PROVIDENT COMPANIES INC /DE/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

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For the fiscal year ended December Commission file number 1-11834
31, 1998

Provident Companies, Inc.
(Exact name of registrant as specified in its charter)

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DELAWARE 62-1598430
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1 FOUNTAIN SQUARE
CHATTANOOGA, TENNESSEE 37402
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code (423) 755-1011

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Securities registered pursuant to Section 12(b) of the Act:

COMMON STOCK, PAR VALUE $1.00 PER SHARE
(Title of Class)

Securities registered pursuant to Section 12(g) of the Act: None

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]

As of March 1, 1999, there were 135,585,015 shares of the registrant's
common stock outstanding. The aggregate market value of the shares of common
stock, based on the closing price of those shares on the New York Stock
Exchange, Inc., held by non-affiliates was approximately $2,594,751,210.

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. [_]

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PART 1

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS

This document contains certain forward-looking statements with respect to
the financial condition, results of operations and business of Provident
Companies, Inc. (the "Company"). These statements may be made directly in this
document referring to the Company or may be made part of this document by
reference to other documents filed with the Securities and Exchange Commission
by the Company, which is known as "incorporation by reference," and may
include statements for the period following the completion of the proposed
merger with UNUM Corporation ("UNUM"). You can find many of these statements
by looking for words such as "believes," "expects," "anticipates," "estimates"
or similar expressions in this document or in documents incorporated herein.

These forward-looking statements are subject to numerous assumptions, risks
and uncertainties. Factors that may cause actual results to differ from those
contemplated by the forward-looking statements include, among others, the
following possibilities:

. Competitive pressures in the insurance industry may increase
significantly through industry consolidation, competitor demutualization,
or otherwise.

. General economic or business conditions, both domestic and foreign, may
be less favorable than expected, resulting in, among other things, lower
than expected revenues, and the Company could experience higher than
expected claims or claims with longer duration than expected.

. Insurance reserve liabilities can fluctuate as a result of changes in
numerous factors, and such fluctuations can have material positive or
negative effects on net income.

. Costs or difficulties related to the integration of the business of the
Company and UNUM may be greater than expected.

. Legislative or regulatory changes may adversely affect the businesses in
which the Company is engaged.

. Necessary technological changes, including changes to address "year 2000"
data issues, may be more difficult or expensive to make than anticipated,
and year 2000 issues at other companies may adversely affect operations.

. Adverse changes may occur in the securities market.

. Changes in the interest rate environment may adversely affect profit
margins.

. The rate of customer bankruptcies may increase.

All subsequent written and oral forward-looking statements attributable to
the Company or any person acting on its behalf are expressly qualified in
their entirety by the cautionary statements contained or referred to in this
section. The Company does not undertake any obligation to release publicly any
revisions to such forward-looking statements to reflect events or
circumstances after the date of this document or to reflect the occurrence of
unanticipated events. See "Risk Factors" herein.

Item 1. Business

General

The Company, a Delaware business corporation, is the parent holding company
for a group of insurance companies that collectively operate in all 50 states,
the District of Columbia, Puerto Rico, and Canada. The Company's two principal
operating subsidiaries are Provident Life and Accident Insurance Company
("Accident") and The Paul Revere Life Insurance Company ("Paul Revere Life").
The Company, through its subsidiaries, is the largest provider of individual
disability insurance and the second largest overall disability insurer in
North America on the basis of in-force premiums. It also provides a
complementary portfolio of life insurance products, including life insurance,
employer- and employee-paid group benefits, and related services.

2

Since 1994, the Company has completed a comprehensive corporate
repositioning that has prepared it to support growth and increase stockholder
value. A new management team headed by J. Harold Chandler, who joined the
Company in November 1993, initiated a strategic review of the business. As a
result of its review, management refocused the Company's strategy to (i) serve
the individual and employee benefits insurance markets, (ii) leverage the
Company's disability insurance expertise, (iii) utilize multiple distribution
channels to reach broader market segments, and (iv) more closely align the
interests of the Company's employees with those of its stockholders.

The Company has successfully undertaken a number of major initiatives in
pursuing this strategy. Specifically, the Company (i) sold its group medical
business for $231.0 million in cash and stock, (ii) began winding down its
guaranteed investment contracts ("GICs") business which carried high capital
requirements, (iii) reduced the annual dividend on the common stock from $0.52
to $0.40 per share on a split-adjusted basis to preserve capital to fund
future growth, (iv) simplified the corporate legal structure and eliminated a
dual class of common stock that had special voting rights in order to present
a more conventional corporate structure profile to the investing market, (v)
sold in six transactions $1,459.6 million in commercial mortgage loans as part
of repositioning its investment portfolio, (vi) restructured its marketing and
distribution channels, along with the support areas of product development,
underwriting, and claims, to better reach and serve individual and employee
benefits customers, (vii) strengthened its claims management procedures in the
disability income insurance business, on which the Company took a $423.0
million pre-tax charge in the third quarter of 1993 to strengthen reserves on
a portion of that block of business, and (viii) began restructuring its
disability income products to discontinue over a reasonable period the sale of
policies which combined noncancelable contracts with long-term own-occupation
provisions and to offer in their place an income replacement contract with
more reasonable limits and better pricing for elective provisions.

In furtherance of its strategic plan, the Company acquired The Paul Revere
Corporation ("Paul Revere") and GENEX Services, Inc. ("GENEX") in early 1997
and disposed of certain non-core lines of business. These actions strengthen
the Company's disability insurance capabilities and enable the Company to
offer a comprehensive and well-focused portfolio of products and services to
its customers. Paul Revere is a specialist in disability insurance, with
$1,030.0 million of disability premium income (91 percent of its total premium
income) in 1998. From 1989 through 1997 it was the largest provider of
individual disability insurance in the United States and Canada on the basis
of in-force premiums. By combining Paul Revere's operations with those of the
Company, the Company has begun to realize significant operating efficiencies,
including leveraging both companies' knowledge of disability risks,
specialized claims and underwriting skills, and sales expertise. The Company
also has realized cost savings as a result of combining the corporate,
administrative, and financial operations of the two companies.

GENEX provides the Company with specialized skills in disability case
management and vocational rehabilitation that advance the Company's goal of
providing products that enable disabled policyholders to return to work. GENEX
provides a full range of disability management services, including work site
injury management, telephonic early intervention services for injured workers,
medical case management, vocational rehabilitation, and disability cost
analysis, to third party administrators, corporate clients, and insurance
companies. It employs over 1,400 people, including 556 medical and vocational
rehabilitation experts, in 120 offices in the United States and Canada. In
addition to its historical focus on the worker's compensation market, GENEX
and the Company are now working together to offer customized disability
programs for the employee benefits market that are intended to integrate and
simplify coverages, control costs, and improve efficiency for employers with
significant disability and related claims. The Company also expects GENEX to
play an increasingly significant role in helping the Company to manage its own
exposure to individual and group disability claims.

As it continues to assess acquisition opportunities that could complement
its core business, the Company has also continued to assess and exit non-core
lines. In 1997, the Company transferred its dental business to Ameritas Life
Insurance Corp. The dental block, which was acquired in the Paul Revere
acquisition, produced $39.2 million in premium income in 1997 and $48.3
million in 1996.

3

Effective January 1, 1998, the Company entered into an agreement with
Connecticut General Life Insurance Company ("Connecticut General") for
Connecticut General to reinsure, on a 100% coinsurance basis, the Company's
in-force medical stop-loss insurance coverages sold to clients of CIGNA
Healthcare and its affiliates ("CIGNA"). This reinsured block constitutes
substantially all of the Company's medical stop-loss insurance business. The
small portion remaining consists of medical stop-loss coverages sold to
clients other than those of CIGNA. These coverages will not be renewed.

Effective April 30, 1998, the Company closed the sale of its individual and
tax-sheltered annuity business to American General Annuity Insurance Company
and The Variable Annuity Life Insurance Company, affiliates of American
General Corporation ("American General"). The in-force business sold consisted
primarily of individual fixed annuities and tax-sheltered annuities in
Accident, Provident National Assurance Company ("National"), Paul Revere Life,
The Paul Revere Protective Life Insurance Company ("Paul Revere Protective"),
and The Paul Revere Variable Annuity Insurance Company ("Paul Revere
Variable"). American General also acquired a number of miscellaneous group
pension lines of business sold in the 1970s and 1980s which are no longer
actively marketed. Pursuant to an administrative services agreement, an
affiliate of American General is providing administrative services to
registered separate accounts of Paul Revere Variable and National. The sale
did not include the Company's block of GICs or group single premium annuities
("SPAs"), which will continue in a run-off mode. In consideration for the
transfer of the approximately $2.4 billion of statutory reserves, American
General paid the Company a ceding commission of approximately $58.0 million.

On July 15, 1997, the Board of Directors authorized the Company to
repurchase up to 1,000,000 shares (2,000,000 shares following a subsequent
stock split) of its common stock. In May 1998, the Company purchased 200,000
shares of common stock under this repurchase program for a total price of $7.7
million at an average price of $38.43 per share. The Company discontinued this
program in anticipation of the proposed merger with UNUM as discussed below.

In the most recent accomplishment under its strategic plan, on November 23,
1998, the Company announced that it had entered into an Agreement and Plan of
Merger with UNUM pursuant to which the Company and UNUM would merge under the
name of UNUMProvident Corporation. UNUM, through it subsidiaries, is a leading
provider in the United States and the United Kingdom of group long-term and
short-term disability insurance policies and individual disability insurance
policies, as well as a major provider of other insurance products, including
life insurance offered through groups, long-term care policies, and employee-
paid insurance products offered to employees at their work site.

Under the terms of the Agreement, Company stockholders will receive 0.73 of
a share of UNUMProvident common stock for each share of the Company's stock
that they hold. UNUM stockholders will receive one share of UNUMProvident
common stock for each share of UNUM common stock they hold. The merger is
subject to approval or clearance by certain federal and state regulators,
approval by stockholders of both companies, and customary closing conditions.
The transaction is expected to be completed by mid-1999.

Business Strategies

The Company's objective is to grow its business and improve its
profitability by continuing to follow the strategies set forth below.

Serve the Individual and Employee Benefits Markets. The Company believes
that the broad individual and employee benefits insurance markets are
attractive for a company with its specialty focus on disability insurance.
First, the Company believes disability insurers have not traditionally served
the broad market's potential demand for protection against loss of income due
to disability, as evidenced by the industry's size. As of December 31, 1998,
the total in-force premium from disability products is approximately $9
billion, compared to $197 billion for annuities and $115 billion for life
insurance. The Company believes that if it is responsive to the needs of its
markets, there is opportunity for growth in the disability industry.

4

Second, individual disability insurance has traditionally been sold
primarily in the medical and physician markets, where market penetration has
been significant. The Company believes that expanding its marketing to other
market segments offers greater opportunities for growth. The penetration of
the attorney, executive, and professional markets, for example, is far less
than that of the medical and physician markets. The market of middle managers
and front-line workers has not been significantly developed by individual
disability insurers. Each of these markets is significantly larger than the
medical and physician market. The Company's strategy is to design products and
services that meet the needs of these underpenetrated market segments,
offering them both individual disability insurance and related life insurance,
as well as other products.

Third, the Company believes that the markets for group disability insurance
are also underpenetrated. The Company is focused on creating customized
solutions for employee benefits customers that include group disability
insurance and related employee- and employer-paid benefits as well as
disability management services. The employee benefits market is undergoing a
change as employers seek to simplify coverages, control costs, and improve
efficiency. The Company has positioned itself to package its products and
services to meet this growing demand for managed disability programs and 24-
hour coverage.

The Company encourages its sales representatives and producers to respond to
the needs of customers by cross-selling complementary products to each
account. In the past several years, for example, the Company has made ease of
meeting customers' needs the priority for its information systems investments.
The Company now offers combined proposals that include pre-approved life
insurance with individual disability policies and bill a range of voluntary
product offerings through a single payroll deduction entry on an employee's
paycheck. The Company also has employee and producer compensation plans that
reward the sale of several of the Company's products rather than single
product sales, including grants of stock options to selected producers and a
multi-line producer compensation plan designed to leverage a producer's
production and overall compensation.

Leverage Disability Insurance Expertise and Risk Management Skills. In
serving its markets, the Company leads with its disability insurance
expertise. The Company is the largest provider of individual disability
insurance with $1.4 billion of premium income in 1998, and the second largest
overall disability insurer in North America, on the basis of in-force
premiums, with an additional $354.1 million of group disability insurance
premium income in 1998. The skills required for disability risk management are
more highly specialized than those used in managing the risk of other life
insurance products. The Company believes that its risk management skills
represent a competitive advantage in the disability businesses. The Company
has made a number of recent improvements to its capabilities. In the claims
management area, for example, the Company has shifted from a geographic
distribution of workflow to an organization focused on impairments
(psychiatric, orthopedic, cardiac, and general medical) in order to provide
claimants with more specialized attention. The addition of GENEX's case
management and vocational rehabilitation expertise has enabled the Company to
further refine its efforts to assist disabled claimants to return to gainful
employment.

Utilize Multiple Distribution Channels to Reach Different Market
Segments. The Company's experience is that different distribution channels
reach different market segments. Therefore, its strategy is to distribute its
products through a number of channels in order to reach the broad individual
and employee benefits markets. The Company distributes its individual products
primarily through independent insurance brokers and agents, financial
planners, and corporate marketing agreements with other insurance companies.
It distributes employee benefits products primarily through brokers, benefits
consultants, and a direct sales force that calls on large corporations. All
products and distribution channels are supported through a network of 70
integrated sales and service offices in the United States, nine offices in
Canada, and non-field sales organizations located in Chattanooga, Tennessee,
Worcester, Massachusetts and Burlington, Ontario.

The Company believes there are substantial opportunities to increase sales
by improving the productivity of each of these distribution channels and
opening new distribution channels for its products. For example, the national
accounts distribution system, which involves the sales of the Company's
products by agents of other insurance companies, generates sales from a small
percentage of the agents of the national account companies. A major focus for
1998 was increasing the penetration of these national account relationships.

5

Align the Interests of the Company's Employees and Producers with those of
its Stockholders. The Company's strategic plan is supported by the goal of
raising employee stock ownership in the Company. Beginning in 1994, the
Company shifted its long-term cash compensation program for executives to a
stock-based plan, introduced ownership requirements of several times salary
for executive management, and instituted stock option and share grant plans
for executive and middle management. The Company continued to introduce new
programs to encourage ownership in 1995, establishing an employee stock
purchase plan open to all employees, introducing stock-based incentive awards,
and expanding the option program to field sales employees. Most recently, the
Company has created a stock-based plan for executives' short-term compensation
and has expanded its option plans to producers who meet certain sales and
profitability goals. These programs are intended to more closely align the
interests of employees, producers, and stockholders.

Prior to the implementation of these programs in 1994, there was little
employee ownership of common stock. The Company had 1,128,434 outstanding
options for shares of common stock on a split-adjusted basis as of December
31, 1993. As of December 31, 1998, employees owned more than 1.1 million
shares of common stock through the employee stock purchase and 401(k) plans,
and the Company had 6,737,932 outstanding options for shares of common stock.
Approximately 50 percent of the Company's employees participate in one or more
of these stock ownership programs.

Reporting Segments

The Company is organized around its customers, with reporting segments that
reflect its major market segments: Individual, Employee Benefits, and
Voluntary Benefits. The Other segment includes products that the Company no
longer actively markets. The Corporate segment includes revenue earned on
corporate assets, interest expense on corporate debt, and amortization of
goodwill. The Company's Individual reporting segment includes individual
disability insurance and individual life insurance. The Employee Benefits
segment includes group long- and short-term disability insurance, group life
insurance, accidental death and dismemberment coverages, and the results of
GENEX. The Voluntary Benefits segment includes employer-sponsored individual
products sold at the work site through payroll deduction. The Other segment
includes the results from GICs, group SPAs, corporate-owned life insurance
("COLI"), individual annuities, medical and dental, and medical stop-loss.

Individual. Individual disability comprises the majority of the segment,
with $1,392.0 million of premium income in 1998 and $1,207.7 million of
premium income in 1997. Individual life insurance products generated $82.4
million of premium income in 1998 and $78.9 million of premium income in 1997.

Individual disability income insurance provides the insured with a portion
of earned income lost as a result of sickness or injury. Under an individual
disability income policy, monthly benefits generally are fixed at the time the
policy is written. The benefits typically range from 30 percent to 75 percent
of the insured's monthly earned income. Various options with respect to length
of benefit periods and waiting periods before payment begins are available and
permit tailoring of the policy to a specific policyholder's needs. The Company
also markets individual disability income policies which include payments for
transfer of business ownership and business overhead expenses. Individual
disability income products do not provide for the accumulation of cash values.

Premium rates for these products are varied by age, sex, and occupation
based on assumptions concerning morbidity, persistency, policy related
expenses, and investment income. The Company develops its assumptions based on
its own claims experience and published industry tables. The Company's
underwriters evaluate the medical and financial condition of prospective
policyholders prior to the issuance of a policy.

The majority of the Company's in-force individual disability income
insurance was written on a noncancelable basis. Under a noncancelable policy,
as long as the insured continues to pay the fixed annual premium for the
policy's duration, the policy cannot be canceled by the Company nor can the
premium be raised. Due to the noncancelable, fixed premium nature of the
policies marketed in the past, profitability of this part of

6

the business of Accident and Provident Life and Casualty Insurance Company
("Casualty") is largely dependent upon achieving the morbidity and interest
rate assumptions set in the 1993 loss recognition study with respect to the
business written in 1993 and prior and those set in the pricing of business
written after 1993. The profitability of the Paul Revere business will be
largely dependent achieving the assumptions as to morbidity, persistency,
interest earned rates, and expense levels assumed when pricing the
acquisition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on pages 20 to 22.

In November 1994, the Company announced its intention to discontinue the
sale of individual disability products which combined lifetime benefits and
short elimination periods with own-occupation provisions (other than
conversion policies available under existing contractual arrangements). At the
same time the Company began introducing products that insured loss of earnings
as opposed to occupations, and these products generally contained more limited
benefit periods and longer elimination periods. Since the acquisition of Paul
Revere in March 1997, the Company has discontinued the sale of certain Paul
Revere products that are not consistent with the Company's strategic direction
for its product portfolio. The Company expects to continue to offer on a
limited basis selected Paul Revere products with own-occupation (while not
working) features applying stricter underwriting standards. The Company is in
the process of repricing these selected products and making modifications to
their features where appropriate. Going forward, the Company expects to offer
a limited portfolio of own-occupation based coverages along with its more
complete line of loss of earnings related disability coverages.

In contrast to traditional noncancelable own-occupation policies, for which
benefits are determined based on whether the insured can work in his or her
original occupation, the loss of earnings policy requires the policyholder to
satisfy two conditions for benefits to begin: reduced ability to work due to
accident or sickness and earnings loss of at least 20 percent. These policies
are aimed at repositioning the individual disability income product by making
it more attractive to a broader market of individual consumers, including
middle to upper income individuals and corporate benefit buyers.

The Company's life insurance offerings include term, universal life, and
interest-sensitive life insurance products. Universal life products provide
permanent life insurance with adjustable interest rates applied to the cash
value and are designed to achieve specific policyholder objectives such as
higher accumulation values and/or flexibility with respect to amount of
coverage and premium payments. The principal difference between fixed premium
and universal life insurance policies centers around policy provisions
affecting the amount and timing of premium payments. Under universal life
policies, policyholders may vary the frequency and size of their premium
payments, and policy benefits may fluctuate accordingly. Premium payments
under the fixed premium policies are not variable by the policyholder and, as
a result, generally reflect lower administrative costs than universal life
products for which extensive monitoring of premium payments and policy
benefits is required.

The largest number of ordinary life policies sold in 1997 and 1998 were ten-
year level term policies. These products have level premiums for an initial
ten-year period after which the policyholder may resubmit to the underwriting
process and possibly qualify for a new ten year period at the attained age
premiums; otherwise, premiums revert to a yearly renewable term premium which
increases annually. When measured by annualized premiums, universal life with
the flexibility and features described above was the largest product category
sold by the Company in this segment in recent years. Paul Revere's largest
product category is interest-sensitive whole life insurance.

Premium rates for the Company's life insurance products are based on
assumptions as to future mortality, investment yields, expenses, and lapses.
Although a margin for profit is included in setting premium rates, the actual
profitability of products is significantly affected by the variation of actual
experience from assumed experience. Profitability of fixed premium products is
also dependent upon investment income on reserves. The profitability of
interest-sensitive products is determined primarily by the ultimate
underwriting experience and the ability to maintain anticipated investment
spreads. The Company believes that the historical claims experience for these
products has been satisfactory.

7

From the Company's viewpoint, the risks involved with interest-sensitive
products include actual versus assumed mortality, achieving investment returns
that at least equal the current declared rate, competitive position of
declared rates on the policies, meeting the contractually guaranteed minimum
crediting rate, and recovery of policy acquisition costs. From the
policyholder's perspective, the risk involved with interest-sensitive products
is whether or not the declared rates on the policy will compare favorably with
the returns available elsewhere in the marketplace.

Employee Benefits. The Employee Benefits segment includes the results of
group products sold to employers for the benefit of employees and the results
of GENEX. Product offerings include disability, permanent and term life
insurance, and accidental death and dismemberment. Group disability comprises
the majority of the segment, with $354.1 million of premium income in 1998.
Group life generated $317.6 million of premium income in 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 22 to 23.

Group long-term disability insurance provides employees with insurance
coverage for loss of income in the event of extended work absences due to
sickness or injury. Services are offered to employers and insureds to
encourage and facilitate rehabilitation, retraining, and re-employment.
Premiums for this product are generally based on expected claims of a pool of
similar risks plus provisions for administrative expenses and profit. Some
cases, however, carry experience rating provisions. Premiums for experience
rated group disability business are based on the expected experience of the
client given their industry group, adjusted for the credibility of the
specific claim experience of the client. A few accounts are handled on an
administrative services only basis with responsibility for funding claim
payments remaining with the customer.

Profitability of group disability insurance is affected by deviations of
actual claims experience from expected claims experience and the ability of
the Company to control its administrative expenses. Morbidity is an important
factor in disability claims experience. Also important is the general state of
the economy; for example, during a recession the incidence of claims tends to
increase under this type of insurance. In general, experience rated disability
coverage for large groups has narrower profit margins and represents less risk
to the Company than business of this type sold to small employers. This is
because the Company must bear all of the risk of adverse claims experience in
small case coverages while larger employers often bear much of this risk
themselves. For disability coverages, case management and rehabilitation
activities with regard to claims, along with appropriate pricing and expense
control, are important factors contributing to profitability.

Group life insurance consists primarily of renewable term life insurance
with the coverages frequently linked to employees' wages. Profitability in
group life is affected by deviations of actual claims experience from expected
claims experience and the ability of the Company to control administrative
expenses. The Company also markets several group benefits products and
services including accident and sickness indemnity and accidental death and
dismemberment policies.

Voluntary Benefits. The Voluntary Benefits segment includes the results of
individual products sold to groups of employees through payroll deduction at
the work site ("voluntary benefits products"). The Company's premium income in
1998 totaled $84.2 million and consisted primarily of universal life and
interest-sensitive life products as well as health products, principally
intermediate disability income policies. Profitability of voluntary benefits
products is affected by the level of employee participation, persistency,
deviations of actual morbidity and mortality experience from expected
experience, and the ability of the Company to control administrative expenses.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" on page 24.

Other. The Other segment includes the results of GICs, group SPAs, COLI,
individual annuities, medical and dental, and medical stop-loss. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 25 to 26.

Under GICs, the Company guarantees the principal and interest to the
contract holder for a specified period, generally three to five years. The
Company marketed GICs for use in corporate tax-qualified retirement plans

8

and derives profits from GICs on the spread between the amount of interest
earned on invested funds and the fixed rate guaranteed in the GIC. In December
1994, the Company discontinued the sale of GICs, but continues to service its
block of existing business. See "Reserves." Group SPAs are used as funding
vehicles primarily when defined benefit pension plans are terminated. The
Company also offers annuities as an employer-sponsored option for retirees
receiving their distributions from 401(k) plans. Pursuant to a group SPA
contract, the Company receives a one-time premium payment and in turn agrees
to pay a fixed monthly retirement benefit to specified employees. Sales of
group SPAs were discontinued in 1996. GICs accounted for $656.8 million and
group SPAs accounted for $1,185.6 million of accumulated funds under
management at December 31, 1998.

The Company believes that there are three primary sources of risk associated
with GICs and group SPAs. Underwriting risk represents the risk that a GIC has
been priced properly to reflect the risk of withdrawal and for group SPAs,
that the mortality rates and the ages and frequency at which annuitants will
retire have been accurately projected. Asset/liability risk represents the
risk that the investments purchased to back the products will adequately match
the future cash flows. Investment risk represents the risk that the underlying
investments backing the GICs and group SPAs will perform according to the
expectations of the Company at the time of purchase.

COLI is a tax-leveraged policy sold from 1983 to 1990, with most of the
block having been sold before June 21, 1986. Beginning in 1986, Congress began
to enact tax legislation that significantly reduced the ability of
policyholders to deduct policy loan interest on these products which detracted
from the internal rate of return which theretofore had been available. In
1988, Congress went further by enacting legislation that had adverse tax
consequences for distributions/policy loans from modified endowment contracts.
Under this legislation, new sales of the majority of the Company's COLI
products would have been subject to adverse tax treatment as modified
endowment contracts due to their high premium level. As a consequence, many of
these products were withdrawn, and revised products which would not be
considered modified endowment contracts were introduced. Policies issued prior
to June 21, 1986, however, were grandfathered from the modified endowment
provisions. In 1996, Congress enacted tax legislation which generally
eliminates tax deductions for policy loan interest on COLI products issued on
or after June 21, 1986.

Medical stop-loss insurance is provided to protect the insured against
significant adverse claims experience with respect to group medical coverage.
As commented on previously, the Company entered into an agreement in 1998 to
reinsure this block of business.

As previously discussed, during 1998 the Company sold its in-force
individual and tax-sheltered annuity business.

Corporate Segment. The Corporate segment consists of revenue earned on
corporate assets, interest expense on corporate debt, amortization of
goodwill, and certain corporate expenses not allocated to a line of business.

Reinsurance

The Company routinely reinsures portions of its business with other
insurance companies. In a reinsurance transaction a reinsurer agrees to
indemnify another insurer for part or all of its liability under a policy or
policies it has issued for an agreed upon premium. The maximum amount of risk
retained by the Company and not reinsured is $500,000 on any individual life
insured and $500,000 on individual accidental death insurance. The amount of
risk retained by the Company on individual disability income products varies
by policy type and year of issue. Since the ceding of reinsurance by the
Company does not discharge its primary liability to the policyholder, the
Company has control procedures with regard to reinsurance ceded. These
procedures include the exchange and review of financial statements filed with
regulatory authorities, exchange of Insurance Regulatory Information System
results, review of ratings by A.M. Best Company, determination of states in
which the reinsurer is licensed to do business, on-site visits before entering
a contract to assess the operations and management of the reinsurer,
consideration of the need for collateral, such as letters of credit, and
audits of the Company's reinsurance activities by its Internal Audit staff.
The Company also assumes reinsurance from other insurers. See "Note 12 to the
Notes to Consolidated Financial Statements" for further discussion.

9

Reserves

The applicable insurance laws under which insurance companies operate
require that they report, as liabilities, policy reserves to meet future
obligations on their outstanding policies. These reserves are the amounts
which, with the additional premiums to be received and interest thereon
compounded annually at certain assumed rates, are calculated to be sufficient
to meet the various policy and contract obligations as they mature. These laws
specify that the reserves shall not be less than reserves calculated using
certain specified mortality and morbidity tables, interest rates, and methods
of valuation. The reserves reported in the Company's financial statements
incorporated herein by reference are calculated based on generally accepted
accounting principles ("GAAP") and differ from those specified by the laws of
the various states and carried in the statutory financial statements of the
life insurance subsidiaries. These differences arise from the use of mortality
and morbidity tables and interest assumptions which are believed to be more
representative of the actual business than those required for statutory
accounting purposes and from differences in actuarial reserving methods.

The consolidated statements of income include the annual change in reserves
for future policy and contract benefits. The change reflects a normal
accretion for premium payments and interest buildup and decreases for policy
terminations such as lapses, deaths, and annuity benefit payments.

In addition to reserves for future policy and contract benefits, the Company
maintains a balance sheet liability for policyholders' funds. Policyholders'
funds, as shown on the Company's consolidated statements of financial
condition as of December 31, 1998, were $3,127.3 million. Of this amount,
$656.8 million reflected the Company's outstanding GICs, the maturity of which
is as follows (in millions):

1 year or less.................................................... $464.7
Over 1 year but less than 2 years................................. 156.5
Over 2 years but less than 3 years................................ 26.5
Over 3 years...................................................... 9.1
------
Total........................................................... $656.8
======

In the third quarter of 1996, Paul Revere recorded a reserve strengthening
of $380.0 million before income taxes. The reserve strengthening recorded was
prompted by the results of a comprehensive study of the adequacy of its
individual disability reserves under GAAP completed in October 1996. In
connection with such reserve study, Paul Revere received an actuarial report
from an independent actuarial firm, which report concluded that the net
individual disability reserves of $2.2 billion reported by Paul Revere at
September 30, 1996, which reflected the $380.0 million reserve strengthening
adjustment, were adequate on a GAAP basis, based on the assumptions reflected
therein.

Subsequently, Paul Revere completed, in cooperation with the Division of
Insurance of the Commonwealth of Massachusetts (the "Massachusetts Division of
Insurance"), a comprehensive study of the adequacy of its statutory individual
disability reserves, as a result of which Paul Revere's statutory reserves
were increased by $144.0 million before income taxes. Pursuant to an agreement
with the Company, dated as of April 29, 1996, Textron Inc. ("Textron"), then
the largest shareholder of Paul Revere, contributed to Paul Revere $121.0
million, representing the amount of required statutory reserve increases, net
of tax benefits.

Regarding the Company's proposed merger with UNUM, the Company and UNUM have
reviewed the anticipated disability claims experience, specifically the
assumptions around expected disability claims duration on existing claims,
considering the impact of the merger. The Company and UNUM anticipate that as
a result of integrating their respective claim operations, there will be a
temporary increase in claim costs. Each company expects that fewer claims will
be resolved or closed during the period when the two companies are planning
and implementing the integration of their claims organizations. The average
length of duration for claims will increase resulting in more benefit payments
being paid for a relatively short time until the consolidation of operations
is complete. During the fourth quarter 1998, the Company and UNUM increased
their claim reserves by approximately $93.6 million ($60.8 million after tax)
and $59.4 million ($38.6 million after tax), respectively,

10

related to the expected increase in disability claim duration on existing
claims. Additionally, the Company and UNUM are in the process of reviewing
their accounting policies and financial statement classifications. One aspect
of this preliminary review has indicated that UNUM's process and assumptions
used to calculate the discount rate for claim reserves of certain disability
businesses differs from that used by the Company. It has been determined that
the Company's process and assumptions are more appropriate in the context of a
combined entity. Upon completion of the merger, UNUM will reduce the rates
used to discount claim reserves for group long-term disability, individual
disability, and the disability businesses of UNUM Limited a UNUM subsidiary in
the UK. The preliminary estimates of discount rate reductions will result in
an estimated increase to UNUM's claim reserves upon consummation of the merger
of approximately $230.0 million ($150.0 million after tax).

See "Risk Factors--Reserves".

Competition

There is intense competition among insurance companies for the individual
and group insurance products of the types sold by the Company. At the end of
1998, there were over 2,000 legal reserve life insurance companies in the
United States, many offering one or more insurance products similar to those
marketed by the Company. The Company's principal competitors in the employee
benefits market include the largest insurance companies in the United States,
many of which have substantially greater financial resources and larger staffs
than the Company. In addition, in the individual life market, the Company
competes with banks, investment advisers, mutual funds, and other financial
entities for investment of savings and retirement funds in general. In the
individual and group disability markets, the Company competes in the United
States and Canada with a limited number of major companies and regionally with
other companies offering specialty products.

All areas of the employee benefits markets are highly competitive due to the
yearly renewable term nature of the products and the large number of insurance
companies offering products in this market. The Company competes with other
companies in attracting and retaining independent agents and brokers to
actively market its products. The principal competitive factors affecting the
Company's business are price and quality of service.

Regulation

The Company and its insurance subsidiaries are subject to detailed
regulation and supervision in the jurisdictions in which each does business.
With respect to the insurance subsidiaries, such regulation and supervision is
primarily for the protection of policyholders rather than for the benefit of
investors or creditors. Although the extent of such regulation varies, state
insurance laws generally establish supervisory agencies with broad
administrative powers.

These supervisory and administrative powers relate chiefly to the granting
and revocation of the licenses to transact business, the licensing of agents,
the approval of policy forms, reserve requirements, and the form and content
of required financial statements. As to the type and amounts of its
investments, the Company's insurance subsidiaries must meet the standards and
tests promulgated by the insurance laws and regulations of Tennessee,
Massachusetts, New York, Delaware, and certain other states in which they
conduct business.

The Company and its insurance subsidiaries are required to file various,
usually quarterly and/or annual, financial statements and are subject to
periodic and intermittent review with respect to their financial condition and
other matters by the various departments having jurisdiction in the states in
which they do business. The last such examination of Accident, Casualty and
National was completed on April 30, 1997, and covered operations for the five-
year period ending December 31, 1995. The final report was issued in the
second quarter of 1997, and no objections were raised by the reviewing
authorities as a result of that examination. The field work related to the
last financial examination of Paul Revere Life and Paul Revere Variable was
completed on March 27, 1997, and covered the operations for the four-year
period ending December 31, 1994. As a result of the examination, statutory
reserves were increased by $35.0 million, which adjustment was reflected in
the statutory

11

financial statements of Paul Revere Life as of December 31, 1995. The scope of
the examination was extended to include a review of the individual disability
income reserves as of September 30, 1996. As a result of that review, which
was completed on February 5, 1997, Paul Revere Life was required to increase
its statutory reserves by $144.0 million on a pre-tax basis or $121.0 million
on an after-tax basis. As a result of the reserve strengthening required, the
former parent of Paul Revere Life made additional capital contributions
totaling $121.0 million: $83.5 million was contributed in December 1996, and
the balance of $37.5 million was contributed on February 5, 1997. The
financial examination of Paul Revere Protective for the three-year period
ending December 31, 1996 has been completed, and the Company received the
final report in the first quarter of 1999. No objections were raised by the
reviewing authorities.

The laws of the states of Tennessee, Massachusetts, New York, and Delaware
require the registration of and periodic reporting by insurance companies
domiciled within their jurisdiction which control or are controlled by other
corporations or persons so as to constitute a holding company system. The
Company is registered as a holding company system in Tennessee, Massachusetts,
New York, and Delaware. The holding company statutes require periodic
disclosure concerning stock ownership and prior approval of certain
intercompany transactions within the holding company system. The Company may
from time to time be subject to regulation under the insurance and insurance
holding company statutes of one or more additional states. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 28.

The National Association of Insurance Commissioners ("NAIC") and insurance
regulators are re-examining existing laws and regulations and their
application to insurance companies. In particular, this re-examination has
focused on insurance company investment and solvency issues and, in some
instances, has resulted in new interpretations of existing law, the
development of new laws, and the implementation of non-statutory guidelines.
The NAIC has formed committees and appointed advisory groups to study and
formulate regulatory proposals on such diverse issues as the use of surplus
notes, accounting for reinsurance transactions, and the adoption of risk-based
capital rules. In 1998, the NAIC approved a codification of statutory
accounting practices effective January 1, 2001, which will serve as a
comprehensive and standardized guide to statutory accounting principles.
Following implementation, statutory accounting principles will continue to be
governed by individual state laws and permitted practices until adoption by
the various states. Accordingly, before codification becomes effective for
each of the Company's insurance subsidiaries, their state of domicile must
adopt codification as the prescribed basis of accounting. The adoption of the
codification will change, to some extent, the accounting practices that the
Company's insurance subsidiaries use to prepare their statutory financial
statements.

Risk Factors

Any one or more of the following factors may cause the Company's actual
results for various financial reporting periods to differ materially from
those expressed in any forward looking statements made by or on behalf of the
Company. See also "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on page 28.

Reserves

The Company maintains reserves for future policy benefits and unpaid claims
expenses which include policy reserves and claim reserves established for its
individual disability insurance, group insurance, and individual life
insurance products. Policy reserves represent the portion of premiums received
which are reserved to provide for future claims. Claim reserves are
established for future payments not yet due on claims already incurred,
primarily relating to individual disability and group disability insurance
products. Reserves, whether calculated under GAAP or statutory accounting
practices, do not represent an exact calculation of future benefit liabilities
but are instead estimates made by the Company using actuarial and statistical
procedures. There can be no assurance that any such reserves would be
sufficient to fund future liabilities of the Company in all circumstances.
Future loss development could require reserves to be increased, which would
adversely affect earnings in current and future periods. Adjustments to
reserve amounts may be required in the event of changes

12

from the assumptions regarding future morbidity (the incidence of claims and
the rate of recovery, including the effects thereon of inflation and other
societal and economic factors), persistency, mortality, and interest rates
used in calculating the reserve amounts.

Capital Adequacy

The capacity for an insurance company's growth in premiums is in part a
function of its statutory surplus. Maintaining appropriate levels of statutory
surplus, as measured by state insurance regulators, is considered important by
state insurance regulatory authorities and the private agencies that rate
insurers' claims-paying abilities and financial strength. Failure to maintain
certain levels of statutory surplus could result in increased regulatory
scrutiny, action by state regulatory authorities, or a downgrade by the
private rating agencies.

Effective in 1993, the NAIC adopted a risk-based capital ("RBC") formula,
which prescribes a system for assessing the adequacy of statutory capital and
surplus for all life and health insurers. The basis of the system is a risk-
based formula that applies prescribed factors to the various risk elements in
a life and health insurer's business to report a minimum capital requirement
proportional to the amount of risk assumed by the insurer. The life and health
RBC formula is designed to measure annually (i) the risk of loss from asset
defaults and asset value fluctuation, (ii) the risk of loss from adverse
mortality and morbidity experience, (iii) the risk of loss from mismatching of
asset and liability cash flow due to changing interest rates, and (iv)
business risks. The formula is to be used as an early warning tool to identify
companies that are potentially inadequately capitalized. The formula is
intended to be used as a regulatory tool only and is not intended as a means
to rank insurers generally.

Based on computations made by the Company in accordance with the prescribed
life and health RBC formula, each of the Company's life insurance subsidiaries
exceeded the minimum capital requirements at December 31, 1998.

Disability Insurance

Disability insurance may be affected by a number of social, economic,
governmental, competitive, and other factors. Changes in societal attitudes,
work ethics, motivation, stability, and mores can significantly affect the
demand for and underwriting results from disability products. Economic
conditions affect not only the market for disability products, but also
significantly affect the claims rates and length of claims. The climate and
the nature of competition in disability insurance have also been markedly
affected by the growth of Social Security, worker's compensation, and other
governmental programs in the workplace. The nature of that portion of the
Company's outstanding insurance business that consists of noncancelable
disability policies, whereby the policy is guaranteed to be renewable through
the life of the policy at a fixed premium, does not permit the Company to
adjust its premiums on business in-force on account of changes resulting from
such factors. Disability insurance products are important products for the
Company. To the extent that disability products are adversely affected in the
future as to sales or claims, the business or results of operations of the
Company could be materially adversely affected.

Industry Factors

All of the Company's businesses are highly regulated and competitive. The
Company's profitability is affected by a number of factors, including rate
competition, frequency and severity of claims, lapse rates, government
regulation, interest rates, and general business considerations. There are
many insurance companies which actively compete with the Company in its lines
of business, some of which are larger and have greater financial resources
than the Company, and there is no assurance that the Company will be able to
compete effectively against such companies in the future.

In recent years, some U.S. life insurance companies have faced claims,
including class-action lawsuits, alleging various improper sales practices in
the sales of certain types of life insurance products. These claims often
relate to the selling of whole life and universal life policies that
accumulate cash values which may be utilized to fund the cost of the insurance
in later years of the policy. Due to subsequent reductions in dividends

13

or interest credited or due to other factors, the cash values have not
accumulated sufficiently to cover costs of insurance, resulting in the need
for ongoing premium payments. Although never a principal product line for the
Company or Paul Revere, both companies have sold a modest amount of interest-
sensitive whole life and universal life policies. There can be no assurance
that any future claims relating to sales of such policies will not have a
material adverse effect on the Company.

Merger with UNUM

The market value of UNUMProvident common stock issued in the merger will
depend upon the market value of the Company's common stock and UNUM common
stock at the completion of the merger. As a result of the reclassification and
the merger, each share of the Company's common stock will be reclassified and
converted into 0.73 of a share of UNUMProvident common stock. Because the
exchange ratio of 0.73 is fixed, the market value of UNUMProvident common
stock issued in the merger will depend upon the market prices of UNUM common
stock and the Company's common stock. These market values may fluctuate prior
to the completion of the merger and therefore may be different at the time the
merger is completed than they were at the time the merger agreement was signed
and the exchange ratio agreed upon and at the time of stockholder approval.
Accordingly, the Company's stockholders and UNUM's stockholders cannot be sure
of the market value of the UNUMProvident common stock that they will receive
in the merger.

The Company may fail to realize benefits anticipated by the parties. The
Company and UNUM expect significant benefits to result from the merger.
However, the merger involves the integration of two large companies that have
previously operated independently of each other, and the successful
combination of the two business enterprises may result in a diversion of
management attention for an extended period of time. In addition, such
integration is likely to lengthen the average disability claims duration for a
relatively short period of time following the completion of the merger. See
the preceding discussion in the "Reserves" section for the anticipated effect
on productivity and management's corresponding increase in claim reserves.
Further, the parties may not be able to achieve the anticipated enhanced
cross-selling opportunities, the development and marketing of more
comprehensive insurance product offerings, cost savings, revenue growth and
consistent use of best practices. Inability to realize the full extent of, or
any of, the anticipated benefits of the merger as well as delays encountered
in the transition process could have a material adverse effect upon the
revenues, level of expenses, operating results, and financial condition of
UNUMProvident. Accordingly, UNUMProvident may not realize the full extent of,
or any of, the anticipated benefits of the merger, and this failure may affect
the value of the UNUMProvident common stock.

The merger is subject to the receipt of consents and approvals from
government entities that may impose conditions that could have a material
adverse effect on UNUMProvident or cause abandonment of the merger. Completion
of the merger is conditioned upon the expiration or termination of the
applicable waiting period under the Hart-Scott-Rodino Act and the receipt of
consents, orders, approvals, and clearances from state and foreign
governmental entities. The terms and conditions of such consents, orders,
approvals, and clearances may require the divestiture of divisions, operations
or assets of UNUMProvident, may affect the license of an insurance subsidiary
of the Company or UNUM, or may impose other conditions which adversely affect
the ongoing operations of UNUMProvident. Such required divestitures or other
conditions, if any, may have a material adverse effect on the business,
financial condition, or results of operations of UNUMProvident or may cause
the abandonment of the merger by the Company or UNUM. The Company and UNUM
have not determined how they will respond to conditions, limitations, or
divestitures which may be required in connection with obtaining any consents,
orders, approvals, and clearances.

Selected Data Of Segments

Information regarding the operations of segments may be found under the
caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 18 to 27.

Employees

At March 1, 1999, the Company had 3,725 full-time employees (excluding
GENEX), including 2,173 at its headquarters in Chattanooga, Tennessee, and
GENEX had 1,363 full time employees, including 172 in its home office in
Wayne, Pennsylvania.

14

Item 2. Properties

The Company's home office property consists of two connected office
buildings totaling 840,000 square feet at 1 Fountain Square, Chattanooga,
Tennessee. The office buildings and substantially all of the surrounding 25
acres of land, used primarily as parking lots, are owned by the Company in
fee. With the acquisition of Paul Revere in 1997, the Company also has a large
operations center and owns facilities in Worcester, Massachusetts comprised of
two connected buildings totaling 438,000 gross square feet of office space and
approximately 5.6 acres of land, used primarily as parking. In addition,
approximately 36,000 square feet of space is leased in three buildings located
in the Worcester area, and 15,000 square feet of office space is leased in
Springfield, Massachusetts. Total rents are approximately $0.6 million
annually.

The Company also leases other office space and minor storage space at
approximately 65 locations in 33 states in the United States and 14 locations
in 7 Canadian provinces for its sales and service force. The Company's real
property lease payments for 1998 were approximately $9.2 million (net of rents
received on subleased property).

Management of the Company believes that the Company's properties and the
properties which it leases are in good condition and are suitable and adequate
for the Company's current business operations.

Item 3. Legal Proceedings

In the ordinary course of its business operations, the Company is involved
in routine litigation with policyholders, beneficiaries, and others, and a
number of such lawsuits were pending as of the date of this filing. In the
opinion of management, the ultimate liability, if any, under these suits would
not have a material adverse effect on the consolidated financial condition or
the consolidated results of operations of the Company.

Two alleged class action lawsuits have been filed in Superior Court in
Worcester, Massachusetts ("the Court") against the Company--one purporting to
represent all career agents of Paul Revere whose employment relationships
ended on June 30, 1997 and were offered contracts to sell insurance policies
as independent producers, and the other purporting to represent independent
brokers who sold certain Paul Revere individual disability income policies
with benefit riders. Motions filed by the Company to dismiss most of the
counts in the complaints, which allege various breach of contract and
statutory claims, have been denied, but the cases remain at a preliminary
stage. To date, no class has been certified in either lawsuit. The Company has
filed a conditional counterclaim in each action which requests a substantial
return of commissions should the Court agree with the plaintiff's
interpretation of the contract. The Company has strong defenses to both
lawsuits and will vigorously defend its position and resist certification of
the classes. In addition, the same plaintiff's attorney who has filed the
purported class action lawsuits has filed 42 individual lawsuits on behalf of
current and former Paul Revere sales managers alleging various breach of
contract claims. The Company has filed a motion in federal court to compel
arbitration for 16 of the plaintiffs who are licensed by the National
Association of Securities Dealers and have executed the Uniform Application
for Registration or Transfer in the Securities Industry (Form U-4). The
Company has strong defenses and will vigorously defend its position in these
cases as well. Although the alleged class action lawsuits and the 42
individual lawsuits are in the early stages, management does not currently
expect these suits to materially affect the financial position or results of
operations of the Company.

Item 4. Submission Of Matters To A Vote Of Security Holders

None

15

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters

Common stock of Provident Companies, Inc. is traded on the New York Stock
Exchange. The stock symbol is PVT. The Board of Directors declared a two-for-
one common stock split which was distributed on September 30, 1997. Historical
common stock information has been restated to reflect the stock split.

Market Price
-----------------
High Low Dividend
------ ------ --------

1998 1st Quarter............................... $ 38 7/8 $ 32 1/2 $0.10
2nd Quarter............................... 41 1/8 32 0.10
3rd Quarter............................... 38 32 7/8 0.10
4th Quarter............................... 42 7/16 26 1/8 0.10

1997 1st Quarter............................... $ 28 7/8 $ 23 3/16 $0.09
2nd Quarter............................... 30 26 0.09
3rd Quarter............................... 35 1/16 26 5/8 0.10
4th Quarter............................... 39 1/16 31 5/8 0.10

As of March 1, 1999, there were 1,725 registered holders of common stock.
The Company's dividend reinvestment plan offers shareholders of common stock a
convenient way to purchase additional shares of common stock without paying
brokerage, commission, or other service fees. More information and an
authorization form may be obtained by writing or calling the Company's
transfer agent, First Chicago Trust Company of New York. The toll-free
customer service number is 1-800-446-2617.

For information on restrictions relating to the Company's insurance
subsidiaries' ability to pay dividends to the Company see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 28 and "Note 16 of the Notes to Consolidated Financial Statements".

16

Item 6. Selected Financial Data

1998(1) 1997(2) 1996 1995 1994
---------- ---------- --------- --------- ---------
(in millions of dollars, except share data)

Income Statement Data
Premium Income.......... $ 2,347.4 $ 2,053.7 $ 1,175.7 $ 1,251.9 $ 1,382.6
Net Investment Income... 1,374.0 1,354.7 1,090.1 1,221.3 1,238.6
Net Realized Investment
Gains (Losses)......... 34.0 15.1 (8.6) (31.7) (30.1)
Other Income............ 182.6 129.7 34.7 113.8 171.1
---------- ---------- --------- --------- ---------
Total Revenue....... 3,938.0 3,553.2 2,291.9 2,555.3 2,762.2
Benefits and Changes in
Reserves............... 2,577.2 2,358.1 1,661.2 1,904.6 1,981.2
Operating Expenses...... 958.0 814.8 404.5 474.7 580.1
---------- ---------- --------- --------- ---------
Income Before Federal
Income Taxes........... 402.8 380.3 226.2 176.0 200.9
Federal Income Taxes.... 148.8 133.0 80.6 60.4 65.6
---------- ---------- --------- --------- ---------
Net Income.............. $ 254.0 $ 247.3 $ 145.6 $ 115.6 $ 135.3
========== ========== ========= ========= =========
Per Common Share Infor-
mation
Earnings--Basic......... $ 1.87 $ 1.88 $ 1.46 $ 1.13 $ 1.35
Earnings--Assuming Dilu-
tion................... $ 1.82 $ 1.84 $ 1.44 $ 1.13 $ 1.35
Stockholders' Equity at
End of Year............ $ 25.20 $ 23.11 $ 17.34 $ 16.48 $ 11.17
Stockholders' Equity
Excluding Net
Unrealized Gains and
Losses on Securities at
End of Year............ $ 19.88 $ 18.49 $ 16.34 $ 15.33 $ 14.46
Cash Dividends.......... $ .40 $ .38 $ .36 $ .36 $ .52
Weighted Average Common
Shares Outstanding
(000s)
--Basic............... 135,117.8 124,505.4 91,044.8 90,762.7 90,622.1
--Assuming Dilution... 138,269.2 127,253.2 92,154.5 90,931.8 90,729.9
Financial Position (at
End of Year)
Assets.................. $ 23,088.1 $ 23,177.6 $14,992.5 $16,301.3 $17,149.9
Long-term Debt,
Subordinated Debt
Securities, and
Preferred Stock........ $ 900.0 $ 881.2 $ 356.2 $ 356.2 $ 358.7
Stockholders' Equity.... $ 3,408.5 $ 3,279.3 $ 1,738.6 $ 1,652.3 $ 1,169.1

- --------
(1) An adjustment of $93.6 million for the anticipated increase in claims
duration considering the inpact of the merger with UNUM and an $8.0
million reserve strengthening for single premium annuities decreased
operating results for 1998 by $101.6 million before taxes and $66.0
million ($0.48 per common share assuming dilution) after taxes.
(2) The Company acquired GENEX Services, Inc. and The Paul Revere Corporation
on February 28, 1997, and March 27, 1997, respectively. These financial
results include the accounts and operating results from their respective
dates of acquisition. The difference in comparability of the years is
frequently attributed to this fact. See "Note 13 of the Notes to
Consolidated Financial Statements."

17

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Consolidated Results By Segment (1)

Year Ended December 31
-----------------------------
1998 1997 1996
--------- --------- -------
(in millions of dollars)

Premium Income
Individual..................................... $ 1,474.4 $ 1,286.6 $ 646.1
Employee Benefits.............................. 710.6 552.3 325.8
Voluntary Benefits............................. 84.2 79.3 70.6
Other.......................................... 78.2 135.5 133.2
--------- --------- -------
2,347.4 2,053.7 1,175.7
--------- --------- -------
Net Investment Income and Other Income
Individual..................................... 779.2 615.7 378.9
Employee Benefits.............................. 221.2 178.2 69.7
Voluntary Benefits............................. 32.2 29.2 26.8
Other.......................................... 496.4 638.5 625.4
Corporate...................................... 27.6 22.8 24.0
--------- --------- -------
1,556.6 1,484.4 1,124.8
--------- --------- -------
Total Revenue (Excluding Net Realized Invest-
ment Gains and Losses)
Individual..................................... 2,253.6 1,902.3 1,025.0
Employee Benefits.............................. 931.8 730.5 395.5
Voluntary Benefits............................. 116.4 108.5 97.4
Other.......................................... 574.6 774.0 758.6
Corporate...................................... 27.6 22.8 24.0
--------- --------- -------
3,904.0 3,538.1 2,300.5
--------- --------- -------
Benefits and Expenses
Individual..................................... 2,018.6 1,670.0 909.6
Employee Benefits.............................. 846.2 690.5 364.7
Voluntary Benefits............................. 93.2 93.4 82.7
Other.......................................... 488.5 681.8 679.8
Corporate...................................... 88.7 37.2 28.9
--------- --------- -------
3,535.2 3,172.9 2,065.7
--------- --------- -------
Income (Loss) Before Net Realized Investment
Gains and Losses and Federal Income Taxes
Individual..................................... 235.0 232.3 115.4
Employee Benefits.............................. 85.6 40.0 30.8
Voluntary Benefits............................. 23.2 15.1 14.7
Other.......................................... 86.1 92.2 78.8
Corporate...................................... (61.1) (14.4) (4.9)
--------- --------- -------
368.8 365.2 234.8
Net Realized Investment Gains (Losses)......... 34.0 15.1 (8.6)
--------- --------- -------
Income Before Federal Income Taxes............. 402.8 380.3 226.2
Federal Income Taxes........................... 148.8 133.0 80.6
--------- --------- -------
Net Income..................................... $ 254.0 $ 247.3 $ 145.6
========= ========= =======
Assets
Individual..................................... $12,200.1 $11,543.5
Employee Benefits.............................. 1,948.2 1,691.0
Voluntary Benefits............................. 495.2 449.0
Other.......................................... 7,166.4 8,313.2
Corporate...................................... 1,278.2 1,180.9
--------- ---------
$23,088.1 $23,177.6
========= =========

18

(1) Revenue earned on corporate assets, general corporate expenses, interest
expense on corporate debt, amortization of goodwill, and assets maintained
for general corporate purposes are included in the Corporate segment.
Assets have been allocated to the segments based upon identifiable
liabilities and allocated stockholders' equity.

Amounts for 1997 and 1996 have been reclassified to conform to current year
presentation.

Introduction

The Company acquired GENEX Services, Inc. ("GENEX") and The Paul Revere
Corporation ("Paul Revere") on February 28, 1997, and March 27, 1997,
respectively. The financial information contained herein includes the accounts
and operating results of GENEX and Paul Revere from the respective dates of
acquisition. Since GENEX and Paul Revere are reflected in the results for 1998
and 1997, and not 1996, the difference in comparability of the years is
frequently attributed to that fact.

Results for Affinity Groups, previously reported as a separate line of
business in the Employee Benefits segment, have been allocated by product type
to various other lines of business in the Employee Benefits and Other
segments. Results for Voluntary Benefits, previously included in the Employee
Benefits segment, are now reported as a separate segment. Results for
Corporate, previously included in the Other segment, are now reported as a
separate segment.

Management believes that the trends in new annualized sales in the
Individual and Employee Benefits segments are important for investors to
assess in their analysis of the Company's results of operations. The trends in
new sales are indicators of the level of market acceptance of new products,
particularly in the individual disability income line of business, and the
Company's potential for growth in its respective markets. The Company has
closely linked its various incentive compensation plans for management and
employees to the achievement of its goals for new sales.

The following discussion of operating results by segment excludes net
realized investment gains and losses from revenue and income before taxes. The
Company's investment focus has been on investment income to support its
insurance liabilities as opposed to the generation of realized investment
gains. Due to the nature of the Company's business, a long-term focus in
necessary to maintain profitability over the life of the business. The
realization of investment gains and losses will impact future earnings levels
as the underlying business is long-term in nature and requires that the
Company be able to sustain the assumed interest rates in its liabilities.
However, income excluding realized investment gains and losses does not
replace net income as a measure of the Company's profitability, and this
discussion should be read in conjunction with the consolidated financial
statements and notes thereto.

Operating Results

Revenue excluding net realized investment gains and losses ("revenue")
increased $365.9 million, or 10.3 percent to $3,904.0 million in 1998 from
$3,538.1 million in 1997. Revenue includes premium income, net investment
income, and other income. This increase resulted from increased revenue in the
Individual segment ($351.3 million), Employee Benefits segment ($201.3
million), Voluntary Benefits segment ($7.9 million), and Corporate segment
($4.8 million). This increase was partly offset by lower revenue in the Other
segment ($199.4 million).

In 1997, revenue increased $1,237.6 million, or 53.8 percent, to $3,538.1
million from $2,300.5 million in 1996. This increase resulted from increased
revenue in the Individual segment ($877.3 million), Employee Benefits segment
($335.0 million), Voluntary Benefits segment ($11.1 million), and Other
segment ($15.4 million). This increase was partly offset by lower revenue in
the Corporate segment ($1.2 million).

Income before net realized investment gains and losses and federal income
taxes ("income") increased $3.6 million, or 1.0 percent, to $368.8 million in
1998 from $365.2 million in 1997. This increase resulted from

19

increased income in the Individual segment ($2.7 million), Employee Benefits
segment ($45.6 million), and Voluntary Benefits segment ($8.1 million). This
increase was partly offset by lower income in the Other segment ($6.1 million)
and Corporate segment ($46.7 million).

In 1997, income increased $130.4 million, or 55.5 percent, to $365.2 million
from $234.8 million in 1996. This increase resulted from increased income in
the Individual segment ($116.9 million), Employee Benefits segment ($9.2
million), Voluntary Benefits segment ($0.4 million), and Other segment ($13.4
million). This increase was partly offset by lower income in the Corporate
segment ($9.5 million).

Net income totaled $254.0 million in 1998, compared to $247.3 million in
1997 and $145.6 million in 1996. Net realized investment gains after federal
income taxes were $22.3 million in 1998 and $9.8 million in 1997, compared to
losses of $5.4 million in 1996.

Individual Segment Operating Results (1)

Year Ended December 31
---------------------------
1998 1997 1996
-------- -------- -------
(in millions of dollars)

Revenue Excluding Net Realized Investment Gains
and Losses
Premium Income
Individual Disability Income................... $1,392.0 $1,207.7 $ 582.8
Individual Life................................ 82.4 78.9 63.3
-------- -------- -------
Total Premium Income............................. 1,474.4 1,286.6 646.1
Net Investment Income............................ 736.0 589.8 371.8
Other Income..................................... 43.2 25.9 7.1
-------- -------- -------
Total............................................ 2,253.6 1,902.3 1,025.0
-------- -------- -------
Benefits and Expenses
Policy and Contract Benefits..................... 936.8 771.6 459.6
Change in Reserves for Future Policy and Contract
Benefits and Policyholders' Funds............... 524.4 425.3 221.3
Commissions...................................... 235.3 211.8 116.9
Increase in Deferred Policy Acquisition Costs.... (67.5) (53.2) (2.3)
Amortization of Value of Business Acquired....... 33.6 26.8 0.5
Other Operating Expenses......................... 356.0 287.7 113.6
-------- -------- -------
Total............................................ 2,018.6 1,670.0 909.6
-------- -------- -------
Income Before Net Realized Investment Gains and
Losses and Federal Income Taxes................. $ 235.0 $ 232.3 $ 115.4
======== ======== =======
Sales--Annualized New Premiums
Individual Disability Income................... $ 114.6 $ 103.9 $ 45.1
Individual Life................................ 8.8 9.6 6.7

- --------
(1) Results for 1997 and 1996 have been reclassified to conform to current
year presentation.

Revenue in the Individual segment increased $351.3 million, or 18.5 percent,
to $2,253.6 million in 1998 from $1,902.3 million in 1997. The increase was
primarily the result of the acquisition of Paul Revere. Premium income in this
segment increased $187.8 million, or 14.6 percent, to $1,474.4 million in 1998
from $1,286.6 million in 1997. Both the individual disability income and
individual life lines of business produced increases in premium income. Also
in this segment, net investment income increased $146.2 million, or 24.8
percent, to $736.0 million in 1998 from $589.8 million in 1997, primarily due
to the acquisition of Paul Revere and increased capital allocation. Management
expects that premium income in the Individual segment will begin to

20

grow on a year-over-year basis as the product transition in the individual
disability income line of business begins to produce increasing levels of new
sales of individual disability products.

In 1997, revenue in the Individual segment increased $877.3 million, or 85.6
percent, to $1,902.3 million from $1,025.0 million in 1996. The increase was
primarily the result of the acquisition of Paul Revere, which contributed
$851.9 million of revenue to this segment in 1997. Premium income in this
segment increased $640.5 million, or 99.1 percent, to $1,286.6 million in 1997
from $646.1 million in 1996. The increase was primarily the result of the
acquisition of Paul Revere, which contributed $636.5 million of premium income
to this segment in 1997. Within this segment, revenue in the individual
disability income line of business increased $840.1 million, or 94.1 percent,
to $1,733.1 million in 1997 from $893.0 million in 1996. Revenue in the
individual life line of business increased $37.2 million, or 28.2 percent, to
$169.2 million in 1997 from $132.0 million in 1996. Both of these lines of
business benefited from the Paul Revere acquisition.

In November 1994, the Company announced its intention to discontinue the
sale of individual disability products which combined lifetime benefits and
short elimination periods with own-occupation provisions (other than
conversion policies available under existing contractual arrangements). At the
same time the Company began introducing products that insured "loss of
earnings" as opposed to occupations, and these products generally contained
more limited benefit periods and longer elimination periods. Since the
acquisition of Paul Revere in March 1997, the Company has discontinued the
sale of certain Paul Revere products that are not consistent with the
Company's strategic direction for its product portfolio. The Company expects
to continue to offer selected Paul Revere products with own-occupation (while
not working) features applying stricter underwriting standards. The Company
has filed new rates for some of these products and is in the process of
repricing other of these selected products and making modifications to their
features where appropriate. Going forward, the Company expects to offer a
limited portfolio of own-occupation based coverages along with its more
complete line of loss of earnings related disability coverages.

In the fourth quarter of 1998, new annualized sales in the individual
disability income line totaled $33.5 million, compared to $28.2 million in the
third quarter of 1998 and $29.8 million in the fourth quarter of 1997,
reflecting the continued product transition. On a pro forma basis, sales of
individual disability income contracts declined in 1998 to $114.6 million from
$127.3 million in 1997, reflecting the planned discontinuance of certain
products and restructuring of others and, secondarily, with the consolidation
of the Company's and Paul Revere's sales offices and related realignment of
the field sales force.

Revenue is not expected to be significantly impacted by the transition in
products due to continued favorable persistency. The magnitude and duration of
the decline in sales from previous years, such as that experienced during 1997
and 1998, are dependent on the response of customers and competitors in the
industry.

Income in the Individual segment increased $2.7 million, or 1.2 percent, to
$235.0 million in 1998 from $232.3 million in 1997. The increase in this
segment was primarily the result of increased income in the individual life
line of business to $36.0 million in 1998 from $28.7 million in 1997 due to
the acquisition of Paul Revere and higher net investment income. Income in the
individual disability income line of business declined $4.6 million, or 2.3
percent, to $199.0 million in 1998 from $203.6 million in 1997. This decline
is primarily due to an $81.0 million increase in the individual disability
reserves for existing claims related to the expected increase in claims
duration due to management's expectation that productivity in the claims
organization will be impacted as a result of planning, consolidation, and
integration efforts related to the Company's merger with UNUM Corporation
("UNUM"). The impact on productivity is expected to lengthen the average
claims duration for a relatively short period of time until the new claims
organization completes its transition process following the merger.

In 1997, income in the Individual segment increased $116.9 million, or 101.3
percent, to $232.3 million from $115.4 million in 1996. This increase is
primarily due to the acquisition of Paul Revere and improved results in the
Company's individual disability income line of business. In this line, income
increased $112.3 million, or 123.0 percent, to $203.6 million in 1997 from
$91.3 million in 1996. This improvement is primarily

21

due to the acquisition of Paul Revere and a higher level of net claim
resolutions. Management believes the substantial investment in the individual
disability claims management process since the first quarter of 1995 helped
produce the improvement that occurred in this line. The major elements of this
investment include an emphasis on early intervention to better respond to the
specific nature of the claims, increased specialization to properly adjudicate
the increasingly specialized nature of disability claims, and an increased
level of staffing with experienced claim adjusters. The individual life line
of business produced income of $28.7 million in 1997, an increase of $4.6
million, or 19.1 percent, over the $24.1 million in 1996. The increase is the
result of the acquisition of Paul Revere.

Employee Benefits Segment Operating Results (1)

Year Ended December 31
---------------------------
1998 1997 1996
-------- -------- --------
(in millions of dollars)

Revenue Excluding Net Realized Investment Gains
and Losses
Premium Income
Long-term Disability............................ $ 261.1 $ 185.2 $ 69.1
Short-term Disability........................... 93.0 66.6 30.3
Group Life...................................... 317.6 270.2 204.7
Accidental Death and Dismemberment.............. 38.9 30.3 21.7
-------- -------- --------
Total Premium Income.............................. 710.6 552.3 325.8
Net Investment Income............................. 123.2 101.5 66.7
Other Income...................................... 98.0 76.7 3.0
-------- -------- --------
Total............................................. 931.8 730.5 395.5
-------- -------- --------
Benefits and Expenses
Policy and Contract Benefits...................... 547.8 416.0 250.5
Change in Reserves for Future Policy and Contract
Benefits and Policyholders' Funds................ 58.1 64.6 49.3
Commissions....................................... 51.7 40.3 13.4
(Increase) Decrease in Deferred Policy Acquisition
Costs............................................ (8.6) 2.1 2.6
Other Operating Expenses.......................... 197.2 167.5 48.9
-------- -------- --------
Total............................................. 846.2 690.5 364.7
-------- -------- --------
Income Before Net Realized Investment Gains and
Losses and Federal Income Taxes.................. $ 85.6 $ 40.0 $ 30.8
======== ======== ========
Sales--Annualized New Premiums
Long-term Disability............................ $ 73.1 $ 35.5 N/A
Short-term Disability........................... 38.3 35.4 N/A
Group Life...................................... 78.4 50.7 $ 27.8
Accidental Death and Dismemberment.............. 7.0 4.5 12.5

- --------
(1) Results for 1997 and 1996 have been reclassified to conform to current
year presentation.

Revenue in the Employee Benefits segment increased $201.3 million, or 27.6
percent, to $931.8 million in 1998 from $730.5 million in 1997. Premium income
in this segment increased $158.3 million, or 28.7 percent, to $710.6 million
in 1998 from $552.3 million in 1997. The increase is the result of the
acquisition of Paul Revere and increased premium income in the group
disability, group life, and accidental death and dismemberment lines of
business. Revenue from GENEX totaled $92.3 million in 1998 compared to $72.3
million in 1997 subsequent to its acquisition.

In 1997, revenue in the Employee Benefits segment increased $335.0 million,
or 84.7 percent, to $730.5 million from $395.5 million in 1996. The increase
was primarily the result of an increase in premium income in

22

this segment of $226.5 million, or 69.5 percent, to $552.3 million in 1997
from $325.8 million in 1996. The increase was primarily the result of the
acquisition of Paul Revere, which added to premium income in the group life
and group disability lines of business. In 1997, Paul Revere added $211.4
million to premium income and $241.3 million to revenue. GENEX contributed
$72.3 million of revenue in 1997 subsequent to its acquisition.

Income in the Employee Benefits segment increased $45.6 million, or 114.0
percent, to $85.6 million in 1998 from $40.0 million in 1997. The increase is
primarily the result of the acquisition of Paul Revere and improved results in
the group disability, group life, accidental death and dismemberment, and
GENEX lines of business. The group disability line of business produced income
of $39.4 million in 1998 compared to $15.3 million in 1997, primarily due to
the acquisition of Paul Revere and the impact of updated factors used in
calculating Social Security offset amounts and probabilities and claim
termination rates, resulting from year-end 1997 group disability reserve
studies. Included in the results from this line for 1998 is a $12.6 million
increase in group disability reserves for existing claims related to the
expected increase in claims duration due to management's expectation that
productivity in the claims organization will be impacted as a result of
planning, consolidation, and integration efforts related to the Company's
merger with UNUM. Also in this segment, income in the group life and
accidental death and dismemberment lines increased to $41.0 million in 1998
from $22.7 million in 1997. Income for GENEX increased to $5.2 million in 1998
from $2.0 million in 1997.

In 1997, income in the Employee Benefits segment increased $9.2 million, or
29.9 percent, to $40.0 million from $30.8 million in 1996. This increase was
primarily due to increased income in the group disability line of business,
which increased $9.5 million to $15.3 million in 1997 from $5.8 million in
1996. This increase was primarily due to the acquisition of Paul Revere. Also
within this segment, GENEX produced income of $2.0 million in 1997. These
results were partly offset by lower income in the group life and accidental
death and dismemberment lines of business, which produced income of $22.7
million in 1997, compared to $25.0 million in 1996.

23

Voluntary Benefits Segment Operating Results

Year Ended December 31
----------------------------
1998 1997 1996
-------- -------- --------
(in millions of dollars)

Revenue Excluding Net Realized Investment Gains
and Losses
Premium Income
Life........................................... $ 69.5 $ 64.5 $ 55.3
Disability..................................... 12.9 13.5 14.3
Other.......................................... 1.8 1.3 1.0
-------- -------- -------
Total Premium Income............................. 84.2 79.3 70.6
Net Investment Income............................ 27.1 25.2 23.3
Other Income..................................... 5.1 4.0 3.5
-------- -------- -------
Total............................................ 116.4 108.5 97.4
-------- -------- -------
Benefits and Expenses
Policy and Contract Benefits..................... 44.2 42.3 36.5
Change in Reserves for Future Policy and Contract
Benefits and Policyholders' Funds............... 17.4 21.0 21.9
Commissions...................................... 23.4 20.0 14.4
Increase in Deferred Policy Acquisition Costs.... (14.6) (11.9) (7.8)
Other Operating Expenses......................... 22.8 22.0 17.7
-------- -------- -------
Total............................................ 93.2 93.4 82.7
-------- -------- -------
Income Before Net Realized Investment Gains and
Losses and Federal Income Taxes................. $ 23.2 $ 15.1 $ 14.7
======== ======== =======
Sales--Annualized New Premiums
Life........................................... $ 24.3 $ 25.4 $ 19.5
Disability..................................... 4.7 2.6 2.9
Other.......................................... 0.9 0.7 0.6

Revenue in the Voluntary Benefits segment increased $7.9 million, or 7.3
percent, to $116.4 million in 1998 from $108.5 million in 1997. The increase
is primarily the result of an increase in premium income in this segment of
$4.9 million, or 6.2 percent, to $84.2 million in 1998 from $79.3 million in
1997. Also in this segment, net investment income increased $1.9 million, or
7.5 percent, to $27.1 million in 1998 from $25.2 million in 1997. New sales in
this segment increased 4.2 percent to $29.9 million in 1998 from $28.7 million
in 1997.

In 1997, revenue in the Voluntary Benefits segment increased $11.1 million,
or 11.4 percent, to $108.5 million from $97.4 million in 1996. The increase is
primarily the result of an increase in premium income of $8.7 million, or 12.3
percent, to $79.3 million in 1997 from $70.6 million in 1996. Also in this
segment, net investment income increased $1.9 million, or 8.2 percent, to
$25.2 million in 1997 from $23.3 million in 1996. New sales in this segment
increased 24.8 percent in 1997 to $28.7 million from $23.0 million in 1996.

Income in the Voluntary Benefits segment increased $8.1 million, or 53.6
percent, to $23.2 million in 1998 from $15.1 million in 1997. The increase is
primarily the result of an increase in revenue as well as improved mortality
experience in 1998 relative to 1997.

In 1997, income in the Voluntary Benefits segment increased $0.4 million, or
2.7 percent, to $15.1 million from $14.7 million in 1996, primarily as a
result of an increase in revenue and an improved mortality experience.

24

Other Segment Operating Results(1)

Year Ended December 31
---------------------------
1998 1997 1996
-------- -------- --------
(in millions of dollars)

Revenue Excluding Net Realized Investment Gains
and Losses
Premium Income.................................... $ 78.2 $ 135.5 $ 133.2
Net Investment Income............................. 460.8 617.6 606.5
Other Income...................................... 35.6 20.9 18.9
-------- -------- --------
Total............................................. 574.6 774.0 758.6
-------- -------- --------
Benefits and Expenses
Policy and Contract Benefits...................... 276.3 457.9 469.9
Change in Reserves for Future Policy and Contract
Benefits and Policyholders' Funds................ 172.2 159.4 152.2
Commissions....................................... 19.9 33.6 23.6
(Increase) Decrease in Deferred Policy Acquisition
Costs............................................ -- (6.1) 0.1
Other Operating Expenses.......................... 20.1 37.0 34.0
-------- -------- --------
Total............................................. 488.5 681.8 679.8
-------- -------- --------
Income Before Net Realized Investment Gains and
Losses and Federal Income Taxes.................. $ 86.1 $ 92.2 $ 78.8
======== ======== ========
Funds Under Management
Guaranteed Investment Contracts................. $ 656.8 $1,603.6 $3,204.3
Group Single Premium Annuities.................. 1,185.6 1,199.1 1,188.1

- --------
(1) Results for 1997 and 1996 have been reclassified to conform to current
year presentation.

The Other operating segment includes results from products no longer
actively marketed, including corporate-owned life insurance ("COLI"), group
pension, medical stop-loss, medical and dental, and individual annuities. The
closed blocks of business have been segregated for reporting and monitoring
purposes.

Effective January 1, 1998, the Company entered into an agreement with
Connecticut General Life Insurance Company ("Connecticut General") for
Connecticut General to reinsure, on a 100% coinsurance basis, the Company's
in-force medical stop-loss insurance coverages sold to clients of CIGNA
Healthcare and its affiliates ("CIGNA"). This reinsured block constitutes
substantially all of the Company's medical stop-loss insurance business. The
small portion remaining consists of medical stop-loss coverages sold to
clients other than those of CIGNA. These coverages will not be renewed. The
medical stop-loss business produced revenue of $14.1 million, $38.0 million,
and $50.6 million and income of $1.6 million, $6.6 million, and $10.2 million
for the years ended 1998, 1997, and 1996, respectively.

On April 30, 1998, the Company closed the sale of its in-force individual
and tax-sheltered annuity business to American General Annuity Insurance
Company and The Variable Annuity Life Insurance Company, affiliates of
American General Corporation ("American General"). The sale was effected by
reinsurance in the form of 100% coinsurance agreements whereby the financial
liability for the various annuity lines was transferred to American General.
The responsibility for providing administrative services was also assumed by
American General pursuant to various administrative services agreements with
the American General affiliates. The in-force business sold consisted
primarily of individual fixed annuities and tax-sheltered annuities in
Provident Life and Accident Insurance Company ("Accident"), Provident National
Assurance Company ("National"), The Paul Revere Life Insurance Company ("Paul
Revere Life"), The Paul Revere Variable Annuity Insurance Company ("Paul
Revere Variable")and The Paul Revere Protective Life Insurance Company ("Paul
Revere Protective"). In addition, American General acquired a number of
miscellaneous group pension lines of business sold in the 1970s and 1980s
which were no longer actively marketed by the Company. Pursuant to an
administrative services agreement, an affiliate of American General is
providing administrative services to registered separate accounts

25

of Paul Revere Variable and National. The sale does not include the Company's
block of guaranteed investment contracts ("GICs") or group single premium
annuities ("SPAs"), which will continue in a run-off mode. In consideration
for the transfer of the approximately $2.4 billion of statutory reserves,
American General paid the Company a ceding commission of approximately $58.0
million. See "Note 14 of the Notes to Consolidated Financial Statements" for
further discussion.

In 1997, the Company transferred its dental business to Ameritas Life
Insurance Corp. The dental block, which was acquired in the Paul Revere
acquisition, produced $39.2 million in premium income in 1997 and $48.3
million in 1996.

Revenue in the Other segment declined $199.4 million, or 25.8 percent, to
$574.6 million in 1998 from $774.0 million in 1997. The decline in revenue in
this segment is primarily due to lower net investment income, which declined
$156.8 million, or 25.4 percent, to $460.8 million in 1998 from $617.6 million
in 1997. This decline is primarily the result of a decrease in GIC funds under
management from $1,603.6 million as of December 31, 1997, to $656.8 million as
of December 31, 1998, resulting from the strategic decision to discontinue the
sale of GICs. Also in this segment, premium income declined $57.3 million, or
42.3 percent, to $78.2 million in 1998 from $135.5 million in 1997. This
decline is primarily due to the transfer of the dental block in 1997.

In 1997, revenue in the Other segment increased $15.4 million, or 2.0
percent, to $774.0 million from $758.6 million in 1996. This increase is
primarily the result of the acquisition of Paul Revere, which added $150.4
million of revenue in 1997, including $119.1 million of revenue in the
individual annuity line of business. This increase was partly offset by a
decline in funds under management resulting from the discontinuation of the
sale of products in the group pension line of business. Revenue in this line
of business declined $107.8 million to $300.6 million in 1997 from $408.4
million in 1996. Revenue in the corporate-owned life insurance line of
business increased by $9.0 million, or 4.5 percent, to $210.3 million in 1997
from $201.3 million in 1996, primarily due to increased net investment income.

Income in the Other segment declined $6.1 million, or 6.6 percent, to $86.1
million in 1998 from $92.2 million in 1997. The decline in this segment was
due in part to the sale of the individual annuity line and the reinsurance of
the medical stop-loss line. Income in the group pension line of business also
declined to $21.7 million in 1998 from $35.3 million in 1997 primarily due to
the result of lower funds under management and lower income from a reduced
amount of capital allocated to this line. In addition, the Company recorded an
$8.0 million reserve strengthening for group SPAs during 1998. This decline
was partly offset by improved income in the COLI line of business which
increased to $27.9 million in 1998 from $19.4 million in 1997.

In 1997, income in the Other segment increased $13.4 million, or 17.0
percent, to $92.2 million from $78.8 million in 1996. This increase was
primarily the result of higher income in the individual annuities line of
business, which increased to $17.9 million in 1997 from $1.9 million in 1996,
due to the acquisition of Paul Revere. This increase was partly offset by
lower income in the group pension line of business, which produced income of
$35.3 million in 1997, a decline of $12.3 million, or 25.8 percent, from $47.6
million in 1996. The medical stop-loss line also produced lower income in
1997, declining $3.6 million, or 35.3 percent, to $6.6 million in 1997 from
$10.2 million in 1996.

The Other segment contains lines of business that are no longer actively
marketed by the Company and are in run-off mode. It is expected that revenue
and earnings in this segment will decline over time as these business lines
wind down. The run-off of the group pension line results in a decline in
assets under management and, in turn, a continued decline in the net
investment income produced by the assets. Management expects to reinvest the
capital supporting these lines of business in the future growth of the
Individual and Employee Benefits segments.

26

Corporate Segment Operating Results

The Corporate segment includes investment earnings on corporate assets not
specifically allocated to a line of business, corporate interest expense,
amortization of goodwill, and certain corporate expenses not allocated to a
line of business.

Revenue in the Corporate segment increased $4.8 million, or 21.1 percent, to
$27.6 million in 1998 from $22.8 million in 1997. This increase is primarily
the result of higher net investment income from unallocated capital and
surplus.

In 1997, revenue in the Corporate segment declined $1.2 million, or 5.0
percent, to $22.8 million from $24.0 million in 1996. This decline is
primarily the result of a lower level of net investment income from
unallocated capital and surplus.

The Corporate segment reported a loss of $61.1 million in 1998 compared to a
loss of $14.4 million in 1997. Interest and debt expense increased to $62.1
million in 1998 from $39.9 million in 1997. Also, amortization of goodwill
increased to $21.4 million in 1998 from $12.6 million in 1997, reflecting the
acquisitions of Paul Revere and GENEX.

In 1997, the Corporate segment reported a loss of $14.4 million compared to
a loss of $4.9 million in 1996. Interest and debt expense increased to $39.9
million in 1997 from $12.4 million in 1996. Also, amortization of goodwill
increased to $12.6 million in 1997 as a result of the acquisition of Paul
Revere and GENEX.

Liquidity And Capital Resources

On March 27, 1997, the Company consummated the acquisition of Paul Revere,
which was financed through common equity issuance to Zurich Insurance Company,
a Swiss insurer, and its affiliates, common equity issuance and cash to Paul
Revere stockholders, debt, and internally generated funds. The debt financing
was provided through an $800.0 million revolving bank credit facility with
various domestic and international banks. The revolving bank credit facility
was established in 1996 to provide partial financing for the purchase of Paul
Revere and GENEX, to refinance the existing bank term notes of $200.0 million,
and for general corporate uses. At December 31, 1997, outstanding borrowings
under the revolving bank credit facility were $725.0 million. The revolving
bank credit facility was repaid on February 24, 1998. The Company also
redeemed its outstanding 8.10% cumulative preferred stock, which had an
aggregate value of $156.2 million, on February 24, 1998. The debt repayment
and preferred stock redemption were funded through short-term borrowing.

On March 16, 1998, the Company completed a public offering of $200.0 million
of 7.25% senior notes due March 15, 2028. On March 16, 1998, Provident
Financing Trust I, a wholly-owned subsidiary trust of the Company, issued
$300.0 million of 7.405% capital securities in a public offering. These
capital securities, which mature on March 15, 2038, are fully and
unconditionally guaranteed by the Company, have a liquidation value of $1,000
per capital security, and have a mandatory redemption feature under certain
circumstances. The Company issued $300.0 million of 7.405% junior subordinated
deferrable interest debentures, which mature on March 15, 2038, to the
subsidiary trust in connection with the capital securities offering. The sole
assets of the subsidiary trust are the junior subordinated debt securities.

In April 1998, the Company entered into a $150.0 million five-year revolving
credit facility and a $150.0 million 364-day revolving credit facility with
various domestic and international banks. The purpose of the facilities is for
general corporate purposes. There are no outstanding borrowings under either
of the credit facilities.

In July 1998, the Company completed a public offering of $200.0 million of
6.375% senior notes due July 15, 2005, and $200.0 million of 7.0% senior notes
due July 15, 2018.

The proceeds from these offerings funded the repayment of the short-term
borrowing used for the February 1998 debt repayment and preferred stock
redemption.

27

The Company believes the cash flow from its operations will be sufficient to
meet its operating and financial cash flow requirements. Periodically, the
Company may issue debt or equity securities to fund internal expansion,
acquisitions, investment opportunities, and the retirement of the Company's
debt and equity.

As a holding company, the Company is dependent upon payments from its
wholly-owned insurance subsidiaries and GENEX to pay dividends to its
stockholders and to pay its expenses. These payments by the Company's
subsidiaries may take the form of either dividends or interest payments on
amounts loaned to such subsidiaries by the Company or expense reimbursement.
At December 31, 1998, the Company had outstanding from its insurance
subsidiaries a $150.0 million surplus debenture due in 2006 with a weighted
average interest rate during 1998 of 7.9% and a $100.0 million surplus
debenture due in 2027 with a weighted average interest rate during 1998 of
8.3%. Semi-annual interest payments are conditional upon the approval by the
insurance department of the state of domicile.

State insurance laws generally restrict the ability of insurance companies
to pay cash dividends or make other payments to their affiliates in excess of
certain prescribed limitations. In the Company's insurance subsidiaries'
states of domicile, regulatory approval is required if an insurance company
seeks to make loans to affiliates in amounts equal to or in excess of three
percent of the insurer's admitted assets or to pay cash dividends in any
twelve month period in excess of the greater of such company's net gain from
operations of the preceding year or ten percent of its surplus as regards
policyholders as of the preceding year end, each as determined in accordance
with accounting practices prescribed or permitted by insurance regulatory
authorities. The Company anticipates that $153.3 million will be available in
1999 for such purposes without regulatory approval.

The Company's liquidity requirements are met primarily by cash flow provided
from operations, principally in its insurance subsidiaries. Premium and
investment income, as well as maturities and sales of invested assets, provide
the primary sources of cash. Cash flow from operations was sufficient in 1998.
Cash is applied to the payment of policy benefits, costs of acquiring new
business (principally commissions) and operating expenses as well as purchases
of new investments. The Company has established an investment strategy that
management believes will provide for adequate cash flow from operations.

As a result of the release of capital generated by the run-off of the GIC
portfolio, the sale of the commercial mortgage loans and other corporate
actions, the Company has increased its available capital to support the growth
of its businesses, including assisting in the financing of the acquisitions of
Paul Revere and GENEX. Management continues to analyze potential opportunities
to utilize the capital to further enhance stockholder value, including
exploring options that would support the Company's growth initiatives.

In November 1998, the Company announced its plans to merge with UNUM, a
leading provider of disability products and other employee benefits, in a
transaction that will create UNUMProvident Corporation. See "Note 17 of the
Notes to Consolidated Financial Statements" for further discussion.

Market Risks

The Company is subject to various market risk exposures including interest
rate risk and foreign exchange rate risk. The following discussion regarding
the Company's risk management activities includes forward-looking statements
that involve risk and uncertainties. Estimates of future performance and
economic conditions are reflected assuming certain changes in market rates and
prices were to occur (sensitivity analysis). Caution should be used in
evaluating the Company's overall market risk from the information presented
below, as actual results may differ