period. 4. PERFORMANCE GOALS AND AWARDS TO PARTICIPANTS Within the Designation Period the Committee will allocate amounts on behalf of each Participant which will be awarded if the Corporation and/or a business unit attains objective performance goals established by the Committee within the Designation Period based on one or more of the following: the market price of a share of the Common stock, earnings-per-share, return to stockholders (including dividends), return-on-equity, earnings on a GAAP, operating, or statutory accounting basis, revenues, annualized sales, market share, cash flow or cost reduction goals, underwriting margin, or any combination of the foregoing. Such goals may be expressed either on an absolute basis or relative to the performance of a peer group selected by the Committee. Where applicable, the Performance Goals may be expressed in terms of attaining a specified level of the particular criteria or the attainment of a percentage increase or decrease in the particular criteria. The Performance Goals may include a threshold level of performance below which no payment will be made (or no vesting will occur), levels of performance at which specified payments will be made (or no vesting will occur) and a maximum level of performance above which no additional payment will be made (or at which full vesting will occur). Each of the foregoing Performance Goals shall be determined in accordance with generally accepted accounting principles and shall be subject to certification by the Committee; provided that the Committee shall have the authority to make equitable adjustments to the Performance Goals in recognition of unusual or non-recurring events affecting the Corporation or any subsidiary or affiliate thereof or the financial statements of the Corporation or any subsidiary or affiliate thereof, in response to changes in applicable laws or regulations, or to account for items of gain, loss or expense determined to be extraordinary or unusual in nature or infrequent in occurrence or related to the disposal of a segment of a business or to a change in accounting principles. The Committee may, in its sole discretion, reduce or cancel any award under the Plan. At the discretion of the Committee, Awards shall be satisfied in cash or restricted stock under the Company's 1996 Stock Long-Term Incentive Plan or a combination of the above. The maximum amount payable in cash and Restricted Stock (valued at the fair market value on the date of grant) to any single participant with respect to any Performance Period shall be the lesser of 250% of the base salary of the participant at the time of designation or $3,000,000. 5. PERFORMANCE PERIOD The Performance Period as to which awards may be made under this Plan shall be the twelve-month period commencing January 1 of a calendar year and ending on December 31 of such calendar year. 6. PAYMENT OF INCENTIVE AWARDS UNDER THE PLAN (a) Following the completion of each Performance Period, the Committee will certify in writing (i) whether the performance goals and any other material terms of each award were attained, and (ii) the award payable to the Participants. (b) Except as provided in Section 7 of this Plan, each Participant shall receive payment, in cash or certificates representing shares of Restricted Stock, subject to all required tax withholdings, of his or her incentive award as soon as practicable following the determination of the amount of such award. 7. DEFERRAL OF PAYMENT OF AWARDS At the discretion of the Committee and subject to such terms and conditions as the Committee may determine, any Participant may elect to defer payment of the cash portion of all or part of any award which such Participant might earn with respect to a Performance Period (together with interest thereon from the date as of which the award would have been paid but for such Participant's election to defer payment at the rate, if any, fixed by the Committee) by complying with such procedures as the Committee may from time to time prescribe. 8. SEPARATION FROM THE CORPORATION AND ITS SUBSIDIARIES The Committee may adopt rules governing the rights of Participants who cease to be employed by the Corporation or its subsidiaries prior to the end of the Performance Period to receive award payments. 10. AMENDMENTS The Committee may amend this Plan at any time, provided that if Section 162(m) of the Code or the Regulations would require stockholder approval of such an amendment in order for payments under the Plan to be deductible then no such amendment shall be effective without such approval. 11. TERMINATION The Board of Directors of the Corporation may terminate this Plan at any time. No termination of this Plan shall adversely affect the right of any person to receive any award for a Performance Period or Periods for which such person had been designated under Section 3 of this Plan, or amounts previously awarded to such person but deferred in accordance with Section 7 of this Plan plus any earnings thereon, or as provided in rules adopted under Section 8 of this Plan. 12. MISCELLANEOUS (a) Nothing contained in this Plan shall be construed as giving any executive officer of the Corporation the right to participate in the Plan, to continued employment or any interest in any asset of the Corporation or any of its subsidiaries, or to prevent the Corporation or any of its subsidiaries or affiliates from taking any action which it deems to be appropriate or in its best interests, whether or not such action would have an adverse effect on this Plan or the amounts payable hereunder. (b) This Plan shall be unfunded and the Corporation shall not be required to establish any segregation of assets to assure payment of any awards made hereunder. (c) A Participant may not sell, transfer or assign any right or interest in the Plan except as provided in rules adopted by the Committee under Section 8 hereof and any attempted sale, transfer or assignment shall be null and void. (d) This Plan shall be governed by and construed in accordance with the laws of the State of Delaware and the applicable provisions of the Code and the Regulations. 13. EFFECTIVE DATE This Plan shall be effective as of January 1, 1997, subject to the subsequent approval hereof by the Corporation's stockholders at the 1997 Annual Meeting of Stockholders and, if so approved, shall remain in effect until terminated in accordance with Section 11 hereof. EX-10.13 5 NON-QUALIFIED 401(K) PLAN Exhibit 10.13 UNUM CORPORATION NONQUALIFIED 401(K) PLAN Effective January 1, 1997 PREAMBLE The purpose of the Plan is to provide employees with retirement benefits that would have been available under the Company's Retirement Savings Plan, but for the limitations on contributions and benefits under the Code. Participation in the Plan shall be limited to a select group of management or highly compensated employees within the meaning of ERISA. The Plan shall be effective January 1, 1997. ARTICLE I Definitions 1.1 "Board" or "Board of Directors" shall mean the Board of Directors of the Company. 1.2 "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.3 "Committee" shall mean the committee appointed by the Board in accordance with Section 11.1 of the Retirement Savings Plan. 1.4 "Company" shall mean UNUM Corporation. 1.5 "Compensation" shall mean a Participant's compensation as defined in Section 1.10 of the Retirement Savings Plan, except that Compensation shall be determined without regard to the limit on the amount of compensation that may be taken into account under Code Section 401(a)(17) and shall include amounts deferred under this Plan. Notwithstanding the foregoing to the contrary, the annual Compensation of any Participant in excess of $500,000 shall not be taken into account. 1.6 "Deferred Compensation Account" shall mean a bookkeeping account established in accordance with Section 2.3. 1.7 "Effective Date" shall mean January 1, 1997. 1.8 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. 1.9 "Fair Market Value" shall mean, with respect to a Share, the closing price as reported on the New York Stock Exchange. 1.10 "Participant" shall mean (a) an employee of the Company or one of its domestic subsidiaries listed on Schedule A, who is a director or above with an annual base salary of $100,000 or more, or (b) a field employee of the Company or such subsidiary who is a manager, assistant manager or regional vice president and who has an annual draw of $100,000 or more. The dollar limit in the preceding sentence shall be adjusted at the same time and in the same manner as the dollar limit under Code Section 415(d). 1.11 "Plan" shall mean the UNUM Corporation Nonqualified 401(k) Plan as set forth herein and as hereafter amended from time to time. 1.12 "Plan Year" shall mean the calendar year. 1.13 "Retirement Savings Plan" shall mean the UNUM Employees Retirement Savings Plan. 1.14 "Share" shall mean a share of common stock, par value ten cents ($0.10), of the Company. 1.15 "Valuation Date" shall mean the last business day of each calendar month and such additional dates as the Committee may designate. ARTICLE II Deferred Compensation 2.1 Deferral Election. A Participant may elect to defer for any Plan Year under this Plan the amount of Compensation, if any, that would have been deferred as elective contributions in accordance with the Participant's initial deferral election for such Plan Year under the Retirement Savings Plan, but for the limit on compensation under Code Section 401(a)(17), the nondiscrimination requirements of Code Section 401(k), the limit on elective deferrals under Code Section 402(g), and the limit on annual additions under Code Section 415. Once each Plan Year a Participant may elect to defer Compensation payable for services to be performed after the date of the deferral election. An election to defer shall be made by executing and delivering to the Committee a deferred compensation agreement, in the form prescribed by the Committee. An election to defer Compensation shall continue in effect until the last day of the Plan 2 Year in which it becomes effective, the date the Participant terminates the election, or the date the Participant ceases to be a Participant, whichever occurs first. A deferral election may not be modified. A Participant may make a new deferral election on or before December 31 of any year to increase or decrease the amount of Compensation to be deferred during the following Plan Year. A Participant may terminate a deferral election at any time by delivering a written notice of termination to the Committee, on such form as the Committee may prescribe. Such notice shall specify the effective date, and deferrals shall cease as soon as practicable thereafter. Such notice shall not be effective with regard to amounts previously deferred. If a Participant ceases to be a member of a select group of management or highly compensated employees, within the meaning of ERISA, his or her deferral election shall terminate, provided that the loss of such status shall not cause amounts previously deferred to become payable. A deferral election may not be made with respect to this Plan for any Plan Year unless the Participant makes a deferral election for such year under the Retirement Savings Plan. Termination or modification of a Participant's deferral election under the Retirement Savings Plan for any Plan Year shall terminate the Participant's deferral election for such year under this Plan. Any such termination under this Plan shall not be effective with respect to amounts previously deferred. 2.2 Matching Contribution. The Company shall make a matching contribution under this Plan on behalf of each Participant who defers Compensation hereunder with respect to any Plan Year for which a matching contribution is in effect under the Retirement Savings Plan. The amount of such contribution shall equal the matching contribution that would have been made pursuant to the formula for matching contributions then in effect under the Retirement Savings Plan (without regard to the nondiscrimination requirements of Code Section 401(m) and the limit on annual additions under Code Section 415) if the Compensation deferred hereunder had been an elective contribution to such plan. 2.3 Account. The Company shall establish a Deferred Compensation Account for each Participant who defers Compensation under the Plan and shall adjust such account as of each Valuation Date as follows: (a) credit the account with the number of Shares that could have been purchased with the amount, if any, deferred by the Participant and the matching contributions, if any, made by the Company since the last Valuation Date, at the Fair Market Value of a Share on the day (or days) the amounts deferred would have been used to purchase Shares under the Retirement Savings Plan had such amounts been deferred under that Plan; (b) credit the account with the number of Shares that could have been purchased with any cash dividend paid since the last Valuation Date at the Fair Market Value of a Share 3 on the dividend payment date, based on the number of Shares credited to such account on the dividend record date; and (c) debit the account by the amount, if any, paid in accordance with Article III since the last Valuation Date. The Company shall appropriately adjust the number of Shares credited to the account to reflect any stock split or stock dividend. The Committee shall provide each Participant with an account statement at least quarterly. 2.4 Investment of Account. Solely for purposes of valuing a Deferred Compensation Account, such account shall be deemed invested in Shares. No Participant shall become a shareholder of the Company or acquire any rights or privileges with respect to Shares by participating in this Plan. The Company shall be under no obligation to make any particular investment pursuant to the Plan. 2.5 Death Benefits. In the event of a Participant's death, his or her Deferred Compensation Account shall be paid, in accordance with Article III, to the surviving spouse or designated beneficiary entitled to receive any death benefit payable with respect to the Participant under the Retirement Savings Plan. In the absence of such surviving spouse or designated beneficiary, the account shall be paid to the Participant's estate. ARTICLE III Distributions 3.1 Form and Time. A Participant's Deferred Compensation Account shall be distributed in cash to the Participant in the form of a lump sum, annual installments over a period of five (5) or ten (10) years or in such other form as the Committee may permit. Payment shall be made or commence on the last business day of the calendar month following the month in which the Participant terminates employment, or January 31 of the calendar year following the calendar year in which the Participant terminates employment. Each Participant shall elect the form and time of payment in the first deferred compensation agreement he or she executes pursuant to Section 2.1, and such election shall apply to any subsequent deferred compensation agreement executed by the Participant. For purposes of this Plan, a termination of employment occurs on the date a Participant 4 ceases to be employed by the Company or one of its subsidiaries and is no longer employed by any of them. Death benefits shall be paid in a cash lump sum as soon as practicable following a Participant's death and not later than the last business day of the calendar month following the month in which the Participant dies. Except as provided in Section 3.2, distribution shall be made under this Plan only on account of a Participant's retirement, death, disability, or other termination of service, and no loans to Participants shall be permitted. 3.2 Acceleration By Committee. In the event a Participant suffers a severe financial hardship as a result of an unforeseeable emergency, the Committee may, in its discretion, accelerate payment of the Participant's Deferred Compensation Account to the extent necessary to eliminate such hardship. An "unforeseeable emergency" means a sudden and unexpected illness, accident, loss of property due to casualty, or other similar extraordinary and unforeseeable circumstance arising as a result of events beyond the control of the Participant. ARTICLE IV Administration 4.1 Administrative Committee. The Committee shall have complete discretionary authority to control and manage the operation and administration of the Plan and to construe Plan provisions. Subject to the provisions of the Plan, the Committee from time to time may establish rules for the administration and interpretation of the Plan. The final determination of the Committee as to any disputed questions shall be conclusive. All actions, decisions and interpretations of the Committee in administering the Plan shall be made in a uniform and nondiscriminatory manner. 4.2 Action By Committee. A majority of the Committee shall constitute a quorum, and an action of the majority present at any meeting shall be deemed the action of the Committee. Any member of the Committee may participate in a meeting of the Committee through conference telephone or similar communications equipment by means of which all individuals participating in the meeting can hear each other. Any action of the Committee may be taken without a meeting if all 5 members of the Committee sign written consents setting forth the action taken or to be taken, at any time before or after the intended effective date of such action. 4.3 Delegation. The Committee may authorize one or more of its members to execute or deliver any instrument, make any payment or perform any other act which the Plan authorizes or requires the Committee to do. The Committee may employ counsel and other agents, may delegate ministerial duties to such agents or to employees of the Company and may procure such clerical, accounting, actuarial, consulting and other services as it may require in carrying out the provisions of the Plan. 4.4 Benefit Payments. No benefit shall be paid under the Plan until an application is made to the Committee in writing. The Committee may require an applicant to furnish such information as it may reasonably request, and may delay the commencement of benefits, if necessary, until such information is made available. The Committee shall have the sole discretion to determine the form and time of benefit payments under the Plan. 4.5 Claims Procedure. If an application for a benefit ("claim") is denied by the Committee, the Committee shall give written notice of such denial to the applicant, by certified or registered mail, within 60 days after the claim was filed with the Committee; provided, however, that such 60-day period may be extended to 120 days by the Committee if it determines that special circumstances exist which require an extension of the time required for processing the claim. Such denial shall set forth: (a) the specific reason or reasons for the denial; (b) the specific Plan provisions on which the denial is based; (c) any additional material or information necessary for the applicant to perfect the claim and an explanation of why such material or information is necessary; and (d) an explanation of the Plan's claim review procedure. Following receipt of such denial, the applicant or his or her duly authorized representative may: (a) request a review of the denial by filing a written application for review with the Committee within 60 days after receipt by the applicant of such denial; (b) review documents pertinent to the claim at such reasonable time and location as shall be mutually agreeable to the applicant and the Committee; and 6 (c) submit issues and comments in writing to the Committee relating to its review of the claim. The Committee shall, after consideration of the application for review, render a decision and shall give written notice thereof to the applicant, by certified or registered mail, within 60 days after receipt by the Committee of the application for review; provided, however, that such 60-day period may be extended to 120 days by the Committee if it determines that special circumstances exist which require an extension of the time required for processing the application for review. Such notice shall include specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision is based. 4.6 Indemnification. The Company shall indemnify and hold harmless each member of the Committee against all expenses and liabilities arising out of his or her acts or omissions with respect to the Plan, provided such member would be entitled to indemnification pursuant to the bylaws of the Company. ARTICLE V Miscellaneous 5.1 Amendment and Termination of Plan. The Board may at any time, in its sole discretion, terminate this Plan or amend the Plan in whole or in part. No such termination or amendment shall affect the right of any Participant or his or her spouse or designated beneficiary to receive a benefit under the terms of this Plan on the date immediately preceding such termination or amendment. 5.2 Employee Status. Nothing contained herein shall confer upon any Participant the right to be retained in the service of the Company or any other right not expressly provided for herein, nor shall the existence of this Plan impair the right of the Company to discharge or otherwise deal with a Participant. 5.3 Funding. This Plan is unfunded for purposes of the Code and Title I of ERISA and is not intended to meet the requirements of Code Section 401(a). The Plan constitutes the Company's mere promise to pay benefits in the future, and a Participant hereunder shall have no greater rights than a general, unsecured creditor of the Company. 7 5.4 Assignment. To the maximum extent permitted by law, no benefit under this Plan shall be assignable or subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, attachment, or encumbrance of any kind. 5.5 Taxes. Any and all taxes that may be due and owing with respect to any payment under the Plan shall be the sole responsibility of the persons to whom and for whose benefit such payment is made, provided, however, that the Company shall withhold from any amount payable under the Plan all amounts that are required by law to be withheld. 5.6 Plan Documents. Each Participant shall receive a copy of this Plan and the Committee shall make available for inspection by the Participant a copy of any rules and regulations adopted by the Committee in administering the Plan. 5.7 Governing Law. This Plan is established under and shall be construed according to the laws of the State of Maine, except to the extent such laws may be preempted by ERISA. IN WITNESS WHEREOF, UNUM Corporation has caused this document to be executed by its duly authorized officer on this day of , 1997. UNUM CORPORATION By:_____________________________________ Its 8 SCHEDULE A UNUM CORPORATION NONQUALIFIED 401(K) PLAN Employees of the following domestic subsidiaries shall be eligible to participate in the Plan in accordance with Section 1.10 effective as of the dates specified below: Subsidiary Date First UNUM Life Insurance Company 1/1/97 UNUM Life Insurance Company of America 1/1/97 Colonial Life & Accident Insurance Co. 1/1/97 Duncanson & Holt Inc. 1/1/97 Duncanson & Holt Services Inc. 1/1/97 EX-12 6 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES EXHIBIT 12 UNUM CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in millions)
Year Ended December 31, ------------------------------ 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------- Earnings: Income from continuing operations before income taxes $341.6 $381.9 $198.6 Add: Fixed charges 52.2 48.0 29.6 ------ ------ ------ Earnings as adjusted $393.8 $429.9 $228.2 ====== ====== ====== Fixed charges: Interest expense $ 40.7 $ 37.2 $ 18.7 Interest portion of rent expense 11.5 10.8 10.9 ------ ------ ------ Total fixed charges $ 52.2 $ 48.0 $ 29.6 ====== ====== ====== Ratio of earnings to fixed charges 7.5 9.0 7.7 ====== ====== ======
For purposes of computing the ratio of earnings to fixed charges, earnings as adjusted consist of income from continuing operations before income taxes plus fixed charges. Fixed charges consist of interest expense and the estimated interest portion of rent expense. EX-21 7 SUBSIDIARIES OF UNUM CORPORATION EXHIBIT 21 SUBSIDIARIES OF UNUM CORPORATION Listed below are the subsidiaries of UNUM Corporation, as of December 31, 1996, with their respective jurisdiction of incorporation. UNUM Holding Company (Delaware) First UNUM Life Insurance Company (New York) Claims Service International, Inc. (Delaware) UNUM Life Insurance Company of America (Maine) Colonial Companies, Inc. (Delaware) Colonial Life & Accident Insurance Company (South Carolina) BenefitAmerica, Inc. (South Carolina) UNUM European Holding Company Limited (United Kingdom) UNUM Limited (United Kingdom) Claims Services International Limited (United Kingdom) Duncanson & Holt, Inc. (New York) Duncanson & Holt Services, Inc. (Maine) Group Management Services, Inc. (Washington) Duncanson & Holt Administrative Services, Inc. (Delaware) Duncanson & Holt Canada Ltd. (Canada) TRI-CAN Reinsurance, Inc. (Canada) Duncanson & Holt Asia PTE Ltd. (Singapore) Duncanson & Holt Europe Ltd. (United Kingdom) Duncanson & Holt Underwriters Ltd. (United Kingdom) Duncanson & Holt Agencies Ltd. (United Kingdom) Duncanson & Holt Syndicate Management Ltd. (United Kingdom) Trafalgar Underwriting Agencies Ltd. (United Kingdom) UNUM Japan Accident Insurance Company Limited (Japan) UNUM (Bermuda) Holdings Ltd. Duncanson & Holt (Bermuda) Ltd. UNUM International Ltd. (Bermuda) EX-23 8 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the following Registration Statements and related Prospectuses of our report dated February 5, 1997, except for Note 5, for which the date is March 1, 1997, and Note 18, for which the date is March 14, 1997, on our audits of the consolidated financial statements and the financial statement schedules of UNUM Corporation and subsidiaries as of December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995, and 1994, which report is included in the Annual Report on Form 10-K: Form S-8 No. 33-31270 pertaining to the UNUM Employees Retirement Savings Plan and Trust Form S-8 No. 33-19090 pertaining to the 1987 Executive Stock Option Plan Form S-8 No. 33-38225 pertaining to the 1990 Long-Term Stock Incentive Plan Form S-8 No. 33-52741 pertaining to the 1990 Long-Term Stock Incentive Plan Form S-3 No. 33-36873 Form S-3 No. 33-69132 Form S-8 No. 33-60124 pertaining to the Colonial Companies, Inc. Security Saver Plan Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 No. 33-55870 Form S-3 No. 333-08187 /s/ COOPERS & LYBRAND L.L.P. Portland, Maine March 25, 1997 EX-24 9 POWER OF ATTORNEY POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kevin J. Tierney and John-Paul DeRosa his true and lawful attorney-in-fact and agent, each acting alone, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign the Annual Report on Form 10-K for the year ending December 31, 1996 of UNUM Corporation pursuant to the Securities Exchange Act of 1934 and any or all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all his said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. Witness our signatures on the date set forth below: Signature Title Date --------- ----- ---- /s/ Gayle O. Averyt Director February 14, 1997 - -------------------- Gayle O. Averyt /s/ Robert E. Dillon, Jr. Director February 14, 1997 - -------------------------- Robert E. Dillon, Jr. /s/ Gwain H. Gillespie Director February 14, 1997 - ----------------------- Gwain H. Gillespie /s/ Ronald E. Goldsberry Director February 14, 1997 - ------------------------- Ronald E. Goldsberry /s/ Donald W. Harward Director February 14, 1997 - ---------------------- Donald W. Harward Signature Title Date --------- ----- ---- /s/ George J. Mitchell Director February 14, 1997 - ----------------------- George J. Mitchell /s/ Cynthia A. Montgomery Director February 14, 1997 - -------------------------- Cynthia A. Montgomery /s/ James L. Moody, Jr. Director February 14, 1997 - ------------------------ James L. Moody, Jr. /s/ Lawrence R. Pugh Director February 14, 1997 - --------------------- Lawrence R. Pugh /s/ Lois Dickson Rice Director February 14, 1997 - ---------------------- Lois Dickson Rice /s/ John W. Rowe Director February 14, 1997 - ----------------- John W. Rowe EX-27 10 FDS --
7 This schedule contains summary financial information extracted from the annual consolidated financial statements of UNUM Corporation and subsidiaries and is qualified in its entirety by reference to such contained in UNUM Corporation's SEC Form 10-K for the year ended December 31, 1996. 0000795581 Form 10-K 1,000 12-mos DEC-31-1996 JAN-01-1996 DEC-31-1996 6,942,700 0 0 31,300 1,132,100 248,100 8,724,700 77,000 1,113,800 844,200 15,467,500 7,170,400 0 0 3,533,600 526,900 0 0 10,000 2,253,100 15,467,500 3,120,400 802,200 3,400 116,700 2,324,700 (91,700) 0 341,600 103,600 238,000 0 0 0 238,000 3.26 0 0 0 0 0 0 0 0 This item contains the amounts of deferred and amortized policy acquisition costs for the period presented.
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