The Growing
Need for
Financial Protection
2011 ANNUAL REPORT
Unum 2011 Annual Report
a
Financial Highlights
Income Per Share*
Income from Continuing Operations, As Adjusted**
$ 2.95
$ 2.69
$ 2.57
$ 2.51
$ 2.21
Net Realized Investment Gain (Loss)
(0.01)
0.05
—
(0.89)
(0.12)
2011
2010
2009
2008
2007
Deferred Acquisition Costs and Reserve Charges
for Closed Block
Special Tax Items and Debt Extinguishment Costs
Regulatory Reassessment Charges
Income from Continuing Operations
Income from Discontinued Operations
(2.24)
0.08
—
0.78
—
—
(0.03)
—
2.71
—
—
—
—
2.57
—
—
—
—
1.62
—
—
(0.10)
(0.10)
1.89
0.02
Net Income
$ 0.78
$ 2.71
$ 2.57
$ 1.62
$ 1.91
Book Value Per Share
Total Stockholders’ Equity
Net Unrealized Gain (Loss) on Securities
Net Gain on Cash Flow Hedges
Foreign Currency Translation Adjustment
Unrecognized Pension and Postretirement Benefit Costs
$ 29.30
$ 28.25
$ 25.62
$ 19.32
$ 22.28
2.07
1.39
(0.41)
(1.52)
1.29
1.14
(0.35)
(1.00)
1.14
1.12
(0.24)
(0.99)
(2.51)
1.38
(0.54)
(1.23)
0.99
0.50
0.35
(0.55)
Total Stockholders’ Equity, As Adjusted**
$ 27.77
$ 27.17
$ 24.59
$ 22.22
$ 20.99
* Per Share Amounts for Operating Statement Data Assume Dilution.
** We analyze our performance using non-GAAP financial measures which exclude certain items and the related tax thereon from net income.
We believe “Income from Continuing Operations, As Adjusted,” which is a non-GAAP financial measure and excludes realized investment gains
and losses, which are recurring, and certain other items as specified, is a better performance measure and a better indicator of the profitability
and underlying trends in our business. Realized investment gains and losses are primarily dependent on market conditions and general economic
events and are not necessarily related to decisions regarding our underlying business. The exclusion of certain other items specified above also
enhances the understanding and comparability of our performance and the underlying fundamentals in our operations, but this exclusion is not
an indication that similar items may not recur. We also believe that book value per common share excluding accumulated other comprehensive
income or loss, which also tends to fluctuate depending on market conditions and general economic trends, is an important measure. See
pages 40, 41 and 167 of this Annual Report for additional non-GAAP financial measure reconciliations.
b
Unum 2011 Annual Report
To Our Shareholders,
Customers and Colleagues
Thomas R. Watjen
Reflecting our commitment to staying focused and disciplined,
2011 was another strong year for Unum. Focus and discipline have
served us well in the past, and I believe that will continue to be
the case as we look toward an improving but still challenging
environment ahead. While I am very pleased with our overall
performance, this is no time to be complacent, and in 2012
our focus will continue to be on the principles that have
contributed to our past success.
Unum 2011 Annual Report
1
67%
of U.S. workers lack
disability coverage
30%
of people in
the U.S. have no
life insurance
OUR PERFORMANCE
Despite some persistent challenges,
through the efforts of our nearly 10,000
employees we once again delivered on
our commitments to our customers,
shareholders and all the stakeholders
that are so important to our company.
Although improving, continued high
unemployment in both the U.S. and U.K.
is adversely affecting the growth rates
in our businesses, while this prolonged
period of low interest rates also poses
challenges for our company and industry.
Despite these pressures, in 2011 we
grew the businesses we targeted for
growth, generated solid profitability in
our core businesses, and maintained a
solid financial foundation. Among the
highlights for the year:
• We delivered pre-tax operating income
of $1.3 billion and after-tax operating
earnings of $897 million;
• Earnings per share grew by almost
10 percent, well ahead of the industry
average, while our return on equity
remained above the industry
average; and
• We finished the year with a very strong
balance sheet, investment portfolio
and capital position.
Again this past year we have been
fortunate to have two sources of value
creation: our business operations and
an active program of returning capital to
shareholders through dividend increases
and share buy backs. Since the fourth
quarter of 2007, we have repurchased
nearly $1.7 billion of stock, reducing our
outstanding share count by 19 percent —
the lowest level since 2002 — and raised
our quarterly dividend by 40 percent.
We believe that a business capable of
both growing and returning capital to
shareholders will continue to generate
above-average, long-term returns for
shareholders. While I was not happy with
our stock’s performance in 2011, we
continued to outperform our industry
for the year just as we have over the
past three- and five-year periods.
I mentioned earlier our strong balance
sheet. A significant contributor to that is
our investment portfolio, which continues
to perform well. The emphasis we’ve
placed on sound risk management has
led to steady investment results, and
our credit quality remains among the
best in the insurance industry.
Our success, though, goes well beyond
just financial results. We strive to be a
company that is viewed not just for its
financial performance but as a leader in
our industry, in our communities, and
with our employees — a leader in every
sense of the word. I am very proud of
the kind of company we have become,
and these are just a few examples:
• Our customer satisfaction ratings have
remained at or near record levels;
• Our company and employees continue
to give back to our communities in many
ways, including more than $12 million
in financial and volunteer support to a
broad range of charitable organizations;
• We continue to create a positive work
environment, which is a real competi-
tive advantage, and were named a
“Best Place to Work in Insurance” for
the third consecutive year; and
• We were once again named among
the “Greenest Companies in America.”
Although we have come a long way, this
is no time to relax. The environment will
continue to change, and we will always
be confronted with new issues and
challenges. As our track record indicates,
though, our people are quick to adapt
to the changing environment and don’t
shy away from tough decisions. A recent
example of this was our decision earlier
this year to discontinue the sale of new
group long-term care policies. This was a
difficult decision because we recognize
there’s a need in the market for this
coverage. After a very thorough analy-
sis, however, we concluded that given
2
Unum 2011 Annual Report
9 10
OUT
OF
workers in the
U.K. lack disability
coverage
Last year, we engaged Charles River
Associates to measure the impact that
employer-sponsored benefits have on
consumers and on public policy. While
I would encourage you to read the full
study at www.unum.com/CRAreport,
there is one particular aspect I want to
highlight here, and that is the connection
our business has to our public programs.
According to the study, disability benefits
acquired through the workplace in the U.S.
protect almost 600,000 families a year
from impoverishment and dependence
on public assistance programs like food
stamps, which translates into direct
savings to taxpayers of up to $4.5 billion
annually. To help put this in perspective,
only 33 percent of those in the workforce
have disability coverage, so as we expand
ownership for this critical coverage it
not only benefits individuals and their
families, but also has a positive impact
on our public spending.
today’s historically low interest rates and
the growing number of challenges in
pricing and managing this product, it
simply no longer met our business and
risk management objectives.
At the same time, we elected to move
both our group and individual long-term
care business (which we discontinued
selling in 2009) into a closed block that
is reported separately from our ongoing
businesses. While there was a cost in
taking this action, we can now focus our
resources on those product lines that
present the best long-range opportunities
for us and our stakeholders. We will of
course continue to provide our long-term
care customers with the high-quality
service they have come to expect from
Unum. Again, I am very proud of how the
organization confronts issues such as this
and is willing to make the tough decisions.
So, as I said, 2011 was another strong
year and I’m proud of the culture we
have established at this company. We
have built momentum over the past
five years that I believe we can sustain
into the future.
OUR BUSINESS
Speaking of the future, I have always felt
that our business is an honorable one that
serves a very important purpose: providing
individuals and their families with the
financial security they need to better
cope with the loss of a loved one or the
inability to work due to illness or injury.
In many ways, the need for what we do
has never been greater. The economic
downturn has left consumers, businesses
and governments all struggling to adapt.
Individual consumers — including the more
than 60 percent of Americans who live
paycheck to paycheck — have neither the
personal savings nor insurance protection
to provide for themselves or their families
if a life-changing event were to occur.
At the same time, governments are
struggling with growing deficits and may
be unable to be that “safety net” they
have been in the past, forcing individuals
to take more personal responsibility for
their own financial security.
For most workers, and especially those
at lower and middle income levels, the
workplace has become the ideal place
to obtain that peace of mind. Here they
get both the information needed to be
an informed consumer as well as access
to affordable protection that would likely
not be available elsewhere. Workplace
benefits have many advantages for
employers as well, including enabling
them to attract and retain top talent and
build greater loyalty and engagement with
their employees — all of which improves
the employer’s competitiveness.
Unum 2011 Annual Report
3
Generating Shareholder Value
2007
2008
2009
2010
2011
Share Repurchases Authorized
$700M
Dividend Increase
—
—
—
—
$500M
$1,000M
+10%
+12.1%
+13.5%
Operating EPS Growth*
Operating EPS Growth
($ in dollars)
$4.00
$3.00
$2.00
$1.00
0
+ 7 . 5 % C A G R
$2.51
$2.57
$2.69
$2.95
$2.21
2007
2008
2009
2010
2011
Excluding special items. See the previous
discussion of non-GAAP financial measures.
Operating ROE
Operating ROE
13.9% 13.9%
14.6%
9.8%
15%
12%
9%
6%
3%
0
2007
2011*
(cid:31) Unum Core ROE
(cid:31) Industry Median
(excluding Unum)
Excluding special items. See the discussion of
these non-GAAP financial measures in
the Appendix.
4
Unum 2011 Annual Report
We also sponsored research in the U.K.,
where consumers face a very similar
challenge. With only 11 percent of Britons
covered by private disability insurance,
the vast majority rely on the government
to provide financial support if they become
incapacitated. In spite of the huge cost
to the government of providing these
benefits, however, the level of protec-
tion is inadequate for most families to
meet their basic needs, and the current
budget pressure certainly doesn’t allow
for expansion of this program. As in the
U.S., private sector coverage can better
protect the individual while at the same
time relieve some of the burden on the
government through reduced public
assistance outlays.
Simply put, post financial crisis, the need
for financial protection has never been
greater, and I continue to believe Unum is
uniquely positioned among benefit pro-
viders to capitalize on these opportunities.
Since the value of our products and
services extends well beyond the individ-
ual, and we now see the impact to public
policy, we have taken a much more
active role in creating awareness among
policymakers in both the U.S. and U.K.
about the importance of employer-
sponsored benefits — especially to those
at lower and middle income levels who
often lack access to this critical protection
outside the workplace. Our hope is that
through a more active dialogue between
the public and private sectors, we will
find ways to work together to make
basic insurance protection like this more
accessible to all consumers.
OUR OUTLOOK
As we look ahead, we have to assume
that the headwinds we’ve faced over the
last few years — particularly low interest
rates and high unemployment — will
continue for the foreseeable future.
Although recent signs in both indicators
are somewhat encouraging, both the pace
and sustainability of further improvements
are questionable. We have therefore
assumed in our plans only modest
improvement in these areas in 2012.
While we have proven that we can
successfully operate in this type of environ-
ment, I am concerned that there is a
significant cost (not benefit) to many
consumers from today’s low interest
rates. Low rates may reduce borrowing
costs, which may have a positive impact
on economic growth and housing prices,
but they are very harmful to savers
(including retirees) and financial institutions
that provide needed financial services
to consumers of all income levels. To
compensate for these persistently low
interest rates, financial service providers
2007
2008
2009
2010
2011
$700M
—
$500M
$1,000M
—
+10%
+12.1%
+13.5%
—
—
“Having the ability to create value through operating performance
and capital management is highly valued and sets us apart from
our competitors.”
eventually must charge more for their
products. This, of course, is counter to
our goal of simplifying our products and
lowering the cost to make them more
affordable to all consumers. I hope that
as we move into 2012, interest rates
are able to move to more market-
driven levels and we gradually reduce
the support that is good for some but
very harmful for others.
Regardless of the environment, looking
ahead we believe we have outstanding
opportunities to profitably grow our
business in selected markets. Our broad
product and service offering, consistent
high-quality service and strong financial
platform position us well and continue to
be tremendous assets. The result is that
in 2012 we expect to moderately grow our
business, something we have consistently
done over the last eight years.
As in the past, if we execute our plans well
we will continue to generate excess
capital. Our track record shows that we
have been very effective in returning that
capital to shareholders, and we expect
to continue this in 2012. Having the abil-
ity to create value through operating
performance and capital management
is highly valued and sets us apart from
our competitors.
Outperforming Our Industry
Unum
Total Return Through December 31, 2011
3-Year
19.03%
5-Year
9.55%
S&P Life & Health Index
14.78%
-34.76%
S&P 500
48.59%
-1.14%
In closing, this past year was another
good one and I believe that we are
well-positioned for the future. We will
continue to take the actions needed to
deliver value for our customers and solid
financial results for our shareholders.
On behalf of all of us at Unum, I’d like to
thank you for your continued support of
our company.
Regards,
Thomas R. Watjen
President and CEO
We have accomplished over the last
several years what we said we would, and
I believe we are in a position to continue
to do so in the years ahead. We have
responded to whatever challenges have
emerged by focusing on our customers
and maintaining the discipline that has
served us so well in the past. I’m confident
that we will continue to respond in this
way because of our people, who are
highly engaged in the business. They
care deeply about serving customers
and doing what is needed to help us
achieve our goals, and they remain our
greatest competitive advantage. I am
forever grateful for what they do for
this company.
Finally, I would like to thank our Board of
Directors and my management team for
the strong leadership they have provided.
As I mentioned, we never shy away from
making tough decisions and this group sets
the right tone for that at the company.
Unum 2011 Annual Report
5
Kevin McCarthy
Rick McKenney
Strength and Flexibility to Target Solutions to Unique Market Needs
Kevin McCarthy, chief operating
Q
officer, and Rick McKenney, chief
financial officer, discuss how
Unum’s operational approach and
capital management help the
A
company navigate the uncertain
economy and prepare it for
the future.
Q
A
HOW IMPORTANT A PART DOES
RISK MANAGEMENT PLAY IN
DECIDING UNUM’S DIRECTION
FOR THE FUTURE?
Rick: Risk management is inherent
in everything we do. It ranges from
the detailed decisions we make
underwriting our products to the
strategic decisions that shape our
business profile. We’ve made conscious
efforts to diversify our earnings sources
and product lines, while also exiting
markets that don’t meet our risk
profile. These actions are part of an
enterprise-wide risk management
framework that involves employees
at all levels, and the oversight of our
Board of Directors, in managing risk
for our company.
HOW HAS UNUM CONTINUED TO
TURN IN SOLID FINANCIAL AND
OPERATIONAL RESULTS DESPITE
THE ECONOMIC DOWNTURN?
Kevin: It all starts with strong
execution of our business plan.
Our employees aren’t distracted by
the external environment and other
factors they can’t control – but instead
have a singular focus on meeting the
needs of our customers. You can see
the results of this philosophy in our
outstanding customer satisfaction
scores, market leadership positions
and industry reputation.
Rick: This focused approach is also
evident in our capital management
philosophy. At its foundation are two
areas. First we have a disciplined
approach to running our businesses
where data-driven decisions keep us
focused on our return on capital.
Additionally, we have maintained a
prudent investment strategy that steers
clear of risky investments and focuses
on supporting the products we write.
Although we’re not immune to the
environment of low interest rates and
high unemployment, our strategy has
served us well during this time as we
have established a track record of
delivering on our commitments and
seen upgrades from every major
rating agency.
6
Unum 2011 Annual Report
Strength and Flexibility to Target Solutions to Unique Market Needs
Q
A
Q
A
Q
A
ARE CURRENT MARKET AND
ECONOMIC CONDITIONS IMPACTING
UNUM’S LONG-TERM
GROWTH PROSPECTS?
Kevin: While the economy is
undoubtedly impacting our ability
to grow revenue, one result of the
downturn is that, more than ever,
people are talking about the need
for a financial safety net. Our goal
is to create long-term relationships
with employers and become a true
partner in developing a compelling
benefits program for their employees,
while providing access to critical
financial protection products they
might otherwise not be able to
acquire on their own.
Rick: We’re fortunate to be in a
position where our business continues
to generate solid margins and excess
capital, which has served both the
company and its shareholders well.
Over the long term, we believe our
disciplined approach to the business
and our sustainable capital manage-
ment strategy will lead to growth in
any environment.
HOW IS UNUM PREPARING ITSELF
TO TAKE ADVANTAGE OF MARKET
OPPORTUNITIES WHEN THEY ARISE?
Kevin: The truth is there are many
more similarities between our three
businesses than there are differences.
With that idea as a foundation, we’re
in the process of eliminating redun-
dancies and building on capabilities
within each of our operations to create
a consistent and shared support structure
across the company. Not only will that
help us enhance the experience for
our customers, it frees up resources
in each business to develop new
solutions for the marketplace.
Q
A
WHAT IS UNUM DOING TO
MAXIMIZE SHAREHOLDER VALUE,
ESPECIALLY IN A WEAK ECONOMY?
Rick: We continue to focus on profitable
growth which means a disciplined
approach to the business, prudent
management of resources and sound
investment choices. This has provided
us with consistent returns and capital
generation through a difficult economic
period. As a result, since 2008 we have
repurchased approximately $1.7 billion
of shares and increased our dividend
payout three different times. Through
these actions, we continue to deliver
very good returns for our shareholders
despite the difficult environment. We
also actively look for opportunities
to grow through market expansion
and acquisition.
WHAT ARE THE COMPANY’S
PRIORITIES GOING FORWARD?
Kevin: To begin with, we must
continue to operate our businesses
well, focusing on meeting the needs of
our customers and managing inherent
risks. Just as important, though, is our
role as advocates for financial protection.
In partnership with respected think
tanks in both the U.S. and U.K. last year,
we sponsored research that made a
compelling case for the economic value
of workplace benefits. Throughout 2012,
we’ll continue our efforts to educate
policymakers in both countries about
the critical role our products play in
financial security for working people,
in hopes that we can partner with the
public sector in developing a solution
to these economic issues.
Unum 2011 Annual Report
7
Unum US
8
8
Unum 2011 Annual Report
Unum 2011 Annual Report
A Versatile Benefits Partner
The employers we serve are working
at the intersection of some very strong
crosswinds. Pressure to recruit and
retain a talented workforce runs
head-on into the need to manage
costs and successfully navigate a
volatile economy.
That same turbulence is buffeting
American workers as well, leaving
them on tenuous financial footing.
More than 60 percent of American
workers live paycheck to paycheck and
are ill-equipped to cope financially if
they can’t work due to illness or injury.
As our customers confront an
increasingly complex landscape, our
job is to act as knowledgeable, creative
partners who deliver the benefits
solutions and services they need. That
means helping employers manage
increasingly tight budgets while
providing their employees the right
mix of financial protection benefits
like disability, life, accident and critical
illness insurance.
At the center of this is the move from a
one-size-fits-all approach to a spectrum
of group and voluntary coverage that
offers employees greater choice —
and provides options to share the cost
between the employer and employee.
The potential effects of health care
reform will make voluntary benefits
even more essential to filling gaps
in coverage and complementing
consumer-driven health plans. Unum
US consistently invests in products,
services and capabilities to make these
coverages accessible, clear and valuable
to businesses and their employees.
That means listening to and learning
from our customers. It also means
understanding and meeting the needs
of an increasingly diverse workforce.
Our focus on serving Spanish-speaking
employees, for example, goes beyond
mere translation. We are committed
to understanding and responding to
cultural differences that influence
benefits decision-making.
The broad range of our product and
service offerings makes us both a
versatile benefits partner for employers
and a valued source of expertise and
guidance for their employees.
It also contributes to our solid operating
performance. Despite the distractions
of a turbulent economy, in 2011 Unum
US reported record pre-tax operating
income, generated sales growth well
above the industry average, and main-
tained some of the highest customer
satisfaction ratings in our history.
The shape of the challenges ahead
will almost certainly change, but
Unum’s flexibility and forward-thinking
solutions will consistently keep our
customers’ needs front and center.
“ Employers rely on us more than ever to provide and deliver the right benefits,
help them manage costs and strengthen their connections with employees.”
— Kevin McCarthy, Executive Vice President and Chief Operating Officer;
President and Chief Executive Officer, Unum US
Unum 2011 Annual Report
9
Addressing the Need for
a “Back-up Plan”
The prospect of continued difficult
economic times in the U.K. has
brought the need to take personal
responsibility for financial security
into sharp focus.
The ability to earn a living is one of our
most valuable assets. Yet only one in
10 private-sector employees in the U.K.
has income protection in the event
illness or injury prevents them from
working. One in five workers will
develop a long-term illness before
retirement. Most will recuperate from
it, but many will never recover from
the financial hardship. With income
protection benefits offered through the
workplace, we have a great opportu-
nity to change this.
In 2011, we broke new ground with the
launch of a comprehensive awareness
campaign educating people about the
need for a back-up plan — a safety net
to protect against the financial impact
of illness or injury. Using social media
supported by television advertising,
public relations activities and engagement
with public officials, we began making
the case for income protection benefits
among the U.K. workforce. This engage-
ment with multiple audiences has
sparked important conversations in
homes, at work and by the government
about the need for a back-up plan.
At the same time, we’re working with
employers and brokers to educate
them on the importance of income
protection benefits. With employers,
we’re showing them the value of
providing these benefits for all of
their workers — not just executives.
By debunking myths that income
protection is too expensive and creates
contractual ties to employees, we can
focus the employer on the affordability
and security it offers to both parties.
And through close collaboration with
our brokers, we are equipping them
with knowledge and understanding
so that they can confidently bring
income protection to the table in their
discussions with clients.
Through all the economic uncertainty
and change in the last few years, our
commitment to workers in the U.K.
has remained constant. By supporting
groundbreaking research, enhancing
our outreach to employers and staying
connected with policymakers, Unum
UK has acted as a strong advocate for
Britons and their need to have a
back-up plan in place.
During this time, we’ve broadened our
range of products to enable employers
to extend income protection to all their
workers, as well as led the market
in taking a more disciplined approach
to pricing — strategic decisions that
strengthened our business and created
a solid foundation on which to build
going forward. And at the end of 2011,
we began to see that work pay off
with excellent customer retention
rates, improving sales in key areas
and a strong return on equity.
Above all, we’ve stayed focused on
offering a customer experience that
is second to none. With every phone
call, every benefit payment, every
service we provide, the people in
the U.K. can count on us to be their
back-up plan.
“ By building public awareness of the need, developing more affordable products and partnering
with brokers and employers to help them appreciate the value of an income protection plan,
we will help ensure that U.K. workers get the back-up plan they deserve.”
— Jack McGarry, President and Chief Executive Officer, Unum UK
10
Unum 2011 Annual Report
Addressing the Need for
a “Back-up Plan”
Unum UK
Unum 2011 Annual Report
11
Colonial Life
The Power of
Personal Benefits Counseling
12
12
Unum 2011 Annual Report
Unum 2011 Annual Report
The Power of
Personal Benefits Counseling
“ Colonial Life is uniquely positioned to help businesses offer competitive, cost-effective benefits
packages and ensure their employees understand their needs and options so they can make
the best choices for themselves and their families.”
— Randy Horn, President and Chief Executive Officer, Colonial Life
Rising health care costs and continued
economic pressure are forcing employers
to seek more cost-effective, sustainable
benefit plans. At the same time, their
employees need access to affordable
coverage that gives them critical financial
protection. Colonial Life’s unique blend of
personal, voluntary insurance products and
benefit communication services meets
both needs by allowing employers to offer
customized solutions for their employees.
These benefits help fill gaps in employees’
financial safety nets and allow them to
select and pay for the type and amount
of protection they and their families
need. Our diverse portfolio of products
is carefully designed to meet changing
dynamics in the increasingly complex
benefits marketplace.
Nowhere is this more important than
in two traditionally underserved
markets: smaller businesses and public
sector employers.
employees may not otherwise have
access to.
Meanwhile, traditionally strong benefits
programs in the public sector are now
threatened by revenue shortfalls. Colonial
Life is reinforcing its already solid com-
mitment to the public sector market,
which accounted for 20 percent of
new business in 2011, through new
efforts such as a partnership with the
U.S. Conference of Mayors and research
projects with the Government Financial
Officers Association.
Smaller companies and over-stretched
public employers typically don’t have
the resources to conduct individual
benefits education sessions with each
employee. A key component of our
solution is personalized benefits educa-
tion and communication that ensures
employees understand their options
and appreciate their employer’s
investment in them.
Barely half of small- and mid-sized
companies currently provide voluntary
benefits. We offer effective, afford-
able solutions these employers and
This includes face-to-face meetings
with each employee to talk about the
employer’s entire benefits package,
including our voluntary options. These
sessions allow employees to understand
the full scope of their benefits options
and make choices that best fit their
specific financial protection needs. This
focus on communication and education
extends beyond the annual enrollment
period with tools such as our benefits
learning center website, which provides
ongoing education and helps employees
better understand the options available
to them.
Continuing to meet customer needs
has resulted in steady growth in sales
within our targeted markets, as well
as consistent operating income and
a solid return on equity despite a
challenging economy. Meanwhile,
independent surveys continue to
show very high satisfaction levels for
all of our customer groups.
The demand for benefits education
and affordable, personalized financial
protection is growing exponentially.
Colonial Life is well-positioned to meet
these needs and offer solutions both
employers and employees value.
Unum 2011 Annual Report
13
Directors and Officers
BOARD OF DIRECTORS
William J. Ryan
Chairman of the Board
of the Company;
Retired Chairman,
TD Banknorth Inc.
E. Michael Caulfield
Former President,
Mercer Human Resource Consulting
Pamela H. Godwin
President,
Change Partners, Inc.
Ronald E. Goldsberry
Automotive Industry Consultant
Kevin T. Kabat
President and Chief Executive Officer,
Fifth Third Bancorp
Thomas Kinser
Retired President and
Chief Executive Officer,
BlueCross BlueShield of Tennessee
Gloria C. Larson
President,
Bentley University
A.S. MacMillan, Jr.
Chief Executive Officer,
Triaxia Partners, Inc.
Edward J. Muhl
Retired National Leader,
PricewaterhouseCoopers LLP
Michael J. Passarella
Retired Managing Partner,
PricewaterhouseCoopers LLP
Thomas R. Watjen
President and Chief Executive Officer
of the Company
COMMITTEES OF THE BOARD
Audit Committee
Michael J. Passarella, Chairperson
E. Michael Caulfield
Kevin T. Kabat
Thomas Kinser
Finance Committee
E. Michael Caulfield, Chairperson
Pamela H. Godwin
Ronald E. Goldsberry
Governance Committee
Ronald E. Goldsberry, Chairperson
Pamela H. Godwin
Gloria C. Larson
Human Capital Committee
A.S. MacMillan, Jr., Chairperson
Kevin T. Kabat
Thomas Kinser
Edward J. Muhl
Regulatory Compliance Committee
Gloria C. Larson, Chairperson
A.S. MacMillan, Jr.
Edward J. Muhl
Michael J. Passarella
SENIOR OFFICERS
Thomas R. Watjen
President and Chief
Executive Officer
Liston Bishop III
Executive Vice President and
General Counsel
Randall C. Horn
President and Chief
Executive Officer,
Colonial Life
Kevin P. McCarthy
Executive Vice President and
Chief Operating Officer;
President and Chief
Executive Officer,
Unum US
Jack F. McGarry
President and Chief
Executive Officer,
Unum UK
Richard P. McKenney
Executive Vice President and
Chief Financial Officer
Eileen C. Farrar
Senior Vice President,
Human Resources
Breege A. Farrell
Senior Vice President and
Chief Investment Officer
Joseph R. Foley
Senior Vice President and
Chief Marketing Officer
Christopher J. Jerome
Senior Vice President,
Global Services
14
Unum 2011 Annual Report
2011
Financial Review
16 Selected Financial Data
18
82
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures
About Market Risk
90 Consolidated Balance Sheets
92 Consolidated Statements of Income
93 Consolidated Statements of Stockholders’ Equity
94 Consolidated Statements of Cash Flows
95
Consolidated Statements
of Comprehensive Income
96 Notes to Consolidated Financial Statements
163
Reports of Independent Registered
Public Accounting Firm and Management’s
Annual Report on Internal Control Over
Financial Reporting
166
Cautionary Statement Regarding
Forward-Looking Statements
167 Appendix
15
Unum 2011 Annual Report Selected Financial Data
(in millions of dollars, except share data)
2011
2010
2009
2008
2007
At or for the Year Ended December 31
Income Statement Data
Revenue
Premium Income
Net Investment Income
Net Realized Investment Gain (Loss)
Other Income
Total
Benefits and Expenses
$ 7,514.2
$ 7,431.4
$ 7,475.5
$ 7,783.3
$ 7,901.1
2,519.6
2,495.5
2,346.6
2,389.0
2,409.9
(4.9)
249.1
24.7
241.6
11.7
257.2
(465.9)
275.9
(65.2)
274.1
10,278.0
10,193.2
10,091.0
9,982.3
10,519.9
Benefits and Change in Reserves for Future Benefits (1)
7,209.5
6,354.1
6,291.6
6,626.4
6,988.2
Commissions
Interest and Debt Expense (2)
Other Expenses (3)
Total
Income from Continuing Operations Before Income Tax
Income Tax (4)
Income from Continuing Operations
Income from Discontinued Operations
Net Income
Balance Sheet Data
Assets
Long-term Debt
879.2
143.3
1,788.8
10,020.8
257.2
21.8
235.4
—
855.4
141.8
1,510.6
8,861.9
1,331.3
445.2
886.1
—
837.1
125.4
853.3
156.7
1,544.6
1,521.9
8,798.7
9,158.3
1,292.3
439.7
852.6
—
824.0
270.8
553.2
—
841.1
241.9
1,451.5
9,522.7
997.2
324.8
672.4
6.9
$ 235.4
$ 886.1
$ 852.6
$ 553.2
$ 679.3
$60,179.0
$57,307.7
$54,477.0
$49,417.4
$52,701.9
$ 2,570.2
$ 2,631.3
$ 2,549.6
$ 2,259.4
$ 2,515.2
Accumulated Other Comprehensive Income (Loss)
$ 448.9
$ 341.9
$ 341.0
$ (958.2)
$ 463.5
Other Stockholders’ Equity
Total Stockholders’ Equity
8,128.1
8,602.5
8,159.1
7,356.1
7,576.4
$ 8,577.0
$ 8,944.4
$ 8,500.1
$ 6,397.9
$ 8,039.9
16
Unum 2011 Annual Report
2011
Unum
Per Share Data
Income from Continuing Operations
Basic
Assuming Dilution
Income from Discontinued Operations
Basic
Assuming Dilution
Net Income
Basic
Assuming Dilution
Stockholders’ Equity
Cash Dividends
At or for the Year Ended December 31
2011
2010
2009
2008
2007
$ 0.78
$ 0.78
$ —
$ —
$ 0.78
$ 0.78
$29.30
$0.395
$ 2.72
$ 2.71
$ —
$ —
$ 2.72
$ 2.71
$28.25
$0.350
$ 2.57
$ 2.57
$ —
$ —
$ 2.57
$ 2.57
$25.62
$0.315
$ 1.62
$ 1.62
$ —
$ —
$ 1.62
$ 1.62
$19.32
$0.300
$ 1.90
$ 1.89
$ 0.02
$ 0.02
$ 1.92
$ 1.91
$22.28
$0.300
Weighted Average Common Shares Outstanding
Basic (000s)
Assuming Dilution (000s)
302,399.8
325,839.0
331,266.2
341,022.8
352,969.1
303,571.0
327,221.1
332,136.2
341,560.3
355,776.5
(1) Included is a reserve charge of $573.6 million in 2011 related to our long-term care business; a reserve charge of $183.5 million in 2011 related to our individual disability
closed block business; and a regulatory claim reassessment charge of $65.8 million in 2007. See Note 5 of the “Notes to Consolidated Financial Statements” contained
herein for further discussion of the long-term care and individual disability closed block reserve charges.
(2) Included are costs related to early retirement of debt of $0.4 million and $58.8 million in 2008 and 2007, respectively.
(3) Includes the net increase in deferred acquisition costs, compensation expense, and other expenses. Included in these expenses are charges of $289.8 million in 2011
related to the impairment of long-term care deferred acquisition costs and regulatory claim reassessment credits of $12.8 million in 2007. See Note 5 of the “Notes to
Consolidated Financial Statements” contained herein for further discussion of the impairment of long-term care deferred acquisition costs.
(4) Included are a $41.3 million reduction of income tax in 2011 related to a tax settlement; an income tax charge of $18.6 million in 2011 related to repatriation of dividends
from our U.K. subsidiaries; and an income tax charge of $10.2 million in 2010 to reflect the impact of a tax law change.
Unum 2011 Annual Report
17
The discussion and analysis presented in this section should be read in conjunction with our Consolidated Financial Statements
and notes thereto.
Executive Summary
During 2011, our focus continued to be on disciplined top-line growth and capital management. Objectives for 2011 included:
• Continue to consistently execute against our operating plans, which emphasize disciplined, profitable growth;
• Further enhance our financial flexibility through solid operating and investment performance and a sustainable capital deployment
strategy;
• Leverage our capabilities, products, relationships, and reputation to deliver on our commitments as well as our bottom-line targets;
• Continue to invest in our businesses and leverage global capabilities to capitalize on current and future growth opportunities.
A discussion of our operating performance and capital management follows.
2011 Operating Performance and Capital Management
For 2011 we reported net income of $235.4 million, or $0.78 per diluted common share, compared to $886.1 million, or $2.71 per
diluted common share, for 2010. After-tax operating income was $896.8 million, or $2.95 per diluted common share, in 2011 compared to
$880.6 million, or $2.69 per diluted common share, in 2010. Separate and distinct from our underlying operating results and excluded from
after-tax operating income are the fourth quarter of 2011 charges related to our long-term care product line strategic review as well as a
claim reserve increase in our individual disability closed block of business to reflect our current estimate of future benefit obligations. Also
excluded from after-tax operating income are a reduction in our 2011 income tax resulting from a tax settlement, an increase in our 2011
income tax related to dividends from our U.K. subsidiaries, and an increase in our 2010 income tax related to the impact of the tax law
change associated with healthcare reform. Our 2011 net income per share and after-tax operating income per share, as compared to the
prior year period, benefited from the repurchase of our common stock during 2011 and 2010.
Total operating revenue in 2011 by segment was marginally higher than 2010, with the current economic environment continuing to
negatively impact our premium growth. Total operating income by segment, excluding the charges related to our long-term care and
individual disability closed blocks of business, was generally consistent with the level of 2010, with higher earnings in Unum US partially
offset by lower earnings in our other core segments, as well as lower earnings in the Corporate segment. See additional information
presented in this “Executive Summary” under “Long-term Care Strategic Review” and “Claim Reserve Increase for Individual Disability
Closed Block Business” as well as “Consolidated Operating Results” and “Reconciliation of Non-GAAP Financial Measures” contained herein.
Our Unum US segment reported an increase in segment operating income of 6.6 percent in 2011 compared to 2010, with higher
operating revenue and favorable risk results. The benefit ratio for the Unum US segment for 2011 was 72.5 percent, compared to
73.4 percent in 2010, with favorable risk results for the supplemental and voluntary products partially offset by less favorable risk results for
the group disability and group life and accidental death and dismemberment products as compared to 2010. Although Unum US premium
income increased slightly in 2011 compared to 2010, the ongoing high levels of unemployment and the competitive environment
continued to pressure our premium income growth. In particular, premium growth from existing customers throughout 2011 continued to
be unfavorably impacted by lower salary growth and lower growth in the number of employees covered under existing policies. Unum US
sales increased 9.9 percent in 2011 compared to 2010. We experienced sales increases in nearly all of our product lines and market
segments in 2011 compared to 2010. Voluntary benefits sales increased 6.3 percent in 2011 compared to 2010. Our group core market
segment, which we define for Unum US as employee groups with fewer than 2,000 lives, reported sales increases of 9.6 percent in 2011
relative to 2010. Persistency, although below the level of last year for some of our Unum US product lines, remains high relative to
historical levels.
18
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations 2011
Unum
Our Unum UK segment reported a decrease in segment operating income of 11.5 percent in 2011, as measured in Unum UK’s local
currency, relative to 2010. The decrease was driven by less favorable risk results and higher expenses related to Unum UK’s growth plans.
Premium income grew 1.9 percent in 2011 relative to 2010, although premium growth continued to be pressured by pricing actions
resulting from the competitive U.K. market. The benefit ratio for Unum UK was 71.8 percent in 2011 compared to 67.0 percent in 2010,
driven by less favorable risk experience in group long-term disability. Unum UK sales, which were also negatively impacted by the
economy and the competitive pricing environment, declined 18.8 percent relative to 2010, as measured in Unum UK’s local currency.
Persistency in 2011 was below the level of 2010 but remains strong.
Our Colonial Life segment operating income in 2011 was consistent with the level of 2010. Although premium income grew
5.5 percent in 2011 compared to 2010, risk results were less favorable, with an overall benefit ratio of 51.9 percent in 2011 compared to
49.7 percent in 2010, due primarily from less favorable risk results in the accident, sickness, and disability product line. Colonial Life’s sales
increased 2.0 percent in 2011 relative to 2010. The number of new agent contracts increased 6.8 percent in 2011 relative to 2010, but the
number of new accounts declined by 1.8 percent. Persistency in 2011 was below the level of 2010 but remains strong.
Our investment portfolio continued to perform well, with an increase in net investment income of 1.0 percent in 2011 relative to 2010.
The net unrealized gain on our fixed maturity securities was $5.8 billion at December 31, 2011, compared to $3.5 billion at December 31,
2010, driven primarily by a decline in U.S. Treasury rates.
We believe our capital and financial positions are strong. At December 31, 2011, the risk-based capital (RBC) ratio for our traditional
U.S. insurance subsidiaries, calculated on a weighted average basis using the NAIC Company Action Level formula, was approximately
405 percent, compared to 398 percent at December 31, 2010. Our leverage ratio, when calculated using consolidated debt to total
consolidated capital, was 27.6 percent at December 31, 2011, compared to 25.9 percent at December 31, 2010. The increase was due
primarily to $312.3 million of securities lending agreements outstanding at December 31, 2011, partially offset by the 2011 maturity of
$225.1 million of senior notes and our 2011 principal payments on the debt of Northwind Holdings, LLC (Northwind Holdings) and Tailwind
Holdings, LLC (Tailwind Holdings). Our leverage ratio, when calculated excluding the non-recourse debt and associated capital of Northwind
Holdings and Tailwind Holdings and the short-term debt arising from securities lending agreements, was 22.4 percent at December 31,
2011, compared to 22.8 percent at December 31, 2010. The cash and marketable securities at our holding companies equaled
approximately $756 million at December 31, 2011, compared to $1.2 billion at December 31, 2010. During 2011, we repurchased
25.4 million shares of Unum Group’s common stock at a cost of $619.9 million. We have completed the $500.0 million share repurchase
program authorized in 2010 and purchased $475.3 million under our $1.0 billion share repurchase program authorized in February 2011.
Despite the difficult economic environment, we continue to make steady and disciplined progress, executing on our business plans
and maintaining our strong financial position. We remain cautious of the near-term outlook for employment levels and wages, both of
which limit opportunities for premium growth, but we believe we are poised to profitably grow as employment trends improve.
Further discussion is included in “Segment Results,” “Investments,” and “Liquidity and Capital Resources” contained herein.
Long-term Care Strategic Review
Following a comprehensive and strategic review of our long-term care business, in February 2012 we announced that we would
discontinue selling group long-term care. We discontinued selling individual long-term care during 2009. Because both group and individual
long-term care are now considered closed blocks of business, effective December 31, 2011, we reclassified our long-term care products
from the Unum US segment to the Closed Block segment. We also reclassified our other insurance products not actively marketed, including
individual life and corporate-owned life insurance, reinsurance pools and management operations, group pension, health insurance, and
individual annuities, which were previously reported in the Corporate and Other segment to the Closed Block segment. The inclusion of all
closed blocks of business into one operating segment aligns with our reporting and monitoring of our closed blocks of business within a
discrete segment and is consistent with our separation of these blocks of business from the lines of business which actively market new
products. Prior period segment results have been restated to reflect these changes in our reporting classifications.
Unum 2011 Annual Report
19
As part of the strategic review, and as is typical in the fourth quarter of each year, we analyzed our reserve assumptions for long-term
care in conjunction with our annual loss recognition testing. We generally perform loss recognition tests on our deferred acquisition costs
and policy reserves in the fourth quarter of each year, but more frequently if appropriate, using best estimate assumptions as of the date of
the test. Included in the analysis was a review of our reserve discount rate assumptions and mortality and morbidity assumptions. Our
analysis of reserve discount rate assumptions considered the significant decline in long-term interest rates which occurred late in the third
quarter of 2011 due to the European Union debt crisis and the Federal Reserve Board’s actions, including the announcement of “Operation
Twist.” We also considered an updated industry study for long-term care experience which was made available mid-year 2011 from the
Society of Actuaries. Our analysis of this study, which was completed during the fourth quarter of 2011, showed that lower termination
rates than we had previously assumed were beginning to emerge in industry and in our own company experience. Based on our analysis,
as of December 31, 2011 we lowered the discount rate assumption to reflect the low interest rate environment and our expectation of
future investment portfolio yield rates. We also changed our mortality assumptions to reflect emerging experience due to an increase in life
expectancies which increases the ultimate number of people who will utilize long-term care benefits and also lengthens the amount of
time a claimant receives long-term care benefits. We changed our morbidity assumptions to reflect emerging industry experience as well
as our own company experience. While our morbidity experience is still emerging and is not fully credible, we modified our assumptions to
align more closely with the recently published industry study. Using our revised best estimate assumptions, as of December 31, 2011 we
determined that deferred acquisition costs of $289.8 million were not recoverable and that our policy and claim reserves should be
increased by $573.6 million to reflect our current estimate of future benefit obligations. These charges decreased our 2011 net income by
$561.2 million. The increase in reserves represented a 10.5 percent increase in long-term care policy and claim reserves as of December 31,
2011, which equal $5.4 billion subsequent to the charge.
Claim Reserve Increase for Individual Disability Closed Block Business
Claim reserves supporting our individual disability closed block of business are calculated using assumptions based on actual
experience believed to be currently appropriate. Claim reserves are subject to revision as current claim experience emerges and alters our
view of future expectations. Claim resolution rates, which measure the resolution of claims from recovery, deaths, settlements, and benefit
expirations, are very sensitive to operational and environmental changes and can be volatile. Our claim resolution rate assumption used in
determining reserves is our expectation of the resolution rate we will experience over the life of the block of business. We are now able,
with a higher degree of confidence, to assess our own experience for older ages in our long duration lifetime claim block as our data has
become credible. There is very little industry experience for lifetime disability benefits, as our insurance companies were the primary
disability companies in the insurance industry at the time lifetime disability benefits were offered. These benefits were offered during the
1980s and 1990s, recent enough such that claimants are just reaching the older ages and providing us with data to build our claim
experience base. Emerging experience indicates a longer life expectancy for our older age, longer duration disabled claimants, which
lengthens the time a claimant receives disability benefits. As a result of this experience, as of December 31, 2011 we adjusted our mortality
assumption within our claim resolution rate assumption and, as a result, increased our claim reserves for our individual disability closed
block of business by $183.5 million and decreased net income by $119.3 million. The increase in reserves represented a 1.5 percent increase
in individual disability policy and claim reserves as of December 31, 2011, which equal $11.9 billion subsequent to the charge.
Outlook for 2012
During 2012, we intend to remain focused on disciplined top-line growth in select markets and a sustainable capital generation and
deployment strategy. We continue to believe that our strategy of delivering a broad set of financial protection choices to employees while
also enabling employers to define their financial contribution in support of those choices should enable us to continue in a leadership
position in our markets over the long term.
20
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations 2011
Unum
Critical Accounting Estimates
We prepare our financial statements in accordance with GAAP. The preparation of financial statements in conformity with GAAP
requires us to make estimates and assumptions that affect amounts reported in our financial statements and accompanying notes.
Estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported
and disclosed in our financial statements. The accounting estimates deemed to be most critical to our financial position and results of
operations are those related to reserves for policy and contract benefits, deferred acquisition costs, valuation of investments, pension and
postretirement benefit plans, income taxes, and contingent liabilities. For additional information, refer to our significant accounting policies
in Note 1 of the “Notes to Consolidated Financial Statements” contained herein.
Reserves for Policy and Contract Benefits
Our largest liabilities are reserves for claims that we estimate we will eventually pay to our policyholders. The two primary categories
of reserves are policy reserves for claims not yet incurred and claim reserves for claims that have been incurred or are estimated to have
been incurred but not yet reported to us. These reserves equaled $39.3 billion and $38.2 billion at December 31, 2011 and 2010,
respectively, or approximately 76.2 percent and 78.9 percent of our total liabilities, respectively. Reserves ceded to reinsurers were
$6.7 billion at both December 31, 2011 and 2010, and are reported as a reinsurance recoverable in our consolidated balance sheets.
Policy Reserves
Policy reserves are established in the same period we issue a policy and equal the difference between projected future policy benefits
and future premiums, allowing a margin for expenses and profit. These reserves relate primarily to our traditional non interest-sensitive
products, including our individual disability and voluntary benefits products in our Unum US segment; individual disability products in our
Unum UK segment; disability and cancer and critical illness policies in our Colonial Life segment; and individual disability and long-term care
products in our Closed Block segment. The reserves are calculated based on assumptions that were appropriate at the date the policy was
issued and are not subsequently modified unless the policy reserves become inadequate (i.e. loss recognition occurs).
• Persistency assumptions are based on our actual historical experience adjusted for future expectations.
• Claim incidence and claim resolution rate assumptions related to mortality and morbidity are based on actual experience or industry
standards adjusted as appropriate to reflect our actual experience and future expectations.
• Discount rate assumptions are based on our current and expected net investment returns.
In establishing policy reserves, we use assumptions that reflect our best estimate while considering the potential for adverse
variances in actual future experience, which results in a total policy reserve balance that has an embedded reserve for adverse deviation.
We do not, however, establish an explicit and separate reserve as a provision for adverse deviation from our assumptions.
We perform loss recognition tests on our policy reserves annually, or more frequently if appropriate, using best estimate assumptions
as of the date of the test, without a provision for adverse deviation. We group the policy reserves for each major product line within a
segment when we perform the loss recognition tests. If the policy reserves determined using these best estimate assumptions are higher
than our existing policy reserves net of any deferred acquisition cost balance, the existing policy reserves are increased or deferred
acquisition costs are reduced to immediately recognize the deficiency. Thereafter, the policy reserves for the product line are calculated
using the same method we used for the loss recognition testing, referred to as the gross premium valuation method, wherein we use our
best estimate as of the gross premium valuation (loss recognition) date rather than the initial policy issue date to determine the expected
future claims, commissions, and expenses we will pay and the expected future gross premiums we will receive.
Because the key policy reserve assumptions for policy persistency, mortality and morbidity, and discount rates are all locked in at
policy issuance based on assumptions appropriate at that time, policy reserve assumptions are generally not changed due to a change in
claim status from active to disabled subsequent to policy issuance. Therefore, we maintain policy reserves for a policy for as long as the
policy remains in-force, even after a separate claim reserve is established. Incidence rates in industry standard valuation tables for policy
reserves have traditionally included all lives, active and disabled. In addition, the waiver of premium provision provides funding for the
Unum 2011 Annual Report
21
policy reserve while a policyholder is disabled. As a result, the funding mechanisms and the cost of claims are aligned and require a policy
reserve to be held while on claim. In addition, most policies allow for multiple occurrences of claims, and a policy reserve is consequently
still maintained at the time of claim to fund any potential future claims. The policy reserves build up and release over time based on
assumptions made at the time of policy issuance such that the reserve is eliminated as policyholders reach the terminal age for coverage,
die, or voluntarily lapse the policy. Policy reserves for Unum US, Unum UK, and Colonial Life products, which at December 31, 2011
represented approximately 11.9 percent, 0.2 percent, and 9.5 percent, respectively, of our total gross policy reserves, are determined using
the net level premium method as prescribed by GAAP. In applying this method, we use, as applicable by product type, morbidity and
mortality incidence rate assumptions, claim resolution rate assumptions, and policy persistency assumptions, among others, to determine
our expected future claim payments and expected future premium income. We then apply an interest, or discount, rate to determine the
present value of the expected future claims and claim expenses we will pay and the expected future premiums we will receive, with a
provision for profit allowed.
Policy reserves for our Closed Block segment include certain older policy forms for individual disability, individual and group long-term
care, and certain other products, all of which are no longer actively marketed. The reserves for individual disability and individual and group
long-term care, which represented approximately 39.7 percent of our total gross policy reserves at December 31, 2011, are determined
using the gross premium valuation method. Reserves for individual disability are based on assumptions established as of January 1, 2004,
the date of loss recognition. Reserves for long-term care are based on assumptions established as of December 31, 2011, the date of loss
recognition. Key assumptions are persistency, mortality, claim incidence, claim resolution rates, commission rates, and maintenance
expense rates. We apply an interest, or discount, rate to determine the present value of the expected future claims, commissions, and
expenses we will pay as well as the expected future premiums we will receive, with no provision for future profit. The interest rate is based
on our expected net investment returns on the investment portfolio supporting the reserves for these blocks of business. Under the gross
premium valuation method, we do not include an embedded provision for the risk of adverse deviation from these assumptions. Gross
premium valuation assumptions do not change after the date of loss recognition unless reserves are again determined to be deficient.
We perform loss recognition tests on the policy reserves for this block of business annually, or more frequently if appropriate.
Policy reserves for certain other products no longer actively marketed and reported in our Closed Block segment represent $5.7 billion
on a gross basis, or approximately 38.7 percent of our total policy reserves. We have ceded $4.4 billion of the related policy reserves to
reinsurers. The ceded reserve balance is reported in our consolidated balance sheets as a reinsurance recoverable. We continue to service a
block of group pension products, which we have not ceded, and the policy reserves for these products are based on expected mortality
rates and retirement rates. Expected future payments are discounted at interest rates reflecting the anticipated investment returns for the
assets supporting the liabilities.
Claim Reserves
Claim reserves are established when a claim is incurred or is estimated to have been incurred but not yet reported (IBNR) to us and, as
prescribed by GAAP, equals our long-term best estimate of the present value of the liability for future claim payments and claim adjustment
expenses. A claim reserve is based on actual known facts regarding the claim, such as the benefits available under the applicable policy,
the covered benefit period, and the age and occupation of the claimant, as well as assumptions derived from our actual historical
experience and expected future changes in experience for factors such as the claim duration and discount rate. Reserves for IBNR claims,
similar to incurred claim reserves, include our assumptions for claim duration and discount rates but because we do not yet know the facts
regarding the specific claims, are also based on historical incidence rate assumptions, including claim reporting patterns, the average cost
of claims, and the expected volumes of incurred claims. Our incurred claim reserves and IBNR claim reserves do not include any provision
for the risk of adverse deviation from our assumptions.
Claim reserves, unlike policy reserves, are subject to revision as current claim experience and projections of future factors affecting
claim experience change. Each quarter we review our emerging experience to ensure that our claim reserves are appropriate. If we believe,
based on our actual experience and our view of future events, that our long-term assumptions need to be modified, we adjust our reserves
accordingly with a charge or credit to our current period income.
22
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations 2011
Unum
Multiple estimation methods exist to establish claim reserve liabilities, with each method having its own advantages and
disadvantages. Available reserving methods utilized to calculate claim reserves include the tabular reserve method, the paid development
method, the incurred loss development method, the count and severity method, and the expected claim cost method. No single method is
better than the others in all situations and for all product lines. The estimation methods we have chosen are those that we believe produce
the most reliable reserves.
Claim reserves supporting our Unum US group and individual disability product lines and our Closed Block individual disability and
individual and group long-term care product lines represent approximately 36.6 percent and 46.8 percent, respectively, of our total claim
reserves at December 31, 2011. We use a tabular reserve methodology for group and individual long-term disability and group and
individual long-term care claims that have been reported. Under the tabular reserve methodology, reserves for reported claims are based
on certain characteristics of the actual reported claimants, such as age, length of time disabled, and medical diagnosis. We believe the
tabular reserve method is the most accurate to calculate long-term liabilities and allows us to use the most available known facts about
each claim. IBNR claim reserves for our long-term products are calculated using the count and severity method using historical patterns of
the claims to be reported and the associated claim costs. For Unum US group short-term disability products, an estimate of the value of
future payments to be made on claims already submitted, as well as IBNR claims, is determined in aggregate rather than on the individual
claimant basis that we use for our long-term products, using historical patterns of claim incidence as well as historical patterns of aggregate
claim resolution rates. The average length of time between the event triggering a claim under a policy and the final resolution of those
claims is much shorter for these products than for our long-term liabilities and results in less estimation variability.
Claim reserves supporting the Unum US group life and accidental death and dismemberment products represent approximately
3.8 percent of our total claim reserves at December 31, 2011. Claim reserves for these products are related primarily to death claims
reported but not yet paid, IBNR death claims, and a liability for waiver of premium benefits. The death claim reserve is based on the actual
face amount to be paid, the IBNR reserve is calculated using the count and severity method, and the waiver of premium benefits reserve
is calculated using the tabular reserve methodology.
Claim reserves supporting our Unum UK segment represent approximately 9.1 percent of our total claim reserves at December 31,
2011, and are calculated using generally the same methodology that we use for Unum US disability and group life reserves. The
assumptions used in calculating claim reserves for this line of business are based on standard United Kingdom industry experience,
adjusted for Unum UK’s own experience.
The majority of the Colonial Life segment lines of business have short-term benefits, which generally have less estimation variability
than our long-term products because of the shorter claim payout period. Our claim reserves for Colonial Life’s lines of business, which
approximate 1.4 percent of our total claim reserves at December 31, 2011, are predominantly determined using the incurred loss
development method based on our own experience. The incurred loss development method uses the historical patterns of payments by
loss date to predict future claim payments for each loss date. Where the incurred loss development method may not be appropriate, we
estimate the incurred claims using an expected claim cost per policy or other measure of exposure. The key assumptions for claim reserves
for the Colonial Life lines of business are: (1) the timing, rate, and amount of estimated future claim payments; and (2) the estimated
expenses associated with the payment of claims.
The following table displays policy reserves, incurred claim reserves, and IBNR claim reserves by major product line, with the
summation of the policy reserves and claim reserves shown both gross and net of the associated reinsurance recoverable. Incurred claim
reserves represent reserves determined for each incurred claim and also include estimated amounts for litigation expenses and other
expenses associated with the payment of the claims as well as provisions for claims which we estimate will be reopened for our long-term
care products. IBNR claim reserves include provisions for incurred but not reported claims and a provision for reopened claims for our
disability products. The IBNR and reopened claim reserves for our disability products are developed and maintained in aggregate based on
historical monitoring that has only been on a combined basis.
Unum 2011 Annual Report
23
December 31, 2011
Gross
Claim Reserves
%
Incurred
IBNR
%
Total
Total
Reinsurance
Ceded
Total
Net
Policy
Reserves
$
—
—% $ 7,230.0
$ 595.7
31.8% $ 7,825.7 $ 63.8 $ 7,761.9
(in millions of dollars)
Group Disability
Group Life and Accidental
Death & Dismemberment
74.3
0.5
780.5
146.2
3.8
1,001.0
1.0
1,000.0
Individual Disability —
Recently Issued
Voluntary Benefits
Unum US Segment
Unum UK Segment
Colonial Life Segment
Individual Disability
Long-term Care
Other
546.7
1,138.6
3.7
7.7
1,759.6
11.9
26.2
1,399.5
1,112.3
4,728.3
5,687.9
0.2
9.5
7.6
32.1
38.7
1,063.9
42.1
9,116.5
2,118.7
243.2
104.5
45.8
892.2
121.4
90.1
4.8
0.3
40.7
9.1
1.4
1,715.1
1,226.5
11,768.3
2,266.3
1,732.8
91.0
26.5
182.3
108.1
12.2
1,624.1
1,200.0
11,586.0
2,158.2
1,720.6
10,494.0
299.1
43.9
11,905.4
1,477.2
10,428.2
667.8
306.5
50.3
186.7
2.9
2.0
5,446.4
48.2
6,181.1
4,824.6
5,398.2
1,356.5
Closed Block Segment
11,528.5
78.4
11,468.3
536.1
48.8
23,532.9
6,350.0
17,182.9
Subtotal, Excl. Unrealized Adj.
$14,713.8 100.0% $22,946.7 $1,639.8 100.0%
39,300.3
6,652.6
32,647.7
Unrealized Adjustment to Reserves
for Unrealized Gain on Securities
Consolidated
5,245.6
293.2
4,952.4
$44,545.9 $6,945.8 $37,600.1
December 31, 2010
Gross
Claim Reserves
%
Incurred
IBNR
%
Total
Total
Reinsurance
Ceded
Total
Net
Policy
Reserves
Group Disability
$ —
—% $ 7,480.2
$ 590.2
33.2%
$ 8,070.4 $ 69.4 $ 8,001.0
Group Life and Accidental
Death & Dismemberment
72.9
0.5
783.7
152.8
3.8
1,009.4
1.5
1,007.9
Individual Disability—
Recently Issued
Voluntary Benefits
Unum US Segment
Unum UK Segment
Colonial Life Segment
Individual Disability
Long-term Care
Other
Closed Block Segment
534.5
1,060.3
3.9
7.7
1,667.7
12.1
26.6
1,318.0
1,249.1
3,867.1
5,703.8
10,820.0
0.2
9.5
9.0
27.9
41.3
78.2
1,005.1
24.1
9,293.1
2,057.6
228.9
99.9
59.0
901.9
142.7
78.6
4.5
0.4
41.9
9.0
1.3
1,639.5
1,143.4
11,862.7
2,226.9
1,625.5
88.3
24.8
184.0
105.6
17.8
1,551.2
1,118.6
11,678.7
2,121.3
1,607.7
10,335.3
309.6
43.7
11,894.0
1,457.4
10,436.6
391.6
364.7
38.5
196.9
1.8
2.3
4,297.2
47.8
6,265.4
4,860.1
4,249.4
1,405.3
11,091.6
545.0
47.8
22,456.6
6,365.3
16,091.3
Subtotal, Excl. Unrealized Adj.
$13,832.3 100.0% $22,671.2
$1,668.2
100.0%
38,171.7
6,672.7
31,499.0
Unrealized Adjustment to Reserves
for Unrealized Gain on Securities
Consolidated
24
Unum 2011 Annual Report
3,108.3
159.0
2,949.3
$41,280.0 $6,831.7 $34,448.3
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2011
Unum
Key Assumptions
The calculation of policy and claim reserves involves numerous assumptions, but the primary assumptions used to calculate reserves
are (1) the discount rate, (2) the claim resolution rate, and (3) the claim incidence rate for policy reserves and IBNR claim reserves. Of these
assumptions, our discount rate and claim resolution rate assumptions have historically had the most significant effects on our level of
reserves because many of our product lines provide benefit payments over an extended period of time.
1. The discount rate, which is used in calculating both policy reserves and incurred and IBNR claim reserves, is the interest rate that
we use to discount future claim payments to determine the present value. A higher discount rate produces a lower reserve. If the
discount rate is higher than our future investment returns, our invested assets will not earn enough investment income to support
our future claim payments. In this case, the reserves may eventually be insufficient. We set our assumptions based on our current
and expected future investment yield of the assets supporting the reserves, considering current and expected future market
conditions. If the investment yield on new investments that are purchased is below or above the investment yield of the existing
investment portfolio, it is likely that the discount rate assumption on claims will be established to reflect the effect of the new
investment yield.
2. The claim resolution rate, used for both policy reserves and incurred and IBNR claim reserves, is the probability that a disability or
long-term care claim will close due to recovery or death of the insured. It is important because it is used to estimate how long
benefits will be paid for a claim. Estimated resolution rates that are set too high will result in reserves that are lower than they need
to be to pay the claim benefits over time. Claim resolution assumptions involve many factors, including the cause of disability,
the policyholder’s age, the type of contractual benefits provided, and the time since initially becoming disabled. We primarily use
our own claim experience to develop our claim resolution assumptions. These assumptions are established for the probability of
death and the probability of recovery from disability. Our studies review actual claim resolution experience over a number of years,
with more weight placed on our experience in the more recent years. We also consider any expected future changes in claim
resolution experience.
3. The incidence rate, used for policy reserves and IBNR claim reserves, is the rate at which new claims are submitted to us. The
incidence rate is affected by many factors, including the age of the insured, the insured’s occupation or industry, the benefit plan
design, and certain external factors such as consumer confidence and levels of unemployment. We establish our incidence
assumption using a historical review of actual incidence results along with an outlook of future incidence expectations.
Establishing reserve assumptions is complex and involves many factors. Reserves, particularly for policies offering insurance coverage
for long-term disabilities and long-term care, are dependent on numerous assumptions other than just those presented in the preceding
discussion. The impact of internal and external events, such as changes in claims management procedures, economic trends such as the
rate of unemployment and the level of consumer confidence, the emergence of new diseases, new trends and developments in medical
treatments, and legal trends and legislative changes, among other factors, will influence claim incidence and resolution rates. In addition,
for policies offering coverage for disability or long-term care at advanced ages, the level and pattern of mortality rates at advanced ages
will impact overall benefit costs. Reserve assumptions differ by product line and by policy type within a product line. Additionally, in any
period and over time, our actual experience may have a positive or negative variance from our long-term assumptions, either singularly or
collectively, and these variances may offset each other. We test the overall adequacy of our reserves using all assumptions and with a
long-term view of our expected experience over the life of a block of business rather than test just one or a few assumptions
independently that may be aberrant over a short period of time. Therefore it is not possible to bifurcate the assumptions to evaluate the
sensitivity of a change in each assumption, but rather in the aggregate by product line. We have presented in the following section an
overview of our trend analysis for key assumptions and the results of variability in our assumptions, in aggregate, for the reserves which
we believe are reasonably possible to have a material impact on our future financial results if actual claims yield a materially different
amount than what we currently expect and have reserved for, either favorable or unfavorable.
Unum 2011 Annual Report
25
Trends in Key Assumptions
Generally, we do not expect our mortality and morbidity claim incidence trends or our persistency trends to change significantly
in the short-term, and to the extent that these trends do change, we expect those changes to be gradual over a longer period of time.
However, we have historically experienced an increase in our group long-term disability morbidity claim incidence trends during and
following a recessionary period, particularly in our Unum US operations. During 2011, claim incidence rates for Unum US group long-term
disability were slightly elevated. Given the current economic conditions, it is possible that our claim incidence rates for this type of product
may increase.
During the fourth quarter of 2011, we completed an extensive review of experience factors for our long-term care business using
emerging industry experience as well as our own company experience. An updated industry study for long-term care experience was
made available mid-year 2011 from the Society of Actuaries which allowed us to compare our limited company experience to broader
industry experience and trends. The trends reflected in emerging industry experience, as well as our own company experience, resulted
in a modification to our mortality and morbidity assumptions, which together with the decline in interest rates as noted below, resulted in
our recognition of a loss deficiency in our long-term care closed block of business as of December 31, 2011. See “Long-term Care Strategic
Review” contained herein.
Throughout the period 2009 to 2011, actual new money interest rates varied with the changing market conditions, and the
assumptions we used to discount our reserves generally trended downward slightly for all segments and product lines. Late in the third
quarter of 2011, long-term interest rates declined significantly due to the European Union debt crisis and the Federal Reserve Board’s
actions, including the announcement of “Operation Twist.” Reserve discount rate assumptions for new policies and new claims have been
adjusted to reflect our current and expected net investment returns. Changes in our average discount rate assumptions tend to occur
gradually over a longer period of time because of the long-duration investment portfolio needed to support the reserves for the majority
of our lines of business.
Both the mortality rate experience and the retirement rate experience for our block of group pension products have remained stable
and consistent with expectations.
Claim resolution rates have a greater chance of significant variability in a shorter period of time than our other reserve assumptions.
These rates are reviewed on a quarterly basis for the death and recovery components separately. Claim resolution rates in our Unum US
segment group and individual long-term disability product lines and our Closed Block individual disability product line have over the last
several years exhibited some variability. Relative to the resolution rate we expect to experience over the life of the block of business, actual
quarterly rates during 2010 and 2011 have varied by +5 and -4 percent in our Unum US group long-term disability line of business, between
+10 and -10 percent in our Unum US individual disability — recently issued line of business, and between +8 and -5 percent in our Closed
Block individual disability line of business. Claim resolution rates are very sensitive to operational and environmental changes and can be
volatile over short periods of time. Throughout the period 2009 to 2011, we had generally stable to improving claims management
performance, and our claim resolution rates were fairly consistent with or slightly favorable to our long-term assumptions. Our claim
resolution rate assumption used in determining reserves is our expectation of the resolution rate we will experience over the life of the
block of business and will vary from actual experience in any one period, both favorably and unfavorably.
As our claims data for older ages in our long duration lifetime claim block in our Closed Block individual disability line of business has
become credible, we are now able, with a higher degree of confidence, to assess our own experience for this particular claim block.
Emerging experience indicates a longer life expectancy for our older age, longer duration disabled claimants, which lengthens the time a
claimant receives disability benefits. As a result of this experience, as of December 31, 2011 we adjusted our mortality assumption within
our claim resolution rate assumption, resulting in an increase of $183.5 million in our Closed Block individual disability line of business claim
reserves. See “Claim Reserve Increase for Individual Disability Closed Block Business” contained herein.
26
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations 2011
Unum
We monitor and test our reserves for adequacy relative to all of our assumptions in the aggregate. In our estimation, scenarios based
on reasonably possible variations in each of our reserve assumptions, when modeled together in aggregate, could produce a potential
result, either positive or negative, in our Unum US group disability line of business that would change our claim reserve balance by
+/- 2.6 percent. Using our actual claim reserve balance at December 31, 2011, this variation would have resulted in an approximate change
(either positive or negative) of $200 million to our claim reserves. Using the same sensitivity analysis approach for our Closed Block
individual disability line of business, the claim reserve balance could potentially vary by +/- 2.5 percent of our reported balance, which at
December 31, 2011, would have resulted in an approximate change (either positive or negative) of $240 million to our claim reserves. The
major contributor to the variance for both the Unum US group long-term disability line of business and the Closed Block individual disability
line of business is the claim resolution rate. In addition, we consider variability in our reserve assumptions related to long-term care policy
reserves. These reserves are held under the gross premium valuation method with assumptions established as of December 31, 2011,
the date of loss recognition. Assumptions for policy reserves do not change after the date of loss recognition unless reserves are again
determined to be deficient. As such, positive developments will result in the accumulation of reserve margin, while adverse developments
would result in an additional reserve charge. Variability in our reserve assumptions for long-term care may be mitigated by potential future
rate increases, particularly those variations associated with long-term changes in morbidity or mortality experience as well as investment
yields. When modeled in the aggregate, downside scenarios based on reasonably possible adverse variations in each of our reserve
assumptions, including the potential impact of future rate increases on expected future premiums we will receive, could require a reserve
increase of +7.3 percent, or approximately $340 million. We believe that these ranges provide a reasonable estimate of the possible changes
in reserve balances for those product lines where we believe it is possible that variability in the assumptions, in the aggregate, could result
in a material impact on our reserve levels, but we record our reserves based on our long-term best estimate. Because these product lines
have long-term claim payout periods, there is a greater potential for significant variability in claim costs, either positive or negative.
Deferred Acquisition Costs (DAC)
We defer certain costs incurred in acquiring new business and amortize (expense) these costs over the life of the related policies.
Deferred costs include certain commissions, other agency compensation, selection and policy issue expenses, and field expenses.
Acquisition costs that do not vary with the production of new business, such as commissions on group products which are generally level
throughout the life of the policy, are excluded from deferral.
Approximately 86.1 percent of our DAC relates to traditional non interest-sensitive products, and we amortize DAC in proportion to the
premium income we expect to receive over the life of the policies. Key assumptions used in developing the future amortization of DAC are
future persistency and future premium income. We use our own historical experience and expectation of the future performance of our
businesses in determining the expected persistency and premium income. The estimated premium income in the early years of the
amortization period is generally higher than in the later years due to the anticipated cumulative effect of policy persistency in the early
years, which results in a greater proportion of the costs being amortized in the early years of the life of the policy. During 2011, our key
assumptions used to develop the future amortization of acquisition costs deferred during 2011 did not change materially from those used in
2010. Generally, we do not expect our persistency or interest rates to change significantly in the short-term, and to the extent that these
trends do change, we expect those changes to be gradual over a longer period of time.
Unum 2011 Annual Report
27
The following are our current assumptions regarding the length of our amortization periods, the approximate DAC balance that
remains at the end of years 3, 10, and 15 as a percentage of the cost initially deferred, and our DAC balances as of December 31, 2011
and 2010.
Unum US
Group Disability
Group Life and Accidental
Death & Dismemberment
Supplemental and Voluntary:
Individual Disability — Recently Issued
Voluntary Benefits
Unum UK
Group Disability
Group Life
Supplemental and Voluntary
Colonial Life
Accident, Sickness, and Disability
Life
Cancer and Critical Illness
Closed Block
Long-term Care
Totals
Amortization
Period
Balance Remaining as a %
of Initial Deferral
Year 3
Year 10
Year 15
DAC Balances
at December 31
2011
2010
7
7
20
15
3
3
20
15
25
19
—
25%
0%
0%
$ 120.1
$ 119.0
25% to 30%
0%
0%
102.7
93.8
75%
55% to 60%
7%
7%
57%
48%
73%
62%
50%
15%
0%
0%
17%
13%
39%
28%
25%
0%
0%
0%
7%
1%
20%
11%
619.4
550.1
14.8
9.3
35.3
397.0
254.3
197.9
639.7
509.7
16.3
7.9
34.0
366.1
252.3
186.6
—
—
—
—
295.7
$2,300.9
$2,521.1
Amortization of DAC on traditional products is adjusted to reflect the actual policy persistency as compared to the anticipated
experience, and as a result, the unamortized balance of DAC reflects actual persistency. We may experience accelerated amortization if
policies terminate earlier than projected. Conversely, we may also experience longer amortization periods if policies terminate later than
projected. Because our actual experience regarding persistency and premium income has varied very little from our assumptions during
the last three years, we have had minimal adjustments to our projected amortization of DAC during those years. We measure the
recoverability of DAC by performing loss recognition tests in the fourth quarter of each year, but more frequently if appropriate, using best
estimate assumptions as of the date of the test. Insurance contracts are grouped for each major product line within a segment when we
perform loss recognition tests. If loss recognition testing indicates that DAC is not recoverable, the deficiency is charged to expense.
Our testing during the fourth quarter of 2011 indicated impairment of our long-term care DAC, and the balance of $289.8 million as of
December 31, 2011 was charged to expense. Our testing indicates that our remaining DAC balance as of December 31, 2011 is recoverable.
See “Long-term Care Strategic Review” contained herein for further discussion.
In October 2010, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update, now included in Accounting
Standards Codification 944 “Financial Services — Insurance,” to address diversity in practice regarding the interpretation of which costs
relating to the acquisition of new or renewal insurance contracts qualify as deferred acquisition costs. The amendments in the update
modify the existing guidance and require that only incremental direct costs associated with the successful acquisition of a new or renewal
insurance contract can be capitalized. All other costs are to be expensed as incurred. The amendments in this update are effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2011, and permit retrospective application. Our
retrospective adoption of this standard during the first quarter of 2012 is expected to result in a cumulative effect decrease in stockholders’
equity as of January 1, 2012, 2011, and 2010 of approximately $407 million, $459 million, and $455 million, respectively. Net income
28
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2011
Unum
restated as a result of the retrospective adoption is expected to decrease $12.1 million, $7.4 million, and $5.3 million for the years ended
December 31, 2011, 2010, and 2009, respectively, excluding the impact of this adoption on the long-term care DAC impairment which
occurred as of December 31, 2011. A portion of the long-term care DAC will be written off as of the beginning of the earliest period
presented, and as such, the remaining balance to be impaired, subsequent to adoption of this update, will equal $196.1 million before tax
as of December 31, 2011. The adjustment to this previously reported impairment charge is expected to increase net income $60.9 million in
2011, resulting in a net increase of $48.8 million on a restated basis for the year ended December 31, 2011. The adoption of this update will
result in a decrease in the level of costs we defer and is expected to result in an immaterial decrease in net income in 2012. See Note 1 of
the “Notes to Consolidated Financial Statements” contained herein.
Valuation of Investments
All of our fixed maturity securities are classified as available-for-sale and are reported at fair value. Our derivative financial
instruments, including certain derivative instruments embedded in other contracts, are reported as either assets or liabilities and measured
at fair value. We hold an immaterial amount of equity securities, which are also reported at fair value.
Definition of Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date and, therefore, represents an exit price, not an entry price. The exit price objective applies
regardless of a reporting entity’s intent and/or ability to sell the asset or transfer the liability at the measurement date.
The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing
observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively
quoted prices in active markets generally have more pricing observability and less judgment utilized in measuring fair value. An active
market for a financial instrument is a market in which transactions for an asset or a similar asset occur with sufficient frequency and volume
to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and
should be used to measure fair value whenever available. Conversely, financial instruments rarely traded or not quoted have less
observability and are measured at fair value using valuation techniques that require more judgment. Pricing observability is generally
impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not
yet established, the characteristics specific to the transaction, and overall market conditions.
Valuation Techniques
Valuation techniques used for assets and liabilities accounted for at fair value are generally categorized into three types:
1. The market approach uses prices and other relevant information from market transactions involving identical or comparable assets
or liabilities. Valuation techniques consistent with the market approach often use market multiples derived from a set of
comparables or matrix pricing. Market multiples might lie in ranges with a different multiple for each comparable. The selection of
where within the range the appropriate multiple falls requires judgment, considering both quantitative and qualitative factors
specific to the measurement. Matrix pricing is a mathematical technique used principally to value certain securities without relying
exclusively on quoted prices for the specific securities but comparing the securities to benchmark or comparable securities.
2. The income approach converts future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount.
Income approach techniques rely on current market expectations of future amounts. Examples of income approach valuation
techniques include present value techniques, option-pricing models that incorporate present value techniques, and the multi-period
excess earnings method.
3. The cost approach is based upon the amount that currently would be required to replace the service capacity of an asset, or the
current replacement cost. That is, from the perspective of a market participant (seller), the price that would be received for the asset
is determined based on the cost to a market participant (buyer) to acquire or construct a substitute asset of comparable utility.
We use valuation techniques that are appropriate in the circumstances and for which sufficient data are available that can be obtained
without undue cost and effort. In some cases, a single valuation technique will be appropriate (for example, when valuing an asset or
Unum 2011 Annual Report
29
liability using quoted prices in an active market for identical assets or liabilities). In other cases, multiple valuation techniques will be
appropriate. If we use multiple valuation techniques to measure fair value, we evaluate and weigh the results, as appropriate, considering
the reasonableness of the range indicated by those results. A fair value measurement is the point within that range that is most
representative of fair value in the circumstances.
The selection of the valuation method(s) to apply considers the definition of an exit price and depends on the nature of the asset or
liability being valued. For assets and liabilities accounted for at fair value, we generally use valuation techniques consistent with the market
approach, and to a lesser extent, the income approach. We believe the market approach valuation technique provides more observable
data than the income approach, considering the type of investments we hold. The market sources from which we obtain or derive the fair
values of our assets and liabilities carried at market value include quoted market prices for actual trades, price quotes from third-party
pricing vendors, price quotes we obtain from outside brokers, matrix pricing, discounted cash flow, and observable prices for similar publicly
traded or privately traded issues that incorporate the credit quality and industry sector of the issuer. Our fair value measurements could
differ significantly based on the valuation technique and available inputs.
When using a pricing service, we obtain the vendor’s pricing methodology documentation to ensure we understand their
methodologies. We periodically review and approve the selection of the pricing vendors we use to ensure we are in agreement with their
methodologies. We also review the reasonableness of sources and inputs used in developing pricing. When markets are less active, brokers
may rely more on models with inputs based on the information available only to the broker. We monitor securities priced by brokers and
evaluate their prices for reasonableness based on benchmarking to available primary and secondary market information. In weighing a
broker quote as an input to fair value, we place less reliance on quotes that do not reflect the result of market transactions. We also
consider the nature of the quote, particularly whether the quote is a binding offer. If prices in an inactive market do not reflect current prices
for the same or similar assets, adjustments may be necessary to arrive at fair value. When relevant market data is unavailable, which may
be the case during periods of market uncertainty, the income approach can, in suitable circumstances, provide a more appropriate fair
value. During 2011, we have applied valuation techniques on a consistent basis to similar assets and liabilities and consistent with those
techniques used at year end 2010.
Inputs to Valuation Techniques
Inputs refer broadly to the assumptions that market participants use in pricing assets or liabilities, including assumptions about risk, for
example, the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and/or the risk inherent
in the inputs to the valuation technique. We use observable and unobservable inputs in measuring the fair value of our financial
instruments.
Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed
based on market data obtained from independent sources.
Unobservable inputs are inputs that reflect our own assumptions about the assumptions market participants would use in pricing the
asset or liability developed based on the best information available in the circumstances.
Inputs that may be used include the following:
• Broker market maker prices and price levels
• Trade Reporting and Compliance Engine (TRACE) pricing
• Prices obtained from external pricing services
• Benchmark yields (Treasury and interest rate swap curves)
• Transactional data for new issuance and secondary trades
• Security cash flows and structures
• Recent issuance/supply
• Sector and issuer level spreads
• Security credit ratings/maturity/capital structure/optionality
• Corporate actions
30
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations 2011
Unum
• Underlying collateral
• Prepayment speeds/loan performance/delinquencies/weighted average life/seasoning
• Public covenants
• Comparative bond analysis
• Derivative spreads
• Relevant reports issued by analysts and rating agencies
• Audited financial statements
We review all prices obtained to ensure they are consistent with a variety of observable market inputs and to verify the validity of a
security’s price. In the event we receive a vendor’s market price that does not appear reasonable based on our market analysis, we may
challenge the price and request further information about the assumptions and methodologies used by the vendor to price the security. We
may change the vendor price based on a better data source such as an actual trade. We also review all price changes from the prior month
which fall outside a predetermined corridor. The overall valuation process for determining fair values may include adjustments to valuations
obtained from our pricing sources when they do not represent a valid exit price. These adjustments may be made when, in our judgment
and considering our knowledge of the financial conditions and industry in which the issuer operates, certain features of the financial
instrument require that an adjustment be made to the value originally obtained from our pricing sources. These features may include the
complexity of the financial instrument, the market in which the financial instrument is traded, counterparty credit risk, credit structure,
concentration, or liquidity. Additionally, an adjustment to the price derived from a model typically reflects our judgment of the inputs that
other participants in the market for the financial instrument being measured at fair value would consider in pricing that same financial
instrument. In the event that we sell an asset, we test the validity of the fair value determined by our valuation techniques by comparing
the selling price to the fair value determined for the asset in the immediately preceding reporting period or prior month end closest to the
transaction date. Historically, our realized gain or loss on disposition of an investment is consistent with the assumptions under the
valuation methodologies described above, which, combined with the results of our testing, indicates to us that our pricing methodologies
are appropriate.
The parameters and inputs used to validate a price on a security may be adjusted for assumptions about risk and current market
conditions on a quarter to quarter basis, as certain features may be more significant drivers of valuation at the time of pricing. Changes to
inputs in valuations are not changes to valuation methodologies; rather, the inputs are modified to reflect direct or indirect impacts on asset
classes from changes in market conditions.
Fair values for derivatives other than embedded derivatives in modified coinsurance arrangements are based on market quotes or
pricing models and represent the net amount of cash we would have paid or received if the contracts had been settled or closed as of the
last day of the period. We analyze credit default swap spreads relative to the average credit spread embedded within the London Interbank
Offered Rate (LIBOR) setting syndicate in determining the effect of credit risk on our derivatives’ fair values. If counterparty credit risk for a
derivative asset is determined to be material and is not adequately reflected in the LIBOR-based fair value obtained from our pricing
sources, we adjust the valuations obtained from our pricing sources. In regard to our own credit risk component, we adjust the valuation of
derivative liabilities wherein the counterparty is exposed to our credit risk when the LIBOR-based valuation of our derivatives obtained from
pricing sources does not effectively include an adequate credit component for our own credit risk.
Fair values for our embedded derivative in a modified coinsurance arrangement are estimated using internal pricing models and
represent the hypothetical value of the duration mismatch of assets and liabilities, interest rate risk, and third party credit risk embedded in
the modified coinsurance arrangement.
Certain of our investments do not have readily determinable market prices and/or observable inputs or may at times be affected by
the lack of market liquidity. For these securities, we use internally prepared valuations combining matrix pricing with vendor purchased
software programs, including valuations based on estimates of future profitability, to estimate the fair value. Additionally, we may obtain
prices from independent third-party brokers to aid in establishing valuations for certain of these securities. Key assumptions used by us to
determine fair value for these securities include risk free interest rates, risk premiums, performance of underlying collateral (if any), and
other factors involving significant assumptions which may or may not reflect those of an active market.
Unum 2011 Annual Report
31
As of December 31, 2011, the key assumptions we generally used to estimate the fair value of these types of securities included those
listed below. Where appropriate, we have noted the assumption used for the prior period as well as the reason for the change.
• Risk free interest rates of 0.83 percent for five-year maturities to 2.89 percent for 30-year maturities were derived from the current
yield curve for U.S. Treasury Bonds with similar maturities. This compares to interest rates of 2.01 percent for five-year maturities to
4.33 percent for 30-year maturities used at December 31, 2010.
• Current Baa corporate bond spreads ranging from 1.53 percent to 2.97 percent were added to the risk free rate to reflect the lack of
liquidity. We used spreads ranging from 1.31 percent to 2.15 percent at December 31, 2010. The changes were based on observable
market spreads. Newly issued private placement securities have historically offered yield premiums higher than a similar interest rate
spread on comparable newly issued public securities.
• Additional basis points were added as deemed appropriate for foreign investments, certain industries, and individual securities in
certain industries that are considered to be of greater risk.
At December 31, 2011, approximately 10.9 percent of our fixed maturity securities were valued using active trades from TRACE pricing
or broker market maker prices for which there was current market activity in that specific security (comparable to receiving one binding
quote). The prices obtained were not adjusted, and the assets were classified as Level 1, the highest category of the three-level fair value
hierarchy classification wherein inputs are unadjusted and represent quoted prices in active markets for identical assets or liabilities.
The remaining 89.1 percent of our fixed maturity securities were valued based on non-binding quotes or other observable and
unobservable inputs, as discussed below.
• Approximately 71.1 percent of our fixed maturity securities were valued based on prices from pricing services that generally use
observable inputs such as prices for securities or comparable securities in active markets in their valuation techniques. These assets
were classified as Level 2. Level 2 assets or liabilities are those valued using inputs (other than prices included in Level 1) that are
either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for
the duration of the instrument’s anticipated life.
• Approximately 4.1 percent of our fixed maturity securities were valued based on one or more non-binding broker price levels, if
validated by observable market data, or on TRACE prices for identical or similar assets absent current market activity. When only one
price is available, it is used if observable inputs and analysis confirms that it is appropriate. These assets, for which we were able to
validate the price using other observable market data, were classified as Level 2.
• Approximately 13.9 percent of our fixed maturity securities were valued based on prices of comparable securities, matrix pricing,
market models, and/or internal models or were valued based on non-binding quotes with no other observable market data. These
assets were classified as either Level 2 or Level 3, with the categorization dependent on whether there was other observable market
data. Level 3 is the lowest category of the fair value hierarchy and reflects the judgment of management regarding what market
participants would use in pricing assets or liabilities at the measurement date. Financial assets and liabilities categorized as Level 3
are generally those that are valued using unobservable inputs to extrapolate an estimated fair value.
We consider transactions in inactive or disorderly markets to be less representative of fair value. We use all available observable
inputs when measuring fair value, but when significant other unobservable inputs and adjustments are necessary, we classify these assets
or liabilities as Level 3.
As of December 31, 2011, approximately 10.9 percent of our fixed maturity securities were categorized as Level 1, 86.4 percent as
Level 2, and 2.7 percent as Level 3. During 2011, we transferred $561.9 million of fixed maturity securities into Level 3 and $626.3 million of
fixed maturity securities out of Level 3. The transfers between levels resulted primarily from a change in observability of three inputs used
to determine fair values of the securities transferred: (1) transactional data for new issuance and secondary trades, (2) broker/dealer
quotes and pricing, primarily related to changes in the level of activity in the market and whether the market was considered orderly, and
(3) comparable bond metrics from which to perform an analysis. For fair value measurements of financial instruments that were
transferred either into or out of Level 3, we reflect the transfers using the fair value at the beginning of the period. We believe this allows
for greater transparency as all changes in fair value that arise during the reporting period of the transfer are disclosed as a component of
our Level 3 reconciliation as shown in Note 2 of the “Notes to Consolidated Financial Statements” contained herein.
32
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations 2011
Unum
Other-than-Temporary Impairment Analysis for Investments
In determining when a decline in fair value below amortized cost of a fixed maturity security is other than temporary, we evaluate the
following factors:
• Whether we expect to recover the entire amortized cost basis of the security
• Whether we intend to sell the security or will be required to sell the security before the recovery of its amortized cost basis
• Whether the security is current as to principal and interest payments
• The significance of the decline in value
• The time period during which there has been a significant decline in value
• Current and future business prospects and trends of earnings
• The valuation of the security’s underlying collateral
• Relevant industry conditions and trends relative to their historical cycles
• Market conditions
• Rating agency and governmental actions
• Bid and offering prices and the level of trading activity
• Adverse changes in estimated cash flows for securitized investments
• Changes in fair value subsequent to the balance sheet date
• Any other key measures for the related security.
We evaluate available information, including the factors noted above, both positive and negative, in reaching our conclusions.
In particular, we also consider the strength of the issuer’s balance sheet, its debt obligations and near term funding requirements, cash flow
and liquidity, the profitability of its core businesses, the availability of marketable assets which could be sold to increase liquidity, its
industry fundamentals and regulatory environment, and its access to capital markets. Although all available and applicable factors are
considered in our analysis, our expectation of recovering the entire amortized cost basis of the security, whether we intend to sell the
security, whether it is more likely than not we will be required to sell the security before recovery of its amortized cost, and whether the
security is current on principal and interest payments are the most critical factors in determining whether impairments are other than
temporary. The significance of the decline in value and the length of time during which there has been a significant decline are also
important factors, but we generally do not record an impairment loss based solely on these two factors, since often other more relevant
factors will impact our evaluation of a security.
While determining other-than-temporary impairments is a judgmental area, we utilize a formal, well-defined, and disciplined process
to monitor and evaluate our fixed income investment portfolio, supported by issuer specific research and documentation as of the end of
each period. The process results in a thorough evaluation of problem investments and the recording of losses on a timely basis for
investments determined to have an other-than-temporary impairment.
If we determine that the decline in value of an investment is other than temporary, the investment is written down to fair value, and
an impairment loss is recognized in the current period, either in earnings or in both earnings and other comprehensive income, as
applicable. For those fixed maturity securities with an unrealized loss for which we have not recognized an other-than-temporary
impairment, we believe we will recover the entire amortized cost, we do not intend to sell the security, and we do not believe it is more
likely than not we will be required to sell the security before recovery of its amortized cost. There have been no defaults in the repayment
obligations of any securities for which we have not recorded an other-than-temporary impairment.
Other-than-temporary impairment losses on fixed maturity securities which we intend to sell or more likely than not will be required
to sell before recovery in value are recognized in earnings and equal the entire difference between the security’s amortized cost basis and
its fair value. For securities which we do not intend to sell and it is not more likely than not that we will be required to sell before recovery
in value, other-than-temporary impairment losses recognized in earnings generally represent the difference between the amortized cost of
the security and the present value of our best estimate of cash flows expected to be collected, discounted using the effective interest rate
implicit in the security at the date of acquisition. The determination of cash flows is inherently subjective, and methodologies may vary
depending on the circumstances specific to the security. The timing and amount of our cash flow estimates are developed using historical
Unum 2011 Annual Report
33
and forecast financial information from the issuer, including its current and projected liquidity position. We also consider industry analyst
reports and forecasts, sector credit ratings, future business prospects and earnings trends, issuer refinancing capabilities, actual and/or
potential asset sales by the issuer, and other data relevant to the collectibility of the contractual cash flows of the security. We take into
account the probability of default, expected recoveries, third party guarantees, quality of collateral, and where our debt security ranks in
terms of subordination. We may use the estimated fair value of collateral as a proxy for the present value of cash flows if we believe the
security is dependent on the liquidation of collateral for recovery of our investment. For fixed maturity securities for which we have
recognized an other-than-temporary impairment loss through earnings, if through subsequent evaluation there is a significant increase in
expected cash flows, the difference between the new amortized cost basis and the cash flows expected to be collected is accreted as net
investment income.
We use a comprehensive rating system to evaluate the investment and credit risk of our mortgage loans and to identify specific
properties for inspection and reevaluation. Mortgage loans are considered impaired when, based on current information and events, it is
probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. We establish an
allowance for probable losses on mortgage loans based on a review of individual loans, considering the value of the underlying collateral.
Mortgage loans are not reported at fair value in our consolidated balance sheets unless the mortgage loan is considered impaired, in which
case the impairment is recognized as a realized investment loss in our consolidated statements of income.
There are a number of significant risks inherent in the process of monitoring our investments for impairments and determining when
and if an impairment is other than temporary. These risks and uncertainties include the following possibilities:
• The assessment of a borrower’s ability to meet its contractual obligations will change.
• The economic outlook, either domestic or foreign, may be less favorable or may have a more significant impact on the borrower
than anticipated, and as such, the investment may not recover in value.
• New information may become available concerning the security, such as disclosure of accounting irregularities, fraud, or corporate
governance issues.
• Significant changes in credit spreads may occur in the related industry.
• Significant increases in interest rates may occur and may not return to levels similar to when securities were initially purchased.
• Adverse rating agency actions may occur.
Pension and Postretirement Benefit Plans
We sponsor several defined benefit pension and other postretirement benefit (OPEB) plans for our employees, including non-qualified
pension plans. The U.S. pension plans comprise the majority of our total benefit obligation and pension expense. Our U.K. operation
maintains a separate defined benefit plan for eligible employees. The U.K. defined benefit pension plan was closed to new entrants on
December 31, 2002.
Our net periodic benefit costs and the value of our benefit obligations for these plans are determined based on a set of economic and
demographic assumptions that represent our best estimate of future expected experience. Major assumptions used in accounting for these
plans include the expected discount (interest) rate and the long-term rate of return on plan assets. We also use, as applicable, expected
increases in compensation levels and a weighted average annual rate of increase in the per capita cost of covered benefits, which reflects a
health care cost trend rate, and the U.K. pension plan also uses expected cost of living increases to plan benefits.
The assumptions chosen for our pension and OPEB plans are reviewed annually, using a December 31 measurement date for each of
our plans. The discount rate assumptions and expected long-term rate of return assumptions have the most significant effect on our net
periodic benefit costs associated with these plans. In addition to the effect of changes in our assumptions, the net periodic cost or benefit
obligation under our pension and OPEB plans may change due to factors such as actual experience being different from our assumptions,
special benefits to terminated employees, or changes in benefits provided under the plans.
Discount Rate Assumptions
The discount rate is an interest assumption used to convert the benefit payment stream to a present value. We set the discount rate
assumption at the measurement date for each of our retirement-related benefit plans to reflect the yield of a portfolio of high quality fixed
34
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations 2011
Unum
income debt instruments matched against the timing and amounts of projected future benefits. A lower discount rate increases the present
value of benefit obligations and increases our costs.
The discount rate we used to determine our 2012 and 2011 net periodic benefit costs for our U.S. pension plans was 5.40 percent
and 5.80 percent, respectively. The discount rate used for the net periodic benefit costs for 2012 and 2011 for our U.K. pension plan was
4.90 percent and 5.60 percent, respectively. The discount rate used in the net periodic benefit cost for our OPEB plan for 2012 and 2011 was
5.20 percent and 5.60 percent, respectively.
Reducing the discount rate assumption by 50 basis points would have resulted in an increase in our 2011 pension expense of
approximately $15.9 million, before tax, and an increase in our benefit obligation of approximately $161.9 million as of December 31, 2011,
resulting in an after-tax decrease in stockholders’ equity of approximately $107.0 million as of December 31, 2011. A 50 basis point
reduction in the discount rate assumption would not change our annual OPEB costs.
Increasing the discount rate assumption by 50 basis points would have resulted in a decrease in our 2011 pension expense of
approximately $13.8 million, before tax, and a decrease in our benefit obligation of approximately $144.2 million as of December 31, 2011,
resulting in an after-tax increase in stockholders’ equity of approximately $95.3 million as of December 31, 2011. A 50 basis point increase
in the discount rate assumption would not change our annual OPEB costs.
Long-term Rate of Return Assumptions
The long-term rate of return assumption is the best estimate of the average annual assumed return that will be produced from the
pension trust assets until current benefits are paid. The U.S. pension plans use a compound interest method in computing the rate of return
on their pension plan assets. The investment portfolio for our U.S. qualified pension plan contains a diversified blend of domestic and
international large cap, mid cap, and small cap equity securities, U.S. government and agency and corporate fixed income securities, private
equity funds of funds, and hedge funds of funds. Assets for our U.K. pension plan are invested in pooled funds, including a diversified
growth fund, which invests in assets such as global equities, hedge funds, commodities, below-investment-grade fixed income securities,
and currencies, as well as leveraged, interest rate, and inflation swap funds intended to broadly match part of the interest rate and inflation
sensitivities of the plan’s liabilities. Assets for our OPEB plan are invested primarily in life insurance contracts. We believe our investment
portfolios are well diversified by asset class and sector, with no potential risk concentrations in any one category.
Our expectations for the future investment returns of the asset categories are based on a combination of historical market
performance, evaluations of investment forecasts obtained from external consultants and economists, and current market yields. For the
U.S. pension plans, the methodology underlying the return assumption included the various elements of the expected return for each asset
class such as long-term rates of return, volatility of returns, and the correlation of returns between various asset classes. The expected
return for the total portfolio is calculated based on the plan’s current asset allocation. Investment risk is measured and monitored on an
ongoing basis through annual liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews. Risk
tolerance is established through consideration of plan liabilities, plan funded status, and corporate financial condition.
In 2011, we changed the investment strategy for our U.K. pension plan, which resulted in new investment classes as well as a new
target allocation for the plan’s assets. At December 31, 2010, the U.K. pension plan’s target allocation was 60 percent equity securities and
40 percent fixed income securities. In 2011, we changed the plan’s target allocation for the assets to 75 percent diversified growth assets
and 25 percent interest rate and inflation swap funds. The new investment classes and new target allocation resulted in lower yields and
lower expected returns on the plan’s assets. We expect that our 2012 pension costs will be higher than our pension costs in 2011 due
primarily to the lower yields on the U.K. plan’s investments. This change in investment strategy will not have an impact on our ability to
fund this plan.
The long-term rate of return on asset assumption used in the net periodic pension costs for our U.S. qualified defined benefit pension
plan for 2012 and 2011 was 7.50 percent for both years. The long-term rate of return on asset assumption used for 2012 and 2011 for our
U.K. pension plan was 5.80 percent and 6.70 percent, respectively, and for our OPEB plan, 5.75 percent for both years. The actual rate of
return on plan assets is determined based on the fair value of the plan assets at the beginning and the end of the period, adjusted for
contributions and benefit payments.
Unum 2011 Annual Report
35
Changing the expected long-term rate of return on the plan assets by +/-50 basis points would have changed our 2011 pension plan
expense by approximately $7.0 million before tax, but our OPEB plan expense would not change. A lower rate of return on plan assets
increases our expense.
Benefit Obligation and Fair Value of Plan Assets
The market-related value equals the fair value of assets, determined as of the measurement date. The return on assets fully recognizes
all asset gains and losses, including changes in fair value, through the measurement date.
During 2011, the fair value of plan assets in our U.S. qualified defined benefit pension plan decreased $8.8 million, or approximately
0.7 percent, while the fair value of plan assets in our U.K. pension plan increased £8.2 million, or approximately 7.3 percent. Although the
effect of these changes in fair value had no impact on our 2011 net periodic pension costs, the unfavorable rate of return on the U.S. plan
assets in 2011 will have an unfavorable impact on our net periodic pension costs for 2012. We expect that our 2012 pension costs for the
U.S. qualified defined benefit pension plan will be higher than our pension costs in 2011 due to asset underperformance and a decrease in
the discount rate. The favorable rate of return on the U.K. plan assets in 2011 will have a favorable impact on our net periodic pension costs
for 2012. However, we expect that our 2012 U.K. pension plan costs will be higher than in 2011 due to a reduction in the expected return on
plan assets resulting from lower yields, as previously discussed. We believe our assumptions appropriately reflect the impact of the current
economic environment.
Our pension and OPEB plans have an aggregate unrecognized net actuarial loss of $702.2 million and an unrecognized prior service
credit of $4.5 million, which together represent the cumulative liability and asset gains and losses as well as the portion of prior service
credits that have not been recognized in pension expense. As of December 31, 2011, the unrecognized net loss for these two items
combined was approximately $697.7 million.
The unrecognized gains or losses are amortized as a component of the net benefit cost. Our 2011, 2010, and 2009 pension and OPEB
expense includes $28.8 million, $29.1 million, and $40.2 million, respectively, of amortization of the unrecognized net actuarial gain (loss)
and prior service credit (cost). The unrecognized net actuarial loss for our pension plans, which is $698.1 million at December 31, 2011, will
be amortized over the average future working life of pension plan participants, currently estimated at 11 years for U.S. participants and
12 years for U.K. participants, to the extent that it exceeds the 10 percent corridor, as described below. The unrecognized net actuarial loss
of $4.1 million for our OPEB plan will be amortized over the average future working life of OPEB plan participants, currently estimated at
7 years, to the extent the loss is outside of a corridor established in accordance with GAAP. The corridor for the pension and OPEB plans
is established based on the greater of 10 percent of the plan assets or 10 percent of the benefit obligation. At December 31, 2011,
$515.1 million of the actuarial loss was outside of the corridor for the U.S. plan and £4.0 million was outside of the corridor for the U.K.
plan. At December 31, 2011, none of the actuarial loss was outside of the corridor for the OPEB plan.
The fair value of plan assets in our U.S. qualified defined benefit pension plan was $1,170.8 million at December 31, 2011, compared to
$1,179.6 million at December 31, 2010. The effect of a reduction in the liability discount rate, together with the decrease in fair value of plan
assets, increased our year end deficit funding level to $274.7 million at December 31, 2011, compared to a deficit of $64.0 million as of
December 31, 2010.
The fair value of plan assets in our OPEB plan was $11.7 million at December 31, 2011, compared to $11.9 million at December 31,
2010. These assets represent life insurance contracts to fund the life insurance benefit portion of our OPEB plan. Our OPEB plan represents a
non-vested, non-guaranteed obligation, and current regulations do not require specific funding levels for these benefits, which are
comprised of retiree life, medical, and dental benefits. It is our practice to use general assets to pay medical and dental claims as they
come due in lieu of utilizing plan assets for the medical and dental benefit portions of our OPEB plan. We expect to continue to receive
subsidies under the Medicare Prescription Drug, Improvement and Modernization Act of 2003, based on current law, to partially offset
these payments. The expected subsidy included in our consolidated balance sheets is immaterial.
Our expected return on plan assets and discount rate discussed above will not affect the cash contributions we are required to make
to our U.S. pension and OPEB plans because we have met all minimum funding requirements set forth by ERISA. We had no regulatory
contribution requirements for 2011 and 2010; however, we elected to make voluntary contributions of $167.0 million in 2010 to our U.S.
36
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations 2011
Unum
qualified defined benefit pension plan. We made no pension contributions to our U.S. qualified defined benefit pension plan during 2011,
but we expect to make a contribution of approximately $53.0 million in 2012.
During 2006, the U.S. federal government enacted the Pension Protection Act of 2006 which requires companies to fully fund defined
benefit pension plans over a seven year period. We have evaluated this requirement and have made estimates of amounts to be funded in
the future. Based on this assessment, we do not believe that the funding requirements of the Pension Protection Act will cause a material
adverse effect on our liquidity.
The fair value of plan assets for our U.K. pension plan was £120.9 million at December 31, 2011, compared to £112.7 million at
December 31, 2010. The U.K. pension plan had a surplus of £11.3 million and £14.8 million at December 31, 2011 and 2010, respectively.
We contribute to the plan in accordance with a schedule of contributions which requires that we contribute to the plan at the rate of at least
24.8 percent of pensionable salaries for active members of the plan, plus 0.4 percent of pensionable salaries for all employees (including
active members of the plan) who are entitled to lump sum death in service benefits under the plan, sufficient to meet the minimum
funding requirement under U.K. legislation. During 2011 and 2010, we made required contributions of £2.9 million and £3.2 million,
respectively. We expect to make contributions of approximately £2.9 million during 2012.
See Note 8 of the “Notes to Consolidated Financial Statements” contained herein for further discussion.
Income Taxes
We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. As of
December 31, 2011, we had no net operating loss carryforward pertaining to our U.S. operations. In 2011, as part of an IRS settlement, we
released the $4.1 million valuation allowance related to basis differences in foreign subsidiaries and net operating loss carryforwards in
foreign jurisdictions for which we previously believed we would not realize a tax benefit.
In evaluating the ability to recover deferred tax assets, we have considered all available positive and negative evidence including past
operating results, the existence of cumulative losses in the most recent years, forecasted earnings, future taxable income, and prudent and
feasible tax planning strategies. In the event we determine that we most likely would not be able to realize all or part of our deferred tax
assets in the future, an increase to the valuation allowance would be charged to earnings in the period such determination is made.
Likewise, if it is later determined that it is more likely than not that those deferred tax assets would be realized, the previously provided
valuation allowance would be reversed.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws in a multitude of
jurisdictions, both domestic and foreign. The amount of income taxes we pay is subject to ongoing audits in various jurisdictions, and a
material assessment by a governing tax authority could affect profitability.
GAAP prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax
positions taken or expected to be taken in income tax returns. The evaluation of a tax position is a two step process. The first step is to
determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the
position. The second step is to measure a position that satisfies the recognition threshold at the largest amount of benefit that is greater
than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more likely than not
threshold but that now satisfy the recognition threshold are recognized in the first subsequent financial reporting period in which that
threshold is met. Previously recognized tax positions that no longer meet the more likely than not recognition threshold are derecognized
in the first subsequent financial reporting period in which that threshold is no longer met. If a previously recognized tax position is settled
for an amount that is different from the amount initially measured, the difference will be recognized as a tax benefit or expense in the
period the settlement is effective. We believe that tax positions have been reflected in our financial statements at appropriate amounts in
conformity with GAAP.
See Note 6 of the “Notes to Consolidated Financial Statements” contained herein.
Unum 2011 Annual Report
37
Contingent Liabilities
On a quarterly basis, we review relevant information with respect to litigation and contingencies to be reflected in our consolidated
financial statements. An estimated loss is accrued when it is probable that a liability has been incurred and the amount of the loss can be
reasonably estimated. It is possible that our results of operations or cash flows in a particular period could be materially affected by an
ultimate unfavorable outcome of pending litigation or regulatory matters depending, in part, on our results of operations or cash flows for
the particular period. See Note 13 of the “Notes to Consolidated Financial Statements” contained herein.
Consolidated Operating Results
(in millions of dollars)
Revenue
Premium Income
Net Investment Income
Net Realized Investment Gain (Loss)
Other Income
Total Revenue
Benefits and Expenses
Year Ended December 31
2011
% Change
2010
% Change
2009
$ 7,514.2
1.1%
$ 7,431.4
(0.6)%
$ 7,475.5
2,519.6
1.0
(4.9)
(119.8)
249.1
10,278.0
3.1
0.8
2,495.5
24.7
241.6
10,193.2
6.3
111.1
(6.1)
1.0
2,346.6
11.7
257.2
10,091.0
Benefits and Change in Reserves for Future Benefits
7,209.5
13.5
6,354.1
Commissions
Interest and Debt Expense
Deferral of Acquisition Costs
Amortization of Deferred Acquisition Costs
Impairment of Deferred Acquisition Costs
Compensation Expense
Other Expenses
Total Benefits and Expenses
Income Before Income Tax
Income Tax
Net Income
N.M. = not a meaningful percentage
879.2
143.3
(628.3)
533.8
289.8
808.0
785.5
2.8
1.1
3.4
(2.4)
N.M.
4.1
(1.2)
10,020.8
13.1
257.2
21.8
$ 235.4
(80.7)
(95.1)
(73.4)
855.4
141.8
(607.7)
547.1
—
776.3
794.9
8,861.9
1,331.3
445.2
$ 886.1
1.0
2.2
13.1
2.4
4.0
—
(2.1)
(2.9)
0.7
3.0
1.3
3.9
6,291.6
837.1
125.4
(593.6)
526.2
—
793.3
818.7
8,798.7
1,292.3
439.7
$ 852.6
In describing our results, we may at times note certain items and exclude the impact on financial ratios and metrics to enhance the
understanding and comparability of our operational performance and the underlying fundamentals, but this exclusion is not an indication
that similar items may not recur. See “Reconciliation of Non-GAAP Financial Measures” as follows for additional discussion of these items.
The comparability of our financial results between years is affected by the fluctuation in the British pound sterling to dollar exchange
rate. The functional currency of our U.K. operations is the British pound sterling. In periods when the pound weakens, translating pounds
into dollars decreases current period results relative to the prior period. In periods when the pound strengthens, translating pounds into
dollars increases current period results in relation to the prior period. Our weighted average pound/dollar exchange rate was 1.603,
1.543, and 1.554 for the years ended 2011, 2010, and 2009, respectively. If the 2010 and 2009 results for our U.K. operations had been
translated at the higher exchange rate of 2011, our operating revenue by segment in 2010 and 2009 would have been higher by
approximately $30.7 million and $20.7 million, respectively, and operating income by segment in 2010 and 2009 would have been higher
by approximately $8.6 million and $8.1 million, respectively. However, it is important to distinguish between translating and converting
38
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2011
Unum
foreign currency. Except for a limited number of transactions, we do not actually convert pounds into dollars. As a result, we view foreign
currency translation as a financial reporting item and not a reflection of operations or profitability in the U.K.
Consolidated premium income for both 2011 and 2010 includes premium growth, relative to the preceding years, for our Unum US
group life and accidental death and dismemberment and voluntary benefits lines of business as well as for Colonial Life. Our Unum US
group disability line of business experienced declines in premium income during both 2011 and 2010 relative to prior years due primarily to
the ongoing high levels of unemployment and the competitive environment which impact sales growth and premium growth from existing
customers. In particular, premium growth from existing customers continues to be unfavorably impacted by lower salary growth and lower
growth in the number of employees covered under an existing policy. Premium income for Unum US individual disability — recently issued
increased in 2011 and decreased in 2010 relative to prior years due primarily to the volume of sales. Unum UK premium income, in local
currency, increased in 2011 but declined in 2010 relative to the prior year periods. Premium growth in Unum UK continues to be pressured
by pricing actions resulting from the competitive U.K. market. Premium income for our individual disability closed block of business
continued its expected decline in both 2011 and 2010. Our long-term care closed block of business experienced premium growth in both
2011 and 2010 relative to prior years due to higher persistency and group long-term care sales.
Net investment income was higher in 2011 relative to 2010 due primarily to continued growth in the level of invested assets and
higher bond call premiums, partially offset by an increase in the amortization of the principal amount invested in our tax credit partnerships
due to the higher level of investment in this asset class, a decrease in income on other partnership investments, and a decline in the level
of prepayment income on mortgage-backed securities. Net investment income was higher in 2010 relative to 2009 due primarily to growth
in the level of invested assets and higher bond call premiums. We also received higher interest income during 2010 on bonds for which
interest income is linked to a U.K. inflation index. We invest in index-linked bonds to support the claim reserves associated with Unum UK
group policies that provide for inflation-linked increases in benefits. Although over the intermediate-term the investment return from
index-linked bonds generally matches the index-linked claim payments and reserves, the effect on investment income from the inflation
index-linked bonds may not be completely offset by a similar change in claim payments and reserves in each quarterly or annual period.
We recognized in earnings a net realized investment loss of $4.9 million in 2011 compared to gains of $24.7 million and $11.7 million
in 2010 and 2009, respectively. Included in these amounts were other-than-temporary impairment losses on fixed maturity securities of
$19.9 million, $15.9 million, and $215.5 million in 2011, 2010, and 2009, respectively, all of which were recognized in earnings other than a
loss of $3.7 million in 2009 which was recognized in other comprehensive income.
Also recognized in earnings through realized investment gains and losses was the change in the fair value of an embedded derivative
in a modified coinsurance arrangement. Changes in the fair value of this embedded derivative resulted in a realized loss of $39.4 million in
2011 compared to realized gains of $21.1 million and $243.1 million in 2010 and 2009, respectively. Gains and losses on this embedded
derivative result primarily from changes in credit spreads in the overall investment market.
The reported benefit ratio was 95.9 percent in 2011. Excluding the reserve charges for our long-term care and individual disability
closed blocks of business, the benefit ratio was 85.9 percent in 2011, compared to 85.5 percent and 84.2 percent in 2010 and 2009,
respectively, with unfavorable year over year risk results in our Unum UK and Colonial Life segments partially offset by favorable risk results
in our Unum US segment. Further discussion of our line of business risk results and claims management performance for each of our
segments is included in “Segment Results” as follows.
Interest and debt expense in 2011 was marginally higher than 2010 due primarily to the September 2010 issuance of $400.0 million of
debt, mostly offset by the maturity of $225.1 million of debt in March 2011. We also experienced lower interest expense in 2011 compared
to 2010 on $350.0 million of debt which we effectively converted into floating rate debt through the use of an interest rate swap entered
into during the fourth quarter of 2010. Interest and debt expense for 2010 was higher than in 2009 due to higher levels of outstanding
debt, partially offset by lower rates of interest on our floating rate debt issued by Northwind Holdings and Tailwind Holdings. See “Debt”
contained herein for additional information.
The deferral of acquisition costs increased in both 2011 and 2010 relative to the prior year periods, with continued growth in certain of
our product lines and the associated increase in deferrable expenses more than offsetting the lower level of deferrable costs in product
lines with lower growth.
Unum 2011 Annual Report
39
The amortization of acquisition costs in 2011 was lower than 2010 due to a decline in amortization related to internal replacement
transactions for our Unum US group disability business, lower levels of accelerated amortization related to favorable persistency relative to
assumptions for certain issue years in our individual disability recently issued and long-term care product lines, as well as favorable
mortality experience for certain of our interest-sensitive life products. The amortization of acquisition costs in 2010 was slightly higher than
the preceding year due to the continued increase in the level of deferred acquisition costs as well as an acceleration of amortization resulting
from lower persistency for certain issue years in our individual disability recently issued and long-term care product lines. Although the
2010 rate of persistency for the overall block of business within these product lines was favorable to 2009, the persistency for certain
individual issue years was less than expected and required additional amortization of deferred acquisition costs.
As previously discussed, at December 31, 2011 we determined that our long-term care deferred acquisition costs of $289.8 million
were not recoverable, and we recognized an impairment charge at that time.
The year over year variability in compensation expense primarily relates to incentive compensation which varies with the volume
of sales. Also impacting the higher compensation expense in 2011 were costs related to the implementation of expense management
initiatives. Other expenses were slightly lower in 2011 compared to the prior year due to our continued focus on operating effectiveness
and expense management. Other expenses decreased in 2010 compared to 2009 due primarily to a decline in our pension costs as well as
continued expense management.
In 2011, we recognized a reduction in federal income taxes of $41.3 million due to a final settlement with the Internal Revenue Service
(IRS) with respect to our appeal of audit adjustments for the tax years 1996 to 2004. Also favorably impacting 2011 income tax compared
to prior years is our increased level of investments in low-income housing tax credit partnerships. Our income tax for 2011 was unfavorably
impacted by an $18.6 million tax related to the repatriation of £150.0 million of dividends from our U.K. subsidiaries.
The income tax rate in the U.K. is expected to be reduced annually, at least one percent per year, beginning in April 2011, with the
ultimate goal of reducing the rate from 28 percent to 23 percent. In accordance with GAAP, we are required to adjust deferred tax assets
and liabilities through income on the date of enactment of a rate change, the first of which occurred during the third quarter of 2010. An
additional rate change was enacted during the third quarter of 2011. We recorded a reduction of $6.8 million and $2.7 million to our income
tax expense during 2011 and 2010, respectively, to reflect the impact of the rate changes on our net deferred tax liability related to our
U.K. operations.
In March 2010, legislation related to healthcare reform was signed into law. Among other things, the new legislation reduced
the tax benefits available to an employer that receives a postretirement prescription drug coverage subsidy from the federal government
under the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Under the new legislation, to the extent our future
postretirement prescription drug coverage expenses are reimbursed under the subsidy program, the expenses covered by the subsidy will
no longer be tax deductible after 2012. Employers that receive the subsidy were required to recognize the deferred tax effects relating to
the future postretirement prescription drug coverage in the period the legislation was enacted. Our income tax expense for 2010 included
a non-cash tax charge of $10.2 million which was recorded in the first quarter of 2010 to reflect the impact of the tax law change.
Reconciliation of Non-GAAP Financial Measures
We analyze our performance using non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a
company’s performance, financial position, or cash flows that excludes or includes amounts that are not normally excluded or included in
the most directly comparable measure calculated and presented in accordance with GAAP. We believe operating income or loss which
excludes realized investment gains and losses and certain other items listed in our reconciliation is a better performance measure and a
better indicator of the profitability and underlying trends in our business. Our investment focus is on investment income to support our
insurance liabilities as opposed to the generation of realized investment gains and losses, and a long-term focus is necessary to maintain
profitability over the life of the business. Realized investment gains and losses depend on market conditions and do not necessarily relate
to decisions regarding the underlying business of our segments. However, income or loss excluding realized investment gains and losses
and certain other items does not replace net income or net loss as a measure of overall profitability. We may experience realized
investment losses, which will affect future earnings levels since our underlying business is long-term in nature and we need to earn the
interest rates assumed in calculating our liabilities.
40
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations 2011
Unum
The non-GAAP financial measures of “operating revenue,” “operating income” or “operating loss,” and “after-tax operating income”
differ from revenue, income (loss) before income tax, and net income as presented in our consolidated operating results and in income
statements prepared in accordance with GAAP due to the exclusion of before-tax realized investment gains and losses and certain other
items.
A reconciliation of operating revenue by segment to revenue and operating income by segment to net income is as follows:
(in millions of dollars)
(in millions of dollars)
Operating Revenue by Segment
Net Realized Investment Gain (Loss)
Revenue
Operating Income by Segment
Net Realized Investment Gain (Loss)
Income Tax
Net Income
Year Ended December 31
2011
2010
2009
$10,282.9
$10,168.5
$10,079.3
(4.9)
24.7
11.7
$10,278.0
$10,193.2
$10,091.0
$ 262.1
$ 1,306.6
$ 1,280.6
(4.9)
21.8
24.7
445.2
11.7
439.7
$ 235.4
$ 886.1
$ 852.6
As previously noted, included in before-tax “Operating Income by Segment” shown in the preceding chart are certain other items
which we may at times exclude from our discussion of financial ratios and metrics in order to enhance the understanding and comparability
of our operational performance and the underlying fundamentals, but this exclusion is not an indication that similar items may not recur.
Excluding the before-tax charges of $289.8 million to recognize an impairment of our long-term care deferred acquisition costs and
$573.6 million and $183.5 million to increase reserves in our long-term care and individual disability closed blocks, respectively, our
operating income by segment is $1,309.0 million for 2011. The after-tax impacts of these charges, as well as certain other items, are
reflected in the following reconciliation of after-tax operating income to net income:
After-tax Operating Income
$ 896.8
$ 2.95
$880.6
$ 2.69
$852.4
$2.57
Year Ended December 31
2011
2010
2009
(in millions)
per share*
(in millions)
per share*
(in millions)
per share*
Deferred Acquisition Costs Impairment
and Reserve Charges for Long-term
Care Closed Block
Reserve Charge for Individual
Disability Closed Block
Tax Reduction from IRS Settlement
Tax Related to U.K. Repatriation
Tax Related to Healthcare Reform Legislation
Net Realized Investment Gain (Loss)
Income Tax (Benefit) on Net Realized
(561.2)
(1.85)
(119.3)
41.3
(18.6)
—
(4.9)
(0.39)
0.14
(0.06)
—
(0.01)
—
—
—
—
—
—
—
—
(10.2)
24.7
(0.03)
0.08
—
—
—
—
—
—
—
—
—
—
11.7
0.04
Investment Gain (Loss)
(1.3)
—
9.0
0.03
11.5
Net Income
*Assuming Dilution
$ 235.4
$ 0.78
$886.1
$ 2.71
$852.6
0.04
$2.57
Unum 2011 Annual Report
41
Consolidated Sales Results
As previously discussed, effective with the fourth quarter of 2011, we reclassified our long-term care line of business from the Unum
US segment to the Closed Block segment. Prior period sales results have been restated to reflect this change in our reporting classifications.
(in millions of dollars)
Unum US
Fully Insured Products
Administrative Services Only (ASO) Products
Total Unum US
Unum UK
Colonial Life
Closed Block
Consolidated
Year Ended December 31
2011
% Change
2010
% Change
2009
$ 707.3
9.9%
$ 643.4
(5.8)% $ 683.1
6.4
713.7
100.2
365.9
36.1
$1,215.9
1.6
9.9
(15.9)
2.0
34.7
5.3
6.3
649.7
119.2
358.8
26.8
$1,154.5
(18.2)
(5.9)
(3.2)
4.4
(2.9)
(2.6)
7.7
690.8
123.2
343.8
27.6
$1,185.4
Sales results shown in the preceding chart generally represent the annualized premium or annualized fee income on new sales which
we expect to receive and report as premium income or fee income during the next 12 months following or beginning in the initial quarter
in which the sale is reported, depending on the effective date of the new sale. Sales do not correspond to premium income or fee income
reported as revenue in accordance with GAAP. This is because new annualized sales premiums reflect current sales performance and what
we expect to recognize as premium or fee income over a 12 month period, while premium income and fee income reported in our financial
statements are reported on an “as earned” basis rather than an annualized basis and also include renewals and persistency of in-force
policies written in prior years as well as current new sales.
Premiums for fully insured products are reported as premium income. Fees for ASO and family medical leave products are included
in other income. Sales, persistency of the existing block of business, and the effectiveness of a renewal program are indicators of growth
in premium and fee income. Trends in new sales, as well as existing market share, also indicate the potential for growth in our respective
markets and the level of market acceptance of price changes and new product offerings. Sales results may fluctuate significantly due to
case size and timing of sales submissions.
We experienced lower sales growth from some of our product lines during 2011 and the two preceding years which we believe is
mostly attributable to the economic environment. We expect this unfavorable pattern may continue in the near term if current economic
conditions persist.
See “Segment Results” as follows for additional discussion of sales by segment.
42
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2011
Unum
Segment Results
Our reporting segments are comprised of the following: Unum US, Unum UK, Colonial Life, Closed Block, and Corporate. In conjunction
with our long-term care strategic review, effective with the fourth quarter of 2011 we modified our reporting segments to reclassify our
long-term care products from the Unum US segment to the Closed Block segment. We also reclassified our other insurance products not
actively marketed, including individual life and corporate-owned life insurance, reinsurance pools and management operations, group
pension, health insurance, and individual annuities, which were previously reported in the Corporate and Other segment to the Closed
Block segment. The inclusion of all closed blocks of business into one operating segment aligns with our reporting and monitoring of our
closed blocks of business within a discrete segment and is consistent with our separation of these blocks of business from the lines of
business which actively market new products. Prior period segment results have been restated to reflect this change in our reporting
classifications.
Financial information for each of the reporting segments is as follows.
Unum US Segment
The Unum US segment includes group long-term and short-term disability insurance, group life and accidental death and
dismemberment products, and supplemental and voluntary lines of business, which are comprised of individual disability — recently issued
insurance and voluntary benefits products. As previously noted, effective with the fourth quarter of 2011, we reclassified our long-term care
products from the Unum US segment to the Closed Block segment.
Unum US Operating Results
Shown below are financial results for the Unum US segment. In the sections following, financial results and key ratios are also
presented for the major lines of business within the segment.
(in millions of dollars, except ratios)
2011
% Change
2010
% Change
2009
Year Ended December 31
Operating Revenue
Premium Income
Net Investment Income
Other Income
Total
Benefits and Expenses
Benefits and Change in Reserves for Future Benefits
3,113.5
Commissions
Interest and Debt Expense
Deferral of Acquisition Costs
Amortization of Deferred Acquisition Costs
Other Expenses
Total
Operating Income Before Income Tax and Net
474.0
1.0
(333.8)
298.7
995.8
4,549.2
$4,296.0
1.0%
$4,255.4
(0.5)%
$4,278.4
951.4
121.6
5,369.0
1.1
(1.0)
0.9
(0.3)
2.9
(16.7)
3.3
(3.0)
1.6
—
941.5
122.8
0.8
3.4
934.3
118.8
5,319.7
(0.2)
5,331.5
3,124.4
460.6
(2.1)
2.7
1.2
(40.0)
(323.2)
307.9
979.7
4,550.6
0.5
4.8
(2.0)
(1.4)
3,192.1
448.3
2.0
(321.6)
293.8
999.3
4,613.9
Realized Investment Gains and Losses
$ 819.8
6.6
$ 769.1
7.2
$ 717.6
Operating Ratios (% of Premium Income):
Benefit Ratio
Other Expense Ratio
Before-tax Operating Income Ratio
.
72.5%
23.2%
19.1%
73.4%
23.0%
18.1%
74.6%
23.4%
16.8%
Unum 2011 Annual Report
43
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Unum US Group Disability Operating Results
Shown below are financial results and key performance indicators for Unum US group disability.
(in millions of dollars, except ratios)
2011
% Change
2010
% Change
2009
Year Ended December 31
Operating Revenue
Premium Income
Group Long-term Disability
Group Short-term Disability
Total Premium Income
Net Investment Income
Other Income
Total
Benefits and Expenses
Benefits and Change in Reserves for Future Benefits
1,722.1
Commissions
Interest and Debt Expense
Deferral of Acquisition Costs
Amortization of Deferred Acquisition Costs
Other Expenses
Total
Operating Income Before Income Tax and Net
159.5
1.0
(61.0)
59.9
547.0
2,428.5
$1,580.2
(3.6)%
$1,639.4
(5.1)%
$1,726.9
455.2
2,035.4
605.0
89.4
2,729.8
5.6
(1.7)
(1.6)
3.1
(1.5)
(1.5)
(0.1)
(16.7)
3.4
(5.7)
0.6
(1.2)
430.9
2,070.3
614.6
86.7
2,771.6
1,747.8
159.7
(0.4)
(4.1)
(2.4)
(2.5)
(3.7)
(6.2)
(1.5)
1.2
(40.0)
(59.0)
63.5
543.7
2,456.9
(5.6)
(5.6)
(5.0)
(5.7)
432.8
2,159.7
629.4
88.9
2,878.0
1,862.8
162.2
2.0
(62.5)
67.3
572.6
2,604.4
Realized Investment Gains and Losses
$ 301.3
(4.3)
$ 314.7
15.0
$ 273.6
Operating Ratios (% of Premium Income):
Benefit Ratio
Other Expense Ratio
Before-tax Operating Income Ratio
Premium Persistency:
Group Long-term Disability
Group Short-term Disability
Case Persistency:
Group Long-term Disability
Group Short-term Disability
84.6%
26.9%
14.8%
90.2%
89.9%
89.0%
88.0%
84.4%
26.3%
15.2%
89.4%
88.6%
88.4%
87.3%
86.3%
26.5%
12.7%
86.9%
86.8%
87.4%
86.5%
Year Ended December 31, 2011 Compared with Year Ended December 31, 2010
Group disability premium income decreased in 2011 compared to 2010, as the ongoing high levels of unemployment and the
competitive environment continued to pressure our premium income growth. In particular, premium growth from existing customers
continued to be unfavorably impacted by lower salary growth and lower growth in the number of employees covered under an existing
policy. Partially offsetting the unfavorable growth trend from existing customers was higher premium and case persistency for both group
long-term disability and group short-term disability.
44
Unum 2011 Annual Report
2011
Unum
Net investment income was lower in 2011 compared to 2010, due primarily to a decrease in the level of assets supporting this line
of business and a decline in the level of prepayment income on mortgage-backed securities, partially offset by an increase in bond call
premiums. Other income includes ASO fees of $56.6 million and $57.6 million in 2011 and 2010, respectively, and $21.3 million and
$17.3 million of fees from fee-based family medical leave products.
The benefit ratio was slightly higher in 2011 compared to 2010 due to an increase in group long-term and short-term disability
incidence rates and a decrease in the claim reserve discount rate, effective with the third quarter of 2011, for group long-term disability new
claim incurrals. These unfavorable impacts on the benefit ratio were mostly offset by a higher rate of group long-term disability recoveries.
The deferral of acquisition costs in 2011 was higher than 2010 due to a higher level of sales in 2011 and an increase in the associated
acquisition costs. The amortization of acquisition costs in 2011 was lower than 2010 due to a decrease in amortization related to internal
replacement transactions. Although we have continued our focus on operating effectiveness and expense management throughout 2011,
the other expense ratio was slightly higher in 2011 relative to 2010 due primarily to an increase in expenses associated with the growth in
the fee-based family medical leave products as well as lower premium income.
Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
Group disability premium income decreased in 2010 compared to 2009, due in part to the high levels of unemployment and the
resulting impact on growth from existing customers as well as the competitive environment. Partially offsetting the unfavorable growth trend
from existing customers was higher premium and case persistency for both group long-term and short-term disability compared to 2009.
Net investment income was lower in 2010 relative to 2009 due primarily to a decrease in the level of assets supporting this line
of business and a decline in the level of prepayment income on mortgage-backed securities, partially offset by an increase in bond call
premiums. Other income included ASO fees of $57.6 million and $59.2 million for 2010 and 2009, respectively, and $17.3 million of fees
each year in both 2010 and 2009 from fee-based family medical leave products.
The benefit ratio was lower in 2010 compared to 2009 due primarily to a higher rate of claim recoveries for group long-term disability,
offset partially by an increase in claim incidence rates for both group long-term and short-term disability.
Interest and debt expense related to the debt issued by Tailwind Holdings decreased in 2010 relative to 2009 due to lower rates
of interest on the floating rate debt and a decrease in the amount of outstanding debt resulting from principal repayments.
The deferral of acquisition costs in 2010 was lower than 2009 due to a lower level of sales. The amortization of acquisition costs in
2010 was lower than 2009 due to a decrease in amortization related to internal replacement transactions and a declining balance in the
deferred acquisition costs asset. The other expense ratio decreased slightly in 2010 relative to 2009, despite the decline in premium
income, due to our continued focus on expense management.
Unum 2011 Annual Report
45
Unum US Group Life and Accidental Death and Dismemberment Operating Results
Shown below are financial results and key performance indicators for Unum US group life and accidental death and dismemberment.
(in millions of dollars, except ratios)
2011
% Change
2010
% Change
2009
Year Ended December 31
Operating Revenue
Premium Income
Group Life
Accidental Death & Dismemberment
Total Premium Income
Net Investment Income
Other Income
Total
Benefits and Expenses
Benefits and Change in Reserves for Future Benefits
Commissions
Deferral of Acquisition Costs
Amortization of Deferred Acquisition Costs
Other Expenses
Total
Operating Income Before Income Tax and Net
$1,106.7
109.2
1,215.9
135.5
2.2
1,353.6
854.6
95.5
(51.9)
43.1
199.3
1,140.6
1.5%
$1,090.3
3.1%
$1,057.7
2.9
1.6
4.6
(8.3)
1.9
1.8
6.9
5.3
(0.5)
1.4
1.9
106.1
1,196.4
129.6
2.4
1,328.4
839.9
89.3
(49.3)
43.3
196.5
1,119.7
1.1
2.9
2.5
26.3
2.9
3.0
4.6
2.5
(5.7)
(0.6)
2.1
104.9
1,162.6
126.5
1.9
1,291.0
815.5
85.4
(48.1)
45.9
197.6
1,096.3
Realized Investment Gains and Losses
$ 213.0
2.1
$ 208.7
7.2
$ 194.7
Operating Ratios (% of Premium Income):
Benefit Ratio
Other Expense Ratio
Before-tax Operating Income Ratio
Premium Persistency:
Group Life
Accidental Death & Dismemberment
Case Persistency:
Group Life
Accidental Death & Dismemberment
70.3%
16.4%
17.5%
88.0%
88.2%
88.6%
88.6%
70.2%
16.4%
17.4%
91.5%
90.7%
88.3%
88.4%
70.1%
17.0%
16.7%
86.9%
88.1%
87.2%
87.2%
Year Ended December 31, 2011 Compared with Year Ended December 31, 2010
Premium income for group life and accidental death and dismemberment increased in 2011 compared to 2010 due primarily to higher
group life sales, partially offset by lower premium persistency in the large case group life products. Case persistency in 2011 was slightly
higher than 2010. Net investment income was higher in 2011 compared to 2010 due primarily to an increase in the level of assets
supporting this line of business, partially offset by a decline in the level of prepayment income on mortgage-backed securities.
The 2011 benefit ratio was consistent with the benefit ratio of 2010. Commissions and the deferral of acquisition costs were higher in
2011 compared to 2010 due primarily to a higher level of group life sales. The amortization of acquisition costs in 2011 was slightly lower
than in 2010, due primarily to volatility in the level of amortization associated with internal replacement transactions. The other expense
ratio in 2011 was consistent with 2010 as we continue our efforts to manage our expense levels relative to premium levels through
operating effectiveness and expense management.
46
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2011
Unum
Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
Premium income for group life and accidental death and dismemberment increased in 2010 relative to 2009 due primarily to favorable
premium and case persistency. Premium and case persistency for the group life product line increased in both the core and large case
market segments. Net investment income was higher in 2010 compared to 2009 due primarily to an increase in the level of assets
supporting this line of business.
The benefit ratio for 2010 was consistent with 2009. Commissions were higher due to an increase in supplemental payments. The
deferral of acquisition costs increased in 2010 compared to 2009 due primarily to the increase in commission expense. The amortization of
acquisition costs in 2010 was lower than 2009 due primarily to a decrease in amortization related to internal replacement transactions. The
other expense ratio decreased in 2010 in comparison to 2009 due to our continued focus on expense management.
Unum US Supplemental and Voluntary Operating Results
Shown below are financial results and key performance indicators for Unum US supplemental and voluntary product lines.
(in millions of dollars, except ratios)
2011
% Change
2010
% Change
2009
Year Ended December 31
Operating Revenue
Premium Income
Individual Disability — Recently Issued
Voluntary Benefits
Total Premium Income
Net Investment Income
Other Income
Total
Benefits and Expenses
Benefits and Change in Reserves for Future Benefits
Commissions
Deferral of Acquisition Costs
Amortization of Deferred Acquisition Costs
Other Expenses
Total
Operating Income Before Income Tax and Net
$ 464.7
580.0
1,044.7
210.9
30.0
1,285.6
536.8
219.0
(220.9)
195.7
249.5
980.1
1.5%
$ 457.9
(1.3)%
$ 463.7
9.3
5.7
6.9
(11.0)
5.4
—
3.5
2.8
(2.7)
4.2
0.6
530.8
988.7
197.3
33.7
1,219.7
536.7
211.6
(214.9)
201.1
239.5
974.0
7.8
3.4
10.6
20.4
4.9
4.5
5.4
1.8
11.4
4.5
6.7
492.4
956.1
178.4
28.0
1,162.5
513.8
200.7
(211.0)
180.6
229.1
913.2
Realized Investment Gains and Losses
$ 305.5
24.3
$ 245.7
(1.4)
$ 249.3
Operating Ratios (% of Premium Income):
Benefit Ratios:
Individual Disability — Recently Issued
Voluntary Benefits
Other Expense Ratio
Before-tax Operating Income Ratio
Interest Adjusted Loss Ratio:
Individual Disability — Recently Issued
Premium Persistency:
Individual Disability — Recently Issued
Voluntary Benefits
52.2%
50.7%
23.9%
29.2%
30.8%
89.3%
80.5%
53.3%
55.1%
24.2%
24.9%
32.5%
90.7%
80.1%
51.4%
56.0%
24.0%
26.1%
32.5%
89.6%
79.9%
Unum 2011 Annual Report
47
Year Ended December 31, 2011 Compared with Year Ended December 31, 2010
Premium income was higher in 2011 compared to 2010 due primarily to growth in our voluntary benefits product line. Premium
persistency for the individual disability — recently issued product line decreased, while the premium persistency for the voluntary benefits
product line increased slightly. Net investment income was higher in 2011 compared to 2010 due primarily to an increase in the level of
assets supporting these lines of business, partially offset by a decline in the level of prepayment income on mortgage-backed securities
and a decline in bond call premiums.
The interest adjusted loss ratio for the individual disability — recently issued line of business in 2011 was lower than 2010 due to lower
incidence rates. The benefit ratio for voluntary benefits was lower in 2011 compared to 2010 due primarily to a lower average paid claim
size for voluntary life and lower paid incidence and prevalence rates for voluntary disability.
Commissions and the deferral of acquisition costs were higher in 2011 than 2010 due to higher sales. The amortization of deferred
acquisition costs was lower in 2011 compared to 2010 due to favorable premium persistency relative to assumptions for certain issue years
within certain of our product lines as well as prospective unlocking for favorable mortality experience relative to assumptions for our
interest-sensitive voluntary life products. The other expense ratio in 2011 was lower than 2010 as we continue to focus on expense
management.
The individual disability — recently issued product line had goodwill of approximately $187.5 million at December 31, 2011, none of
which is currently believed to be at risk for future impairment. The fair value of this product line is significantly in excess of its carrying value.
Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
Premium income increased in 2010 relative to 2009 due primarily to sales growth in the voluntary benefits product line and higher
persistency. Premium income declined in 2010 relative to 2009 for individual disability — recently issued due to lower sales, partially offset
by favorable persistency. Net investment income increased in 2010 relative to 2009 due to an increase in the level of assets supporting
these lines of business and an increase in bond call premiums, partially offset by a decline in the level of prepayment income on mortgage-
backed securities.
The interest adjusted loss ratio for the individual disability — recently issued line of business in 2010 was consistent with 2009, with a
higher rate of claim recoveries generally offsetting the higher paid claim incidence rates. The benefit ratio for voluntary benefits decreased
in 2010 when compared to 2009 due primarily to a lower average paid claim size in the voluntary life product line, particularly in the
second half of 2010.
Commissions in 2010 were higher than 2009 due to the increase in voluntary benefits sales. The deferral of acquisition costs in 2010
was slightly higher than the level of 2009. The amortization of deferred acquisition costs was higher in 2010 relative to 2009 due to an
acceleration of amortization resulting from lower persistency for certain issue years in certain of the product lines. The other expense ratio
in 2010 was slightly higher than the level of 2009.
48
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations Unum US Sales
(in millions of dollars)
Sales by Product
Fully Insured Products
Group Disability, Group Life, and AD&D
Group Long-term Disability
Group Short-term Disability
Group Life
AD&D
Subtotal
Supplemental and Voluntary
Individual Disability — Recently Issued
Voluntary Benefits
Subtotal
Total Fully Insured Products
ASO Products
Total Sales
Sales by Market Sector
Group Disability, Group Life, and AD&D
Core Market (< 2,000 lives)
Large Case Market
Subtotal
Supplemental and Voluntary
Total Fully Insured Products
ASO Products
Total Sales
2011
Unum
Year Ended December 31
2011
% Change
2010
% Change
2009
$165.0
11.3%
$148.2
(18.6)%
$182.1
84.9
185.3
17.6
452.8
55.6
198.9
254.5
707.3
6.4
$713.7
5.7
11.0
(2.8)
9.5
30.2
6.3
10.7
9.9
1.6
9.9
80.3
166.9
18.1
413.5
42.7
187.2
229.9
643.4
6.3
$649.7
(4.3)
(9.7)
(3.2)
(11.9)
(17.2)
15.6
7.7
(5.8)
(18.2)
(5.9)
83.9
184.9
18.7
469.6
51.6
161.9
213.5
683.1
7.7
$690.8
$322.1
9.6%
$294.0
(8.3)%
$320.6
130.7
452.8
254.5
707.3
6.4
$713.7
9.4
9.5
10.7
9.9
1.6
9.9
119.5
413.5
229.9
643.4
6.3
$649.7
(19.8)
(11.9)
7.7
(5.8)
(18.2)
(5.9)
149.0
469.6
213.5
683.1
7.7
$690.8
Year Ended December 31, 2011 Compared with Year Ended December 31, 2010
Unum US sales improved in 2011 compared to 2010, with growth in each of our product lines, other than accidental death and
dismemberment, and growth in each of our major market segments. Sales in our group core market segment were 9.6 percent higher
in 2011 compared to 2010, with increases in each of the product lines within this market segment. The number of new accounts added
in our group core market segment during 2011 was 4.4 percent higher than the number of new accounts added during 2010.
Sales in our group large case market segment were 9.4 percent higher in 2011 compared to 2010 due to higher group long-term
disability and group life sales, partially offset by lower group short-term disability and accidental, death, and dismemberment sales.
Our sales mix of group products in 2011 was approximately 71 percent core market and 29 percent large case market.
Sales of voluntary benefits were 6.3 percent higher in 2011 compared to 2010 due primarily to higher sales from existing customers.
The number of new accounts added in the voluntary benefits product line was 2.9 percent higher in 2011 than the number of new accounts
added during 2010.
Sales in our individual disability — recently issued line of business, which are primarily concentrated in the multi-life market, were
30.2 percent higher in 2011 compared to 2010. The year over year increase was primarily due to strong sales in our larger sized markets,
as well as the unusually low volume of sales we experienced during 2010 for this line of business.
Unum 2011 Annual Report
49
We believe that the group core market and voluntary benefits market, which combined together are approximately 73 percent of our
Unum US sales for 2011 and grew approximately 8.3 percent relative to 2010, represent significant growth opportunities. We will also seek
disciplined and opportunistic growth, generally at the market growth rate, in the group large case and individual disability markets. While in
the short-term we expect economic trends to continue to pressure sales growth, we believe we are well positioned for economic recovery.
Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
Unum US sales in 2010 were negatively impacted by economic conditions and the competitive environment, as sales declined
5.9 percent in 2010 relative to 2009. Sales in our group core market segment decreased 8.3 percent in 2010 compared to 2009, with lower
group long-term and short-term disability sales and lower group life and accidental death and dismemberment sales. The number of new
accounts added in our group core market segment during 2010 was 3.0 percent lower than the number of new accounts added during
2009. Sales in the group large case market segment decreased 19.8 percent in 2010 compared to 2009, due in part to one large case sold
in 2009. Our 2010 sales mix was approximately 71 percent core market and 29 percent large case market, compared to our 2009 sales mix
of approximately 68 percent core market and 32 percent large case market.
Sales of voluntary benefits increased 15.6 percent in 2010 relative to 2009, and the number of new accounts increased 13.3 percent.
Sales in our individual disability — recently issued line of business decreased 17.2 percent in 2010 compared to 2009.
Segment Outlook
Although we experienced premium and sales growth during 2011, we believe that premium and sales growth, particularly growth
in existing customer accounts, will continue to be pressured by ongoing high levels of unemployment and the competitive environment.
Opportunities for premium and sales growth are expected to re-emerge as the economy improves and employment growth resumes.
We expect some volatility in net investment income to continue as a result of fluctuations in bond calls and other types of miscellaneous
net investment income. We intend to continue to manage our expense levels relative to premium levels through operating effectiveness
and performance management.
Certain risks and uncertainties are inherent in the disability insurance business. Components of claims experience, such as incidence
and recovery rates, may be worse than we expect. Disability claim incidence and claim recovery rates may be influenced by, among other
factors, the rate of unemployment and consumer confidence. Within the group disability market, pricing and renewal actions can be taken
to react to higher claim rates, but these actions take time to implement, and there is a risk that the market will not sustain increased prices.
In addition, changes in economic and external conditions may not manifest themselves in claims experience for an extended period of
time. The current economic conditions may lead to a higher rate of claim incidence, lower levels of claim recoveries, or lower claim discount
rates. We have previously taken steps to improve our risk profile, including reducing our exposure to volatile business segments through
diversification by market size, product segment, and industry segment. We believe our claims management organization is positioned for
stable and sustainable performance levels. We are uncertain as to whether the higher claim incidence experienced in 2011 was due to the
normal volatility that occurs in our group disability business or was related to the economy. As a result of the continued decline in interest
rates, during 2011, we lowered our claim discount rate for new claim incurrals in group disability. We are initiating price increases for our
group disability products during 2012 as a result of higher claim incidence and the lower claim discount rate. We continuously monitor key
indicators to assess our risks and attempt to adjust our business plans accordingly.
We believe our Unum US growth strategy is sound and that we will be able to leverage the capabilities, products, and relationships
and reputation we have built to deliver growth as the benefits market stabilizes. We continue to see future growth opportunity based on
employee choice, defined employer funding, superior service, and effective communication. We intend to maintain our discipline and will
continue (i) directing the majority of our efforts on capturing opportunities emerging in our core group and voluntary markets to grow
them at above-market rates, (ii) focusing on margins in large case group insurance, while leveraging core market, voluntary, and other
shorter-term investments to grow at market rates, and (iii) seeking opportunities to improve margins and return in our supplemental lines
of business. We believe we are well positioned strategically in our markets and that opportunities for continued disciplined growth exist in
our group core market segment and in the voluntary markets. While the current economic conditions have impacted our ability to grow
premium income and will continue to do so until we return to a more normal economic environment, we expect to achieve marginal year
50
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations 2011
Unum
over year growth in our premium income during 2012. We anticipate that the benefit ratio in our group disability product line will be
generally consistent with the levels of 2011 and 2010, depending on claim incidence rates and claim discount rates. We think future profit
margin improvement is achievable, driven primarily by our continued product mix shift and expense efficiencies as our claims performance
gradually flattens.
We began offering group dental benefits through a partnership with United Concordia, beginning with an initial launch in a selected
market during the fourth quarter of 2011, with additional markets expected to be added throughout 2012. The product offering will include
flexible plan designs aligned with our other employer-sponsored benefit coverages and will be targeted to the group core market segment.
Unum UK Segment
The Unum UK segment includes insurance for group long-term disability, group life, and supplemental and voluntary lines of business.
The supplemental and voluntary lines of business are comprised of individual disability, critical illness, and voluntary benefits products.
Unum UK’s products are sold primarily in the United Kingdom through field sales personnel and independent brokers and consultants.
Operating Results
Shown below are financial results and key performance indicators for the Unum UK segment.
(in millions of dollars, except ratios)
2011
% Change
2010
% Change
2009
Year Ended December 31
Operating Revenue
Premium Income
Group Long-term Disability
Group Life
Supplemental and Voluntary
Total Premium Income
Net Investment Income
Other Income
Total
Benefits and Expenses
Benefits and Change in Reserves for Future Benefits
Commissions
Deferral of Acquisition Costs
Amortization of Deferred Acquisition Costs
Other Expenses
Total
Operating Income Before Income Tax and Net
$419.6
(0.4)%
$421.2
(12.7)%
$482.4
203.6
64.4
687.6
189.9
0.3
877.8
493.8
45.7
(30.6)
29.2
147.7
685.8
18.6
11.4
5.7
11.4
(75.0)
6.7
13.3
3.6
8.1
8.1
9.5
11.8
171.6
57.8
650.6
170.5
16.1
3.4
(5.2)
36.9
1.2
(50.0)
822.3
1.1
435.8
44.1
(28.3)
27.0
134.9
613.5
16.6
(5.6)
(2.7)
(11.5)
(4.8)
8.9
147.8
55.9
686.1
124.5
2.4
813.0
373.6
46.7
(29.1)
30.5
141.7
563.4
Realized Investment Gains and Losses
$192.0
(8.0)
$208.8
(16.3)
$249.6
Operating Ratios (% of Premium Income):
Benefit Ratio
Other Expense Ratio
Before-tax Operating Income Ratio
Premium Persistency:
Group Long-term Disability
Group Life
Supplemental and Voluntary
71.8%
21.5%
27.9%
86.6%
89.3%
87.3%
67.0%
20.7%
32.1%
91.3%
92.7%
88.9%
54.5%
20.7%
36.4%
88.5%
80.1%
88.2%
Unum 2011 Annual Report
51
Foreign Currency Translation
The functional currency of Unum UK is the British pound sterling. Unum UK’s premiums, net investment income, claims, and expenses
are received or paid in pounds, and we hold pound-denominated assets to support Unum UK’s pound-denominated policy reserves and
liabilities. We translate Unum UK’s pound-denominated financial statement items into dollars for our consolidated financial reporting. We
translate income statement items using an average exchange rate for the reporting period, and we translate balance sheet items using the
exchange rate at the end of the period. We report unrealized foreign currency translation gains and losses in accumulated other
comprehensive income in our consolidated balance sheets.
Fluctuations in the pound to dollar exchange rate have an effect on Unum UK’s reported financial results and our consolidated financial
results. In periods when the pound strengthens relative to the preceding period, as occurred in 2011 compared to 2010, translating pounds
into dollars increases current period results relative to the prior period. In periods when the pound weakens relative to the preceding
period, as occurred in 2010 compared to 2009, translating into dollars decreases current period results relative to the prior periods.
(in millions of pounds, except ratios)
2011
% Change
2010
% Change
2009
Year Ended December 31
Operating Revenue
Premium Income
Group Long-term Disability
Group Life
Supplemental and Voluntary
Total Premium Income
Net Investment Income
Other Income
Total
Benefits and Expenses
Benefits and Change in Reserves for Future Benefits
Commissions
Deferral of Acquisition Costs
Amortization of Deferred Acquisition Costs
Other Expenses
Total
Operating Income Before Income Tax and Net
£261.6
(3.9)%
£272.3
(11.9)%
£309.0
127.0
40.1
428.7
118.4
0.1
547.2
307.7
28.5
(19.1)
18.2
92.1
427.4
14.5
7.2
1.9
7.4
(88.9)
2.9
9.3
—
4.4
4.6
5.4
7.8
110.9
37.4
420.6
110.2
17.9
5.1
(4.1)
38.4
0.9
(43.8)
531.7
2.3
281.4
28.5
(18.3)
17.4
87.4
18.1
(4.4)
(1.1)
(10.8)
(3.1)
396.4
10.3
94.1
35.6
438.7
79.6
1.6
519.9
238.3
29.8
(18.5)
19.5
90.2
359.3
£160.6
1.554
Realized Investment Gains and Losses
£119.8
(11.5)
£135.3
(15.8)
Weighted Average Pound/Dollar Exchange Rate
1.603
1.543
Year Ended December 31, 2011 Compared with Year Ended December 31, 2010
Premium income was higher in 2011 compared to 2010, although premium growth continued to be pressured by pricing actions
resulting from the competitive U.K. market. The 2011 growth in group life premium income was due primarily to an increase in the inforce
block of business from prior year sales. Persistency, although below the level of 2010, remains strong. Net investment income was higher
in 2011 compared to 2010 due primarily to an increase in the level of assets supporting this business segment, an increase in bond calls,
and higher returns from inflation index-linked bonds. These index-linked bonds support the claim reserves associated with certain of our
group policies that provide for inflation-linked increases in benefits.
52
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2011
Unum
The benefit ratio was higher in 2011 compared to 2010 due to unfavorable risk experience in group long-term disability, which was
driven in part by the impact of higher inflation on claim reserves associated with disability policies containing an inflation-linked benefit
increase feature. We invest in index-linked bonds to support the claim reserves associated with group policies that provide for inflation-
linked increases in benefits. Although over the intermediate-term the investment return from index-linked bonds generally matches the
index-linked claim payments and reserves, the effect on investment income from the inflation index-linked bonds may not be completely
offset by a similar change in claim payments and reserves in each quarterly period. Also unfavorably impacting the benefit ratio for group
long-term disability was a lower level of claim resolutions during 2011 compared to 2010, partially offset by improved claim incidence
levels during 2011. Group life risk results were favorable in 2011 compared to the prior year, driven by improved mortality experience.
Commissions and the deferral and amortization of acquisition costs were generally consistent in 2011 compared to 2010. Other
expenses in 2011 were higher than 2010 due to elevated development and marketing expenditures related to Unum UK’s growth plans.
The other expense ratio for 2011 was favorably impacted by higher premium income relative to the prior year.
Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
Premium income decreased for 2010 relative to 2009 due primarily to lower premium growth from existing customers and pricing
actions due to the competitive U.K. market, partially offset by higher persistency. Net investment income increased in 2010 relative to 2009
due primarily to an increase in the level of assets supporting this business segment as well as an increase from inflation index-linked bonds.
The benefit ratio increased in 2010 relative to 2009 due primarily to unfavorable risk results for the group long-term disability product
line, which was driven primarily by lower premium income and the impact of higher inflation on claim reserves associated with disability
policies containing an inflation-linked benefit increase feature, as discussed above, as well as a lower level of claim resolutions. The level of
disability claim incidence improved over the level of 2009. Risk results for the group life line of business were also unfavorable in 2010
when compared to 2009 due to an increase in claim size for the dependent life line of business.
Commissions and the deferral of acquisition costs in 2010 were generally consistent with the level of 2009. The decrease in
amortization of deferred acquisition costs in 2010 relative to 2009 is due primarily to a decrease in amortization related to internal
replacement transactions. The other expense ratio in 2010 remained consistent when compared to 2009 due to a continued focus on
expense management.
Sales
Shown below are sales results in dollars and in pounds for the Unum UK segment.
(in millions)
Group Long-term Disability
Group Life
Supplemental and Voluntary
Total Sales
Group Long-term Disability
Group Life
Supplemental and Voluntary
Total Sales
Year Ended December 31
2011
% Change
2010
% Change
2009
$ 47.8
(10.0)%
$ 53.1
(6.5)%
$ 56.8
43.8
8.6
$100.2
£ 29.8
27.5
5.4
£ 62.7
(23.6)
(2.3)
(15.9)
57.3
8.8
$119.2
6.5
(30.2)
(3.2)
(13.4)%
£ 34.4
(5.8)%
(25.9)
(5.3)
(18.8)
37.1
5.7
£ 77.2
11.1
(28.8)
(0.9)
53.8
12.6
$123.2
£ 36.5
33.4
8.0
£ 77.9
Sales in Unum UK’s group long-term disability and group life product lines were lower in 2011 compared to 2010 due to a decline in
sales in both the core market, which we define for Unum UK as employee groups with fewer than 500 lives, and in the large case market.
These declines were partially offset by higher sales to existing customers. Sales in the supplemental and voluntary line of business
decreased in 2011 compared to 2010.
Unum 2011 Annual Report
53
Sales in Unum UK decreased slightly in 2010 compared to 2009, with the decrease in sales in the group long-term disability line of
business being attributable to a decline in sales in the large case market, partially offset by higher sales to existing customers and higher
core market sales. The sales growth in group life was attributable to higher sales in the large case markets as well as higher sales to
existing customers, partially offset by slightly lower core market sales. The decrease in sales in supplemental and voluntary was due to a
decline in sales in the large case market. Negatively affecting year over year comparisons is an increase in 2009 sales which resulted from
the exit of another large insurance provider from the U.K. group risk market.
Segment Outlook
The challenging economic and competitive pricing environment in the U.K. continue to negatively impact Unum UK’s premium growth,
and we expect this may continue in the near term if current economic and competitive conditions in the U.K. persist. Our sales growth may
also continue to be impacted by a prolonged competitive pricing environment in the U.K. The level of disability claim incidence in 2011 was
favorable relative to the same period of 2010, but our claim resolutions were unfavorable relative to the 2010 due in part to a lower level of
early duration claims and the impact of the economic environment on our ability to resolve claims. The current economic conditions may
lead to a higher rate of claim incidence, lower levels of claim recoveries, or lower claim discount rates. We are initiating price increases for
our group disability and group life products during 2012 to mitigate the impact of the current economic conditions. We continuously
monitor key indicators to assess our risks and attempt to adjust our business plans accordingly. Continued fluctuations in the U.S. dollar
relative to the British pound sterling impact our reported operating results.
Our current growth strategy focuses on generating organic growth and expanding our role as the leading provider of group disability
insurance in the U.K. Our strategy for future growth combines optimizing the performance of our existing business while developing new
market opportunities. We intend to optimize performance of the existing business by (i) increasing underwriting and pricing discipline,
(ii) improving our claims management processes, and (iii) expanding our broker market capabilities and sales effectiveness. We intend
to develop new market opportunities by raising awareness of the need for income protection, including seeking to increase coverage
of currently insured groups to include a greater percentage of the workforce, and by offering a suite of employer and employee paid
workplace solutions using integrated products with simpler, defined choices and flexible funding options through a streamlined and
efficient platform with online capabilities matched to broker and employer needs.
In the current competitive pricing market and economic environment, we continue to have a cautious outlook for premium growth.
We anticipate returning to more normalized levels of premium growth through stable persistency and price increases, as well as increased
sales to existing and new customers which we expect to occur commensurate with the timing of the U.K. economic recovery. We expect
our overall benefit ratio in 2012 to be favorable compared to 2011. We expect our profit margins to continue at a favorable level, consistent
with 2011.
54
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations 2011
Unum
Colonial Life Segment
The Colonial Life segment includes insurance for accident, sickness, and disability products, life products, and cancer and critical
illness products issued primarily by Colonial Life & Accident Insurance Company and marketed to employees at the workplace through an
independent contractor agency sales force and brokers.
Operating Results
Shown below are financial results and key performance indicators for the Colonial Life segment.
(in millions of dollars, except ratios)
2011
% Change
2010
% Change
2009
Year Ended December 31
Operating Revenue
Premium Income
Accident, Sickness, and Disability
$ 695.3
5.2%
$ 661.0
5.6%
$ 625.8
Life
Cancer and Critical Illness
Total Premium Income
Net Investment Income
Other Income
Total
Benefits and Expenses
Benefits and Change in Reserves for Future Benefits
Commissions
Deferral of Acquisition Costs
Amortization of Deferred Acquisition Costs
Other Expenses
Total
Operating Income Before Income Tax and Net
190.7
249.3
1,135.3
132.4
0.5
1,268.2
589.4
245.9
(252.9)
189.0
214.7
986.1
8.0
4.7
5.5
8.1
(28.6)
5.8
10.2
5.7
2.6
1.0
2.9
7.6
176.5
238.2
1,075.7
122.5
0.7
1,198.9
534.7
232.6
(246.4)
187.2
208.6
916.7
6.6
6.5
6.0
7.2
40.0
6.1
11.3
8.0
7.6
4.9
2.5
8.0
165.6
223.7
1,015.1
114.3
0.5
1,129.9
480.6
215.3
(229.0)
178.5
203.6
849.0
Realized Investment Gains and Losses
$ 282.1
—
$ 282.2
0.5
$ 280.9
Operating Ratios (% of Premium Income):
Benefit Ratio
Other Expense Ratio
Before-tax Operating Income Ratio
Persistency:
Accident, Sickness, and Disability
Life
Cancer and Critical Illness
51.9%
18.9%
24.8%
73.8%
85.0%
84.0%
49.7%
19.4%
26.2%
75.9%
86.0%
84.9%
47.3%
20.1%
27.7%
74.4%
84.7%
83.8%
Year Ended December 31, 2011 Compared with Year Ended December 31, 2010
Premium income was higher in 2011 compared to 2010 due primarily to prior period sales growth and stable persistency for the life
and cancer and critical illness lines of business, partially offset by lower persistency for the accident, sickness, and disability line of business.
Although we experienced premium growth in 2011, the growth rate continued to be negatively impacted by economic conditions that we
believe affected the buying patterns of employees. Net investment income was higher in 2011 compared to 2010 due primarily to growth
in the level of assets and higher bond call premiums, partially offset by a decrease in income from partnership investments.
Unum 2011 Annual Report
55
The overall benefit ratio was higher in 2011 compared to 2010 due to less favorable risk results in the accident, sickness, and disability
product line due to a higher level of incurred claims in our accident and disability products. Risk results in the life product line were slightly
lower in 2011 compared to 2010. Risk results in the cancer and critical illness product line were generally consistent in 2011 compared to 2010.
Commissions and the deferral of acquisition costs were both higher in 2011 compared to 2010 due primarily to an increase in
costs related to growth in new business premium. The amortization of deferred acquisition costs continues to increase as the level of the
deferred asset grows. The other expense ratio was lower in 2011 compared to 2010 due primarily to higher premium income and a
continued focus on expense management.
Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
Premium income increased in 2010 relative to 2009 due primarily to increased sales and favorable persistency, although premium
growth was negatively impacted in both years due to economic conditions. Net investment income increased in 2010 in comparison to
2009 due to growth in the level of assets, an increase in income from partnership investments, and an increase in bond call premiums.
The overall benefit ratio increased in 2010 relative to 2009 due to unfavorable experience in the accident, sickness, and disability
product line resulting from an increase in the level of paid claims and reserves driven by a higher level of claim incidence and slightly
higher average claim sizes. The cancer and critical illness benefit ratio increased relative to 2009 due primarily to the continued higher
levels of large claims on the older block of cancer products, partially offset by a refinement of the loss adjustment expense reserve
calculation. Somewhat negatively affecting year over year comparisons is the release of active life reserves in the second quarter of 2009
in our cancer and critical illness product line. The life benefit ratio decreased in 2010 relative to 2009 due primarily to favorable mortality.
Commissions and the deferral of acquisition costs both increased in 2010 compared to 2009 due primarily to increased sales. The
amortization of deferred acquisition costs in 2010 was higher relative to 2009 due to the continued increase in the level of deferred
acquisition costs, offset partially by the decrease in amortization related to certain of our interest-sensitive policies. The other expense ratio
decreased in 2010 compared to 2009 due primarily to a continued focus on expense management.
Sales
(in millions of dollars)
Accident, Sickness, and Disability
Life
Cancer and Critical Illness
Total Sales
Year Ended December 31
2011
% Change
2010
% Change
$242.9
65.5
57.5
$365.9
2.3%
(0.3)
3.2
2.0
$237.4
65.7
55.7
$358.8
7.4%
(3.8)
2.4
4.4
2009
$221.1
68.3
54.4
$343.8
Colonial Life’s sales were higher in 2011 relative to 2010, with new account sales 1.6 percent above the level of 2010, and existing
account sales 2.2 percent higher than in 2010. Commercial market sales were 2.5 percent higher in 2011 compared to 2010, driven
primarily by a sales increase of 4.4 percent in the core commercial market segment, which we define as accounts with fewer than 1,000
lives. Sales in the large case commercial market segment decreased 7.4 percent in 2011 compared to 2010. In the public sector market,
sales were generally consistent in 2011 as compared to 2010. Sales results for 2011 were unfavorably impacted by our decision to
discontinue selling our limited benefit medical product during 2011. The number of new accounts declined 1.8 percent in 2011 compared
to 2010, while the average new case size was 3.4 percent higher for 2011 relative to 2010.
Colonial Life’s sales were higher in 2010 compared to 2009, with 4.2 percent growth in new account sales, and 4.4 percent growth
in existing account sales relative to the prior year. Commercial market sales were 8.1 percent higher in 2010 compared to 2009, driven
primarily by a sales increase of 9.3 percent in the core commercial market segment. Sales in the large case commercial market segment
increased 2.6 percent in 2010 compared to 2009. In the public sector market, sales were 8.1 percent lower in 2010 compared to 2009.
The number of new accounts added in 2010 was 13.6 percent higher than 2009, while the average new case size was 8.2 percent lower
relative to 2009.
56
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2011
Unum
Segment Outlook
Our premium growth in 2011 was in line with the level of growth in 2010 but is below the level of our long-term growth expectations.
We believe slower sales and premium growth levels may continue in the near term if the current economic conditions persist and continue
to affect employment growth and the buying patterns of employees. We expect volatility in net investment income to continue during
2012 as a result of fluctuations in bond calls and other types of miscellaneous net investment income. Periods of economic downturns have
historically had minimal impact on the risk results of Colonial Life, due primarily to a diversified product portfolio that is designed with short
duration, indemnity benefits. We continuously monitor key indicators to assess our risks and attempt to adjust our business plans accordingly.
We believe we have a stable business model, with service levels and customer retention that allow us to focus on and deliver
premium growth despite the recent marketplace changes and uncertainties. We believe we are well positioned for growth and that
opportunities exist to accelerate growth during the next several years by (i) focusing on target market segments, (ii) driving new sales in
the public sector market, (iii) growing the reach and effectiveness of our distribution, and (iv) effectively serving our customers.
During 2012, we expect premium growth to be modest relative to our long-term outlook. We believe that strong profit margins
will continue, and we expect our overall benefit ratio to be generally consistent with the level of 2011. We believe premium growth will
re-accelerate as the economy improves, employment growth resumes, and our growth strategies gain momentum.
Closed Block Segment
As previously noted, effective with the fourth quarter of 2011, we modified our reporting segments. The Closed Block segment now
consists of our closed individual disability and long-term care lines of business, as well as certain other insurance products. The individual
disability line of business generally consists of those policies in-force before the substantial changes in product offerings, pricing, distribution,
and underwriting, which generally occurred during the period 1994 through 1998. A small amount of new business continued to be sold
after these changes, but we stopped selling new individual disability policies in this segment at the beginning of 2004 other than update
features contractually allowable on existing policies. Long-term care includes group long-term care, which we announced in February 2012
that we would discontinue selling, and individual long-term care, which we discontinued selling in 2009. The other insurance products line
of business consists of certain other products no longer actively marketed, including individual life and corporate-owned life insurance,
reinsurance pools and management operations, group pension, health insurance, and individual annuities.
Unum 2011 Annual Report
57
Operating Results
Shown below are financial results and key performance indicators for the Closed Block segment.
(in millions of dollars, except ratios)
2011
% Change
2010
% Change
2009
Year Ended December 31
Operating Revenue
Premium Income
Individual Disability
Long-term Care
All Other
Total Premium Income
Net Investment Income
Other Income
Total
Benefits and Expenses
$ 787.0
(7.1)%
$ 847.0
(5.7)%
$ 898.5
608.1
0.2
1,395.3
1,189.7
106.1
2,691.1
1.5
(94.3)
(3.8)
2.0
(6.6)
(1.4)
33.4
(3.8)
(10.3)
12.2
(32.4)
—
(13.4)
38.3
599.2
3.5
1,449.7
1,166.4
0.8
29.6
(3.1)
5.4
113.6
(13.3)
2,729.7
(0.1)
2,259.2
118.1
11.7
(9.8)
25.0
—
207.9
2,612.1
0.6
(6.9)
(29.5)
(29.5)
6.8
—
(1.6)
0.1
594.7
2.7
1,495.9
1,106.8
131.1
2,733.8
2,245.3
126.8
16.6
(13.9)
23.4
—
211.2
2,609.4
Benefits and Change in Reserves for Future Benefits
3,012.8
Commissions
Interest and Debt Expense
Deferral of Acquisition Costs
Amortization of Deferred Acquisition Costs
Impairment of Long-term Care Deferred Acquisition Costs
Other Expenses
Total
Operating Income (Loss) Before Income Tax and Net
113.6
10.5
(11.0)
16.9
289.8
180.0
3,612.6
Realized Investment Gains and Losses
$ (921.5)
N.M.
$ 117.6
(5.5)
$ 124.4
Interest Adjusted Loss Ratios:
Individual Disability (1)
Long-term Care (2)
Operating Ratios (% of Premium Income):
Other Expense Ratio
Before-tax Operating Income (Loss) Ratio (3)
Premium Persistency:
Individual Disability
Long-term Care
N.M. = not a meaningful percentage
108.0%
179.3%
12.9%
(66.0)%
92.9%
96.0%
85.0%
80.8%
14.3%
8.1%
93.0%
95.8%
81.6%
76.5%
14.1%
8.3%
93.2%
95.1%
(1) Included in this ratio for 2011 is a before-tax reserve charge of $183.5 million. Excluding this charge, the interest adjusted loss ratio for individual disability would have
been 84.7%.
(2) Included in this ratio for 2011 is a before-tax reserve charge of $573.6 million. Excluding this charge, the interest adjusted loss ratio for long-term care would have been 84.9%.
(3) Included in this ratio for 2011 are before-tax charges of $183.5 million for individual disability reserves, $573.6 million for long-term care reserves, and $289.8 million
for impairment of our long-term care deferred acquisition costs. Excluding these charges, the before-tax operating income ratio would have been 9.0%.
58
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2011
Unum
Individual Disability
Year Ended December 31, 2011 Compared with Year Ended December 31, 2010
The decrease in premium income in 2011 compared to 2010 is due to the run-off of this closed line of business driven by expected
policy terminations and maturities. Net investment income was lower in 2011 compared to 2010 due to a decrease in bond call premiums
and a lower level of assets supporting this closed line of business.
Other income, which includes the underlying results of certain blocks of reinsured business and the net investment income of
portfolios held by those ceding companies to support the block we have reinsured, decreased in 2011 compared to 2010 due to lower
investment income in the portfolios held by the ceding companies.
Risk results were unfavorable relative to the prior year due to the previously discussed 2011 reserve charge. Excluding the reserve
charge, risk results were slightly favorable compared to 2010 due to higher claim recoveries, partially offset by higher claim incidence rates.
See “Claim Reserve Increase for Individual Disability Closed Block Business” included herein.
Interest and debt expense in 2011 was lower than in 2010 due to a decline in the amount of outstanding debt issued by Northwind
Holdings as a result of principal repayments. The other expense ratio was favorable in 2011 compared to 2010 due to lower claim litigation
costs and lower expenses related to claim volumes, partially offset by lower premium income.
Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
The decrease in premium income for 2010 compared to 2009 is due to the expected run-off of this closed line of business. Net
investment income for 2010 was slightly higher than 2009, with higher bond call premiums mostly offset by a lower level of assets
supporting this closed line of business.
Other income decreased in 2010 relative to 2009 due to less favorable investment results from the portfolios held by the ceding
companies as well as less favorable risk results from the reinsured business.
The interest adjusted loss ratio for 2010 increased relative to 2009 due to lower claim recoveries and lower claim settlements, partially
offset by lower claim incidence rates.
Interest and debt expense in 2010 declined when compared to 2009 due to lower rates of interest on our floating rate debt issued
by Northwind Holdings and a decrease in the amount of outstanding debt resulting from principal repayments. The other expense ratio
decreased in 2010 compared to 2009 due primarily to lower claims management and claim litigation costs relative to the declining level
of premium income.
Long-term Care
Year Ended December 31, 2011 Compared with Year Ended December 31, 2010
The increase in premium income for 2011 relative to 2010 was driven by strong persistency and higher sales of group long-term
care, which increased 36.5 percent in 2011 compared to 2010. Net investment income was higher in 2011 compared to 2010 due primarily
to an increase in the level of assets supporting this line of business, partially offset by a decline in the level of prepayment income on
mortgage-backed securities and a decrease in bond call premiums.
Risk results were unfavorable relative to the prior year due to the previously discussed 2011 reserve charge. Excluding the reserve
charge, risk results were unfavorable compared to 2010 due to increases in active life reserves, which were driven by favorable premium
persistency relative to assumptions for certain issue years. Claim incidence rates for long-term care were also higher in 2011 compared
to 2010.
Unum 2011 Annual Report
59
The deferral of acquisition costs was higher in 2011 relative to 2010 due to the increase in deferrable expenses associated with higher
sales of group long-term care products. The amortization of deferred acquisition costs was lower in 2011 than in 2010 due to lower levels of
accelerated amortization related to favorable premium persistency relative to assumptions for certain issue years. As previously discussed,
at December 31, 2011 we determined that our long-term care deferred acquisition costs of $289.8 million were not recoverable, and we
recognized an impairment charge at that time. See “Long-term Care Strategic Review” included herein for discussion of the reserve charge
and the impairment.
In late 2010, we began a process of filing requests with various state insurance departments for a rate increase on certain of our
individual long-term care policies. The rate increase reflects current interest rates and claim experience, higher expected future claims,
persistency, and other factors related to pricing individual long-term care coverage. In states for which a rate increase is submitted and
approved, customers are also given options for coverage changes or other approaches that might fit their current financial and insurance
needs. Higher premium income associated with the rate increase is expected to begin to emerge during 2012.
Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
The slight increase in premium income for 2010 relative to 2009 was driven by favorable persistency and higher sales of group
long-term care, which increased 15.2 percent in 2010 compared to 2009. Net investment income for 2010 was higher than 2009 due to
an increase in the level of assets supporting this line of business, an increase in the level of prepayment income on mortgage-backed
securities, and an increase in bond call premiums.
The interest adjusted loss ratio for long-term care increased in 2010 relative to 2009 due primarily to an increase in the active life
reserve and higher paid claim incidence rates. Commissions and the deferral of acquisition costs were lower in 2010 relative to 2009 due
primarily to the discontinuance of individual long-term care sales. The amortization of acquisition costs increased in 2010 relative to 2009
due primarily to an acceleration of amortization resulting from lower persistency in certain older issue years.
All Other
Our other insurance products had generally consistent performance year over year, with the exception of higher litigation costs in 2010.
Segment Outlook
We expect that this segment may experience volatility in net investment income due to the variability in interest rates on floating rate
assets and also due to volatility of bond call premiums relative to historical levels. A portion of the volatility in interest income will be offset
by commensurate changes in the interest expense on our individual disability floating rate debt.
We expect that operating revenue and income for this segment will continue to decline over time as these closed blocks of business
wind down, although we do expect higher premium income associated with long-term care rate increases. We also expect a small amount
of new group long-term care business to continue to be sold through features contractually allowable on existing group policies. Profitability
of our long-tailed products is affected by claims experience related to mortality and morbidity, investment returns, and persistency. We
believe that the interest adjusted loss ratios for the individual disability and long-term care lines of business will be relatively flat over the
long term, but these product lines may experience quarterly volatility. Claim resolution rates, which measure the resolution of claims from
recovery, deaths, settlements, and benefit expirations, are very sensitive to operational and environmental changes and can be volatile.
Our claim resolution rate assumption used in determining reserves is our expectation of the resolution rate we will experience over the life
of the block of business and will vary from actual experience in any one period. It is possible that variability in any of our reserve
assumptions, including, but not limited to, interest rates, mortality, morbidity, and persistency, could result in a material impact on our
reserve levels.
60
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations 2011
Unum
Corporate Segment
The Corporate segment includes investment income on corporate assets not specifically allocated to a line of business, interest
expense on corporate debt other than non-recourse debt, and certain other corporate income and expense not allocated to a line of
business. As previously noted, this segment was modified effective with the fourth quarter of 2011 to reclassify the results from certain
insurance products no longer actively marketed from the previously named “Corporate and Other” segment to the Closed Block segment.
Operating Results
(in millions of dollars)
Operating Revenue
Net Investment Income
Other Income
Total
Expenses
Interest and Debt Expense
Other Expenses
Total
Year Ended December 31
2011
% Change
2010
% Change
2009
$ 56.2
(40.6)%
$ 94.6
41.8%
$ 66.7
20.6
76.8
131.8
55.3
187.1
N.M.
(21.6)
2.2
37.9
10.7
3.3
97.9
(25.0)
37.7
128.9
40.1
169.0
20.7
(28.6)
3.7
4.4
71.1
106.8
56.2
163.0
Operating Loss Before Income Tax and Net
Realized Investment Gains and Losses
$(110.3 )
(55.1)
$(71.1)
22.6
$(91.9)
N.M. = not a meaningful percentage
Year Ended December 31, 2011 Compared with Year Ended December 31, 2010
Net investment income was lower in 2011 compared to 2010 due to lower short-term interest rates, lower asset levels, a lower
proportion of assets invested at long-term interest rates, a decrease in bond call premiums, and an increase in the amortization of the
principal amount invested in our tax-credit partnerships. The negative impact on net investment income and operating income by segment
due to the higher level of investment in tax-credit partnerships is offset by a lower income tax rate due to the tax benefits recognized as a
result of these investments. Other income was higher in 2011 compared to 2010 due to $17.5 million of interest income related to the
previously discussed settlement of our appeal to the IRS related to tax years 1996 to 2004.
Interest and debt expense increased in 2011 relative to 2010 due primarily to the September 2010 issuance of $400.0 million of
5.625% senior notes, partially offset by the maturity of our $225.1 million 7.625% senior notes in March 2011. We experienced lower
interest in 2011 compared to 2010 on our $350.0 million 7.125% unsecured senior notes which we effectively converted into floating rate
debt through the use of an interest rate swap entered into during the fourth quarter of 2010. Other expenses increased in 2011 compared
to 2010 due primarily to increases in expense accruals, general operating expenses due in part to corporate initiatives, and state income
taxes resulting from the repatriation of U.K. dividends from our U.K. subsidiaries.
Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
Net investment income was higher in 2010 compared to 2009 due to higher asset levels and a higher proportion of assets invested at
long-term interest rates, partially offset by lower interest rates on short-term investments.
Interest and debt expense increased in 2010 compared to 2009 due primarily to the September 2010 issuance of $400.0 million of
5.625% senior notes and the September 2009 issuance of $350.0 million of 7.125% senior notes. The higher interest and debt expense
associated with the two new debt issuances was partially offset by the repayment of $10.0 million of 7.08% medium-term notes due 2024
during the first quarter of 2010 and the repayment of $108.2 million of 5.859% senior notes during the second quarter of 2009. The
decrease in other expenses was due primarily to lower pension costs.
Unum 2011 Annual Report
61
Segment Outlook
We expect the quality of our investment portfolio to remain strong in 2012. We are currently holding capital at our insurance
subsidiaries and holding companies at levels that exceed our long-term requirements. We expect to continue to generate excess capital on
an annual basis through strong statutory earnings. While we intend to maintain our disciplined approach to risk management throughout
2012, we believe we are well positioned with substantial flexibility to preserve our capital strength and at the same time explore
opportunities to deploy the excess capital that is generated each period.
Investments
Overview
Our investment portfolio is well diversified by type of investment and industry sector. We have established an investment strategy
that we believe will provide for adequate cash flows from operations and allow us to hold our securities through periods where significant
decreases in fair value occur. We believe our emphasis on risk management in our investment portfolio, including credit and interest rate
management, has positioned us well and generally reduced the volatility in our results.
We have no exposure to subprime mortgages, “Alt-A” loans, or collateralized debt obligations in our asset-backed, mortgage-backed
securities, or public bond portfolios. We have no direct exposure to sovereign debt of certain countries in the European Union, specifically
Greece, Ireland, Italy, Portugal, and Spain. At December 31, 2011, we had minimal exposure to investments for which the payment of
interest and principal is guaranteed under a financial guaranty insurance policy, and all such securities are rated investment-grade absent
the guaranty insurance policy. At December 31, 2011, we held $294.1 million fair value ($318.5 million amortized cost) of perpetual
debentures, or “hybrid” securities, that generally have no fixed maturity date. Interest on these securities due on any payment date may be
deferred by the issuer. The interest payments are generally deferrable only to the extent that the issuer has suspended dividends or other
distributions or payments to any of its shareholders or any other perpetual debt instrument.
Below is a summary of our formal investment policy, including the overall quality and diversification objectives:
• The majority of investments are in high quality publicly traded securities to ensure the desired liquidity and preserve the capital
value of our portfolios.
• The long-term nature of our insurance liabilities also allows us to invest in less liquid investments to obtain superior returns.
A maximum of 10 percent of the total investment portfolio may be invested in below-investment-grade securities, 2 percent in
equity securities, 3 percent in tax credit funds, up to 35 percent in private placements, and 10 percent in commercial mortgage loans.
The remaining assets can be held in publicly traded investment-grade corporate securities, mortgage-backed securities, bank loans,
asset-backed securities, government and government agencies, and municipal securities.
• We intend to manage the risk of losses due to changes in interest rates by matching asset duration with liabilities, in the aggregate.
• The weighted average credit quality rating of the portfolio should be Baa1 or higher.
• The maximum investment per issuer group is limited based on internal limits reviewed by the finance committee of Unum Group’s
board of directors and approved by the boards of directors of our insurance subsidiaries and is more restrictive than the five percent
limit generally allowed by the state insurance departments which regulate the type of investments our insurance subsidiaries are
allowed to own. These internal limits are as follows:
62
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations 2011
Unum
Rating
AAA/AA
A
BBB+
BBB
BBB-
BB+
BB
BB-
B+
B/B-
CCC
Internal Limit
($ in millions)
$200
175
150
125
90
75
60
50
30
20
10
• The portfolio is to be diversified across industry classification and geographic lines.
• Derivative instruments may be used to replicate permitted asset classes, hedge interest rate risk and foreign currency risk, and match
liability duration and cash flows consistent with the plan reviewed by the finance committee of Unum Group’s board of directors and
approved by the boards of directors of our insurance subsidiaries.
• Asset mix guidelines and limits are established by us, reviewed by the finance committee of Unum Group’s board of directors, and
approved by the boards of directors of our insurance subsidiaries.
• The allocation of assets and the selection and timing of the acquisition and disposition of investments are subject to ratification,
on a weekly basis, by an investment subcommittee appointed by the boards of directors of our insurance subsidiaries. These actions
are also reviewed by the finance committee of Unum Group’s board of directors on a quarterly basis.
• We review these investment policies and guidelines annually, or more frequently if deemed necessary, and recommend
adjustments, as appropriate. Any revisions are reviewed by the finance committee of Unum Group’s board of directors and must be
approved by the boards of directors of our insurance subsidiaries.
See “Critical Accounting Estimates” contained herein for further discussion of our valuation of investments.
Investment Results
Net investment income increased 1.0 percent in 2011 relative to 2010 due primarily to continued growth in the level of invested
assets and higher bond call premiums, partially offset by an increase in the amortization of the principal amount invested in our tax credit
partnerships driven by the higher level of investment in this asset class, a decrease in income on other partnership investments, and a
decline in the level of prepayment income on mortgage-backed securities.
Net investment income increased 6.3 percent in 2010 relative to 2009 due primarily to continued growth in the level of invested
assets and higher bond call premiums. We also received higher interest income during 2011 and 2010, compared to the preceding years, on
bonds for which interest income is linked to a U.K. inflation index. In addition, we earned lower interest rates on our floating rate invested
assets during 2010 compared to 2009, largely offset by lower interest expense on our floating rate debt.
The duration weighted book yield on the fixed income securities in our investment portfolio was 6.67 percent as of December 31,
2011, compared to a yield of 6.71 percent as of December 31, 2010. As previously noted, we actively manage our asset and liability cash
flow match and our asset and liability duration match to limit interest rate risk. Duration is a measure of the percentage change in the fair
values of assets and liabilities for a given change in interest rates. Cash flows from the in-force asset and liability portfolios are projected at
current interest rate levels and also at levels reflecting an increase and a decrease in interest rates to obtain a range of projected cash flows
under the different interest rate scenarios. These results enable us to assess the impact of projected changes in cash flows and duration
resulting from potential changes in interest rates.
Unum 2011 Annual Report
63
To assess the impact of a duration mismatch, we measure the potential changes in estimated fair value based on a hypothetical
change in interest rates to quantify a dollar value change. Although we test the asset and liability portfolios under various interest rate
scenarios as part of our modeling, the majority of our liabilities related to insurance contracts are not interest rate sensitive, and we
therefore have minimal exposure to policy withdrawal risk. Our determination of investment strategy relies more on long-term measures
such as reserve adequacy analysis and the relationship between the portfolio yields supporting our various product lines and the aggregate
discount rates embedded in the reserves.
Realized investment gains and losses, before tax, are as follows:
(in millions of dollars)
Fixed Maturity Securities
Gross Gains on Sales
Gross Losses on Sales
Other-Than-Temporary Impairment Loss
Mortgage Loans and Other Invested Assets
Gross Gains on Sales
Gross Losses on Sales
Impairment Loss
Foreign Currency Transactions
Embedded Derivative in Modified Coinsurance Arrangement
Other Derivatives
Net Realized Investment Gain (Loss)
Year Ended December 31
2011
2010
2009
$ 74.0
(24.0)
(19.9)
7.1
(0.5)
(0.6)
(1.6)
(39.4)
—
$ (4.9)
$ 61.1
(41.3)
(15.9)
7.9
(0.5)
(3.8)
(3.9)
21.1
—
$ 48.6
(83.5)
(211.8)
10.0
(0.4)
(8.1)
1.5
243.1
12.3
$ 24.7
$ 11.7
Additional information regarding individual realized investment losses of $10.0 million or greater from other-than-temporary
impairments and/or sales during the years 2011, 2010, and 2009, if applicable, is as follows.
Realized Investment Losses $10.0 Million or Greater from Other-Than-Temporary Impairments
• During 2010, we recognized an other-than-temporary impairment loss of $10.2 million on securities issued by a Netherlands financial
services company. The company recorded significant impairment losses in its securities and real estate portfolios during 2009 and
2008 and required a significant amount of government aid. At the time of the impairment loss, these securities had been in an
unrealized loss position for a period of greater than three years.
• During 2009, we recognized an other-than-temporary impairment loss of $33.3 million on securities issued by a U.S. media
conglomerate. The company reported mixed fourth quarter 2008 operating results as its outdoor advertising weakened significantly.
During the first quarter of 2009, the company borrowed $1.6 billion against its lines of credit and completed a tender/exchange offer
to improve its near term debt maturity profile. Continued signs that the company’s operations had weakened materially in the first
quarter 2009, as well as the continued weakness in the economy, led us to believe that covenant violations could occur in the near
future. At the time of the impairment loss, these securities had been in an unrealized loss position for a period of greater than
three years.
• During 2009, we recognized an other-than-temporary impairment loss of $32.9 million on securities issued by a U.K. financial
institution. The decline in value of the securities was primarily the result of the global credit crisis and the slowdown in the economy.
In addition, this financial institution made a major acquisition during the peak of the past credit cycle. The financial institution then
had to recognize impairments on loans and other assets held by the acquired company, resulting in the need for additional capital.
This capital was initially provided by shareholders and others, but as the economic environment further deteriorated, the financial
institution participated in the government guarantee of senior debt, capital injections, and an asset protection scheme. At the time
of the impairment loss, these securities had been in an unrealized loss position for a period of greater than three years.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
2011
Unum
• During 2009, we recognized an other-than-temporary impairment loss of $23.9 million on securities issued by a U.S. automotive
parts company. Due to the weak economy, automobile production had decreased dramatically, with the expectation of further
production reductions at the time of the impairment loss. Declining earnings caused the company to be out of compliance with
covenants in certain of its debt issues. The company eventually obtained waivers on these covenants, the terms of which precluded
the company from making interest payments on certain of its other debt issues. The company was unable to cure this default within
the grace period and ultimately was forced to file for bankruptcy. At the time of the impairment loss, these securities had been in an
unrealized loss position for a period of greater than three years.
• During 2009, we recognized an other-than-temporary impairment loss of $23.7 million on principal protected equity linked trust
certificates representing our investment in a trust which held forward contracts to purchase shares of a Vanguard S&P 500 index
mutual fund. We recognized the other-than-temporary impairment loss because we intended to sell the security. At the time of the
impairment loss, these securities had been in an unrealized loss position for a period of greater than one year but less than two years.
• During 2009, we recognized an other-than-temporary impairment loss of $20.1 million on securities issued by a large specialty
chemical company. The company reported fourth quarter 2008 earnings that were weaker than expected, which limited its prospects
of refinancing its 2009 debt maturities. The company had been pursuing asset sales to raise cash but was unable to do so in time to
avoid a financial restructuring. During the first quarter of 2009, the company filed for bankruptcy protection. At the time of the
impairment loss, these securities had been in an unrealized loss position for a period of greater than two years but less than three years.
• During 2009, we recognized an other-than-temporary impairment loss of $19.5 million on securities issued by a U.S. automotive parts
company. The majority of the company’s revenues were generated by sales to a single domestic automobile manufacturer. Due to
the weak economy, automobile production had decreased dramatically, with the expectation of further production cuts. The U.S.
government made available a $5 billion credit facility to several automotive parts companies to help maintain automotive supplier
liquidity. However, with their largest customer likely to undergo a major financial restructuring and/or bankruptcy filing, the company
faced increased challenges. In March 2009 its external auditors stated there was substantial doubt about the company’s ability to
continue as a going concern if the automotive industry’s financial problems were not resolved soon. At the time of the impairment
loss, these securities had been in an unrealized loss position for a period of greater than three years.
• During 2009, we recognized an other-than-temporary impairment loss of $17.5 million on securities issued by a U.K. financial
institution. During 2008, a significant decrease in funding liquidity ultimately required the U.K. government to nationalize this
institution. In this process, the government provided guarantees on deposits, senior debt, and loans. Since 2008, the company
initiated several programs to improve its liquidity and to repay the loans to the government. In the first quarter of 2009, the company
announced it had developed a plan for a legal and capital restructuring of the company, which it expected to complete in the second
half of 2009. During the second quarter of 2009, the company submitted its plan to the European Commission (EC) and requested
permission to begin the program under EC competition rules. The EC released various aspects of the company’s restructuring plan,
which included splitting the company into multiple entities. It appeared we would be unable to recover the entire cost basis of our
securities, which are subordinate to the government’s debt as well as other creditors. At the time of the impairment loss, these
securities had been in an unrealized loss position for a period of greater than two years but less than three years.
Realized Investment Losses $10.0 Million or Greater from Sale of Fixed Maturity Securities
• During 2009, we recognized a loss of $14.2 million on the sale of securities issued by a large publisher of yellow page advertising.
The company had suffered from deterioration in print directories’ advertising as well as a significant rise in bad debt expenses due to
the impact of the recession on small business customers. The company maintained significant amounts of available cash and was
still generating free cash flows despite the weakening economy. However, during the first quarter of 2009, the company announced
that it had hired a financial adviser to review its capital structure alternatives regarding debt payments due in 2010. At the time of
disposition, these securities had been in an unrealized loss position for a period of greater than three years.
Unum 2011 Annual Report
65
Embedded Derivative in a Modified Coinsurance Arrangement
We report changes in the fair value of an embedded derivative in a modified coinsurance arrangement as realized investment gains
and losses, as required under the provisions of GAAP. GAAP requires us to include in our realized investment gains and losses a calculation
intended to estimate the value of the option of our reinsurance counterparty to cancel the reinsurance contract with us. However, neither
party can unilaterally terminate the reinsurance agreement except in extreme circumstances resulting from regulatory supervision,
delinquency proceedings, or other direct regulatory action. Cash settlements or collateral related to this embedded derivative are not
required at any time during the reinsurance contract or at termination of the reinsurance contract, and any accumulated embedded
derivative gain or loss reduces to zero over time as the reinsured business winds down. We therefore view the effect of realized gains and
losses recognized for this embedded derivative as a reporting requirement that will not result in a permanent change in assets or
stockholders’ equity.
The change in fair value of this embedded derivative recognized as a realized gain or loss during 2011, 2010, and 2009 resulted
primarily from a change in credit spreads in the overall investment market. The fair value of this embedded derivative was $(135.7) million
at December 31, 2011, compared to $(96.3) million at December 31, 2010, and is reported in other liabilities in our consolidated balance sheets.
Fixed Maturity Securities
The fair values and associated unrealized gains and losses of our fixed maturity securities portfolio, by industry classification,
are as follows:
Fixed Maturity Securities — By Industry Classification
As of December 31, 2011
(in millions of dollars)
Fair Value of
Fixed Maturity
Securities
with Gross
Unrealized Loss
Gross
Unrealized
Loss
Fair Value of
Fixed Maturity
Securities
with Gross
Unrealized Gain
Net
Unrealized
Gain
Gross
Unrealized
Gain
Fair Value
$ 2,283.2
$ 216.4
$ 227.5
$ 21.6
$ 2,055.7
$ 238.0
Classification
Basic Industry
Capital Goods
Communications
Consumer Cyclical
Consumer Non-Cyclical
Energy (Oil & Gas)
Financial Institutions
Mortgage/Asset-Backed
Sovereigns
Technology
Transportation
U.S. Government Agencies and Municipalities
3,760.2
2,821.5
1,185.1
5,374.9
3,676.5
3,316.9
2,973.2
1,376.7
824.3
1,307.5
2,896.0
443.3
395.2
130.2
860.3
638.7
111.1
338.6
237.3
123.1
220.2
512.4
Utilities
Redeemable Preferred Stocks
10,633.3
1,617.6
57.4
1.6
504.2
209.1
151.6
187.9
39.7
1,002.3
113.8
—
40.0
26.5
133.2
334.2
20.9
33.0
26.4
10.8
8.4
1.2
73.1
5.5
—
0.5
1.3
9.9
28.6
1.9
3,256.0
2,612.4
1,033.5
5,187.0
3,636.8
2,314.6
2,859.4
1,376.7
784.3
1,281.0
2,762.8
476.3
421.6
141.0
868.7
639.9
184.2
344.1
237.3
123.6
221.5
522.3
10,299.1
1,646.2
36.5
3.5
Total
$42,486.7
$5,846.0
$2,990.9
$222.2
$39,495.8
$6,068.2
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Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2011
Unum
The following two tables show the length of time our investment-grade and below-investment-grade fixed maturity securities had
been in a gross unrealized loss position as of December 31, 2011 and at the end of the prior four quarters. The relationships of the current
fair value to amortized cost are not necessarily indicative of the fair value to amortized cost relationships for the securities throughout the
entire time that the securities have been in an unrealized loss position nor are they necessarily indicative of the relationships after
December 31, 2011.
Unrealized Loss on Investment-Grade Fixed Maturity Securities
Length of Time in Unrealized Loss Position
(in millions of dollars)
December 31
September 30
June 30
March 31
December 31
2011
2010
Fair Value < 100% >= 70% of Amortized Cost
<= 90 days
> 90 <= 180 days
> 180 <= 270 days
> 270 days <= 1 year
> 1 year <= 2 years
> 2 years <= 3 years
> 3 years
Sub-total
Fair Value < 70% >= 40% of Amortized Cost
> 2 years <= 3 years
> 3 years
Sub-total
Total
$ 12.8
$ 38.9
$ 16.7
$14.8
34.3
8.0
—
33.7
1.1
40.9
14.1
—
24.6
11.4
1.8
28.1
2.9
39.7
14.8
2.6
2.4
42.2
130.8
118.9
121.3
—
9.5
9.5
—
27.1
27.1
3.3
11.1
14.4
82.4
14.5
1.6
1.5
9.6
37.2
161.6
3.4
11.9
15.3
$ 93.2
16.9
1.9
—
2.0
24.4
43.3
181.7
3.2
—
3.2
$140.3
$146.0
$135.7
$176.9
$184.9
Unum 2011 Annual Report
67
Unrealized Loss on Below-Investment-Grade Fixed Maturity Securities
Length of Time in Unrealized Loss Position
(in millions of dollars)
December 31
September 30
June 30
March 31
December 31
2011
2010
Fair Value < 100% >= 70% of Amortized Cost
<= 90 days
> 90 <= 180 days
> 180 <= 270 days
> 270 days <= 1 year
> 1 year <= 2 years
> 2 years <= 3 years
> 3 years
Sub-total
Fair Value < 70% >= 40% of Amortized Cost
> 180 <= 270 days
> 1 year <= 2 years
> 3 years
Sub-total
Total
$ 3.3
11.9
8.5
0.7
13.0
—
37.3
74.7
—
5.0
2.2
7.2
$ 39.5
$ 3.9
$ 5.2
$ 5.1
15.6
1.6
6.7
13.7
0.3
35.2
112.6
0.7
—
10.3
11.0
0.7
4.6
0.1
3.5
5.3
18.0
36.1
—
—
0.4
0.4
4.0
0.1
3.1
—
5.1
23.3
40.8
—
—
0.4
0.4
0.1
4.1
—
—
14.0
28.8
52.1
—
—
0.4
0.4
$81.9
$123.6
$36.5
$41.2
$52.5
The following table shows our fixed maturity securities with a gross unrealized loss of $10.0 million or greater, by industry type. We held
no securities at December 31, 2011 with a gross unrealized loss of $20.0 million or greater.
Gross Unrealized Losses $10 Million or Greater on Fixed Maturity Securities
(in millions of dollars)
Classification
Investment-Grade
Financial Institutions
Communications
As of December 31, 2011
Fair Value
Gross Unrealized Loss
Number of Issuers
$149.7
51.9
$201.6
$30.7
10.6
$41.3
2
1
3
At December 31, 2011, our mortgage/asset-backed securities had an average life of 4.28 years, effective duration of 3.78 years, and
a weighted average credit rating of AAA. The mortgage/asset-backed securities are valued on a monthly basis using valuations supplied by
the brokerage firms that are dealers in these securities as well as independent pricing services. One of the risks involved in investing in
mortgage/asset-backed securities is the uncertainty of the timing of cash flows from the underlying loans due to prepayment of principal
with the possibility of reinvesting the funds in a lower interest rate environment. We use models which incorporate economic variables and
possible future interest rate scenarios to predict future prepayment rates. The timing of prepayment cash flows may also cause volatility in
our recognition of investment income. We recognize investment income on these securities using a constant effective yield based on
projected prepayments of the underlying loans and the estimated economic life of the securities. Actual prepayment experience is
reviewed periodically, and effective yields are recalculated when differences arise between prepayments originally projected and the
actual prepayments received and currently projected. The effective yield is recalculated on a retrospective basis, and the adjustment is
reflected in net investment income.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
2011
Unum
We have not invested in mortgage-backed derivatives, such as interest-only, principal-only, or residuals, where market values
can be highly volatile relative to changes in interest rates. All of our mortgage-backed securities have fixed rate coupons. The credit quality
of our mortgage-backed securities portfolio has not been negatively impacted by the issues in the market concerning subprime mortgage
loans. The change in value of our mortgage-backed securities portfolio has moved in line with that of prime agency-backed mortgage-
backed securities.
As of December 31, 2011, the amortized cost and fair value of our below-investment-grade fixed maturity securities was
$2,776.2 million and $2,810.9 million, respectively. Below-investment-grade securities are inherently more risky than investment-grade
securities since the risk of default by the issuer, by definition and as exhibited by bond rating, is higher. Also, the secondary market for
certain below-investment-grade issues can be highly illiquid. Additional downgrades may occur, but we do not anticipate any liquidity
problems resulting from our investments in below-investment-grade securities, nor do we expect these investments to adversely affect
our ability to hold our other investments to maturity.
Investments in Issuers in Certain European Countries
Our investments are chosen for specific portfolio management purposes, including asset and liability management and portfolio
diversification across geographic lines and sectors to minimize non-market risks. In our approach to investing in fixed maturity securities,
specific investments within approved countries and industry sectors are evaluated for their market position and specific strengths and
potential weaknesses. For each security, we consider the political, legal and financial environment of the sovereign entity in which an
issuer is domiciled and operates. The country of domicile is based on consideration of the issuer’s headquarters, in addition to location
of the assets and the country in which the majority of sales and earnings are derived. We continually evaluate our foreign investment
risk exposure, including that within certain countries in the European Union, specifically Greece, Ireland, Italy, Portugal, and Spain.
Our monitoring is heightened for investments in these specific countries due to our concerns over the current economic and political
environments as well as the banking crisis, and we believe these investments are more vulnerable to potential credit problems.
We do not have foreign currency risk, as the cash flows from these investments are denominated in currencies to match the related
liabilities. We have no direct exposure to sovereign debt of these countries and have not used credit derivatives to hedge our exposure or
to sell credit protection. Our exposure relates only to non-financial institutions and is as follows:
European Fixed Maturity Securities Exposure — By Country
(in millions of dollars)
As of December 31, 2011
Greece
Ireland
Italy
Portugal
Spain
Total
Fair Value
$ 54.4
61.1
196.9
79.7
159.6
$551.7
Amortized Cost
$ 50.2
66.3
217.1
87.7
157.3
$578.6
Unum 2011 Annual Report
69
We have no unfunded commitments to issuers domiciled in these countries. Further discussion on our exposure to each country
is as follows:
Greece
We have no direct exposure to Greek financial institutions. Our singular holding domiciled in Greece is a geographically diversified
company, generates less than 10 percent of its revenue from Greece, and was rated investment-grade as of December 31, 2011. The
company aggregates cash and manages its debt payments outside the country in which it is domiciled, which we believe enables the
company to place low reliance on the banking system of Greece. As of December 31, 2011, this company was current on its obligations to
us, and we believe it will continue to meet its debt obligations. This security was in an unrealized gain position as of December 31, 2011.
Ireland
We have no direct exposure to Irish financial institutions. In November 2010, Ireland received a support package valued at €85 billion
from the International Monetary Fund/European Union based on its plan of recovery. Thus far, Ireland appears committed to fiscal
consolidation. However, we believe there are risks associated with the austerity and recessionary pressures. As of December 31, 2011, all of
our Irish investments were current on their obligations to us, and we believe they will continue to meet their debt obligations. In addition,
we have the intent to hold these investments to recovery in value. As a result, we did not recognize any other-than-temporary impairment
losses on these investments as of December 31, 2011.
Italy
We have no direct exposure to Italian financial institutions. We believe there are risks associated with the debt sustainability of Italy
given the high refinancing rates, lack of competitiveness, and recessionary pressures. As of December 31, 2011, all of our Italian
investments were current on their obligations to us, and we believe they will continue to meet their debt obligations. In addition, we have
the intent to hold these investments to recovery in value. As a result, we did not recognize any other-than-temporary impairment losses on
these investments as of December 31, 2011.
Portugal
We have no direct exposure to Portuguese financial institutions. In May 2011, Portugal received a support package valued at €78
billion from the International Monetary Fund/European Union. We believe there is risk that Portugal will be unable to achieve the deficit
reduction targets set out in this loan agreement, and future aid may require private sector participation. As of December 31, 2011, our only
holdings in Portugal consisted of two investment-grade issuers. These companies were current on their obligations to us, and we believe
they will continue to meet their debt obligations. In addition, we have the intent to hold these investments to recovery in value. As a result,
we did not recognize any other-than-temporary impairment losses on these investments as of December 31, 2011.
Spain
We have no direct exposure to Spanish financial institutions, although we do own fixed maturity securities of certain United Kingdom
and United States subsidiaries of Spanish financial institutions. Spain has a high budget deficit of 8 percent compared to their stated
6 percent target. We believe there are risks associated with Spain’s high unemployment, banking sector problems in which the market
expects more impairment losses, and recessionary pressures. All of our Spanish domiciled securities were rated investment-grade as
of December 31, 2011 and were current on their obligations to us. We believe they will continue to have the ability to meet their debt
obligations. In addition, we have the intent to hold these investments to recovery in value. As a result, we did not recognize any
other-than-temporary impairment losses on these investments as of December 31, 2011.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations 2011
Unum
Risk Management
While we have no direct sovereign holdings in the aforementioned countries, we have performed comprehensive stress testing and
scenario analyses on all of our corporate holdings of issuers domiciled in these countries. We have performed stress tests under a number
of scenarios including deep recession, liquidity crisis, and currency redenomination with significant devaluation. We continue to closely
monitor this situation.
A potential risk for these corporate holdings is access to bank lines in their countries of domicile and redenomination risk as it pertains
to their outstanding liabilities. Even in the scenario of currency redenomination and liquidity crisis, we believe the risk is largely mitigated
because our holdings in these countries are non-financial and operate in defensive industries that provide essential services. Most are
market leaders with access to diverse, global capital markets. Current developments regarding ratings downgrades, bailout packages, or
higher sovereign interest rates have not had a material impact on our financial condition or results of operations.
Mortgage Loans
Our mortgage loan portfolio was $1,612.3 million and $1,516.8 million on an amortized cost basis at December 31, 2011 and
December 31, 2010, respectively. Our mortgage loan portfolio is comprised entirely of commercial mortgage loans. We believe our
mortgage loan portfolio is well diversified geographically and among property types. The incidence of problem mortgage loans and
foreclosure activity continues to be low. Due to conservative underwriting, we expect the level of problem loans to remain low relative to
the industry.
We held two mortgage loans at December 31, 2011 and 2010 which were considered impaired. These mortgage loans were carried
at the estimated net realizable values of $22.5 million and $22.9 million, respectively, net of a valuation allowance of$1.5 million at each
period end. During 2011, we foreclosed on two impaired mortgage loans and transferred them into other long-term investments in our
consolidated balance sheets. No realized loss was recognized on the foreclosures. During 2011, we sold one mortgage loan and recognized
a loss of $0.2 million on the sale.
Derivative Financial Instruments
We use derivative financial instruments primarily to manage reinvestment risk, duration, and currency risk. Historically, we have
utilized current and forward interest rate swaps and options on forward interest rate swaps, current and forward currency swaps, forward
treasury locks, currency forward contracts, and forward contracts on specific fixed income securities. Our current credit exposure on
derivatives, which is limited to the value of those contracts in a net gain position less collateral held, was $19.9 million at December 31,
2011. We held $45.6 million of cash collateral from our counterparties at December 31, 2011. The carrying value of fixed maturity securities
posted as collateral to our counterparties was $114.9 million at December 31, 2011. We believe that our credit risk is mitigated by our use
of multiple counterparties, all of which have a median credit rating of A or better, and by our use of cross-collateralization agreements.
Other
Our exposure to non-current investments, defined as foreclosed real estate and invested assets which are delinquent
as to interest and/or principal payments, totaled $58.6 million and $56.2 million on a fair value basis at December 31, 2011 and
December 31, 2010, respectively.
See Notes 3 and 4 of the “Notes to Consolidated Financial Statements” contained herein for further discussion of our investments and
our derivative financial instruments.
Unum 2011 Annual Report
71
Liquidity and Capital Resources
Our liquidity requirements are met primarily by cash flows provided from operations, principally in our insurance subsidiaries.
Premium and investment income, as well as maturities and sales of invested assets, provide the primary sources of cash. Debt and/or
securities offerings provide an additional source of liquidity. Cash is applied to the payment of policy benefits, costs of acquiring new
business (principally commissions), operating expenses, and taxes, as well as purchases of new investments.
We have established an investment strategy that we believe will provide for adequate cash flows from operations. We attempt to
match our asset cash flows and durations with expected liability cash flows and durations to meet the funding requirements of our
business. However, deterioration in the credit market may delay our ability to sell our positions in certain of our fixed maturity securities in
a timely manner and adversely impact the price we receive for such securities, which may negatively impact our cash flows. Furthermore,
if we experience defaults on securities held in the investment portfolios of our insurance subsidiaries, this will negatively impact statutory
capital, which could reduce our insurance subsidiaries’ capacity to pay dividends to our holding companies. A reduction in dividends to our
holding companies could force us to seek external financing to avoid impairing our ability to pay dividends to our stockholders or meet our
debt and other payment obligations.
Our policy benefits are primarily in the form of claim payments, and we have minimal exposure to the policy withdrawal risk
associated with deposit products such as individual life policies or annuities. A decrease in demand for our insurance products or an
increase in the incidence of new claims or the duration of existing claims could negatively impact our cash flows from operations. However,
our historical pattern of benefits paid to revenues is consistent, even during cycles of economic downturns, which serves to minimize
liquidity risk.
We have met all minimum pension funding requirements set forth by ERISA. We made voluntary contributions to our U.S. qualified
defined benefit pension plan of $67.0 million and $100.0 million during the first and fourth quarters of 2010, respectively. The fourth quarter
of 2010 contribution was made in lieu of our planned 2011 contribution, and we made no additional contributions to our U.S. qualified
defined benefit plan during 2011. We expect to make a voluntary contribution of approximately $53.0 million to our U.S. qualified defined
benefit plan during 2012. We have estimated our future funding requirements under the Pension Protection Act of 2006 and do not believe
that the funding requirements will cause a material adverse effect on our liquidity.
We also contribute to our U.K. pension plan sufficient to meet the minimum funding requirement under U.K. legislation. We made
required contributions during 2011 of £2.9 million, and we expect to make contributions of approximately £2.9 million during 2012.
In May 2010, our board of directors authorized the repurchase of up to $500.0 million of Unum Group’s common stock, with the
pace of repurchase activity to depend upon various factors such as the level of available cash, alternative uses for cash, and our stock price.
During 2010, we repurchased 16.4 million shares, at a cost of $356.0 million, under this share repurchase program. The $500.0 million
share repurchase program had an expiration date of May 2011. In February 2011, our board of directors authorized the repurchase of up to
$1.0 billion of Unum Group’s common stock, in addition to the amount remaining to be repurchased under the $500.0 million authorization.
The $1.0 billion share repurchase program has an expiration date of August 2012.
During 2011, we repurchased 7.1 million shares, at a cost of $200.0 million, using an accelerated repurchase agreement with a
financial counterparty. Under the terms of the repurchase agreement, we received a price adjustment based on the volume weighted
average price of our common stock during the term of the agreement. The price adjustment resulted in the delivery to us of approximately
0.6 million additional shares. In total, we repurchased 7.7 million shares of our common stock under this agreement. The shares
repurchased pursuant to the accelerated repurchase agreement completed the $500.0 million repurchase authorization and initiated the
$1.0 billion repurchase program. In addition to these repurchases, during 2011 we repurchased an additional 17.7 million shares on the
open market at a cost of $419.9 million, for a total repurchase of 25.4 million shares during 2011.
Cash equivalents and marketable securities held at Unum Group and our other intermediate holding companies are a significant
source of liquidity for us and were approximately $756 million and $1.2 billion at December 31, 2011 and 2010, respectively. The decrease
during 2011 reflects the purchase and retirement of $225.1 million of our 7.625% senior notes as well as the repurchase of shares of our
common stock. The December 31, 2011 balance, of which $88 million was held in certain of our foreign subsidiaries in the U.K., was made
up primarily of commercial paper, fixed maturity securities with a current average maturity of 2.7 years, and various money-market funds.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations 2011
Unum
No significant restrictions exist on our ability to use or access these funds, with the exception of funds held in the U.K. During the fourth
quarter of 2011, we repatriated £150.0 million, or approximately $232.1 million, from our U.K. subsidiaries, which was subject to repatriation
tax effects of $18.6 million. We currently have no intent, nor do we foresee a need, to repatriate additional funds. We believe we hold
domestic resources sufficient to fund our liquidity requirements for the next 12 months and that our current level of holding company cash
and marketable securities can be utilized to mitigate potential losses from defaults. If we repatriate additional funds from our subsidiaries in
the U.K., the amounts repatriated would be subject to repatriation tax effects which generally equal the difference in the U.S. tax rate and
the U.K. tax rate.
Unum Limited is expected to adopt new capital requirements and risk management standards under Solvency II effective January 1,
2014. Solvency II requirements, which result from a fundamental review of the capital adequacy standards for the European insurance
industry, have not been fully finalized, but the current proposals contain amended requirements on capital adequacy and risk management
for insurers. We continue to assess the impact on our capital requirements. Our Bermuda-based insurance subsidiary is subject to regulation
by the Bermuda Monetary Authority (BMA). During 2010, the BMA initiated a comprehensive review of its insurance regulatory and solvency
framework and continued to work with European regulators throughout 2011 toward completion of the assessment. It is too early to assess
the impact, but the insurance industry may ultimately be subject to new rules regarding governance, administrative and accounting processes,
and/or long-term capital requirements. See “Capital Requirements” contained in Item 1 of our Annual Report on Form 10-K for the fiscal year
ended December 31, 2011 for additional information.
During 2012, we intend to retain a level of capital in our traditional U.S. insurance subsidiaries such that we maintain a weighted
average RBC level well above capital adequacy requirements. We also expect Unum Limited to operate above the FSA capital adequacy
requirements and minimum solvency margins.
Consolidated Cash Flows
Operating Cash Flows
Net cash provided by operating activities was $1,193.7 million for the year ended December 31, 2011, compared to $1,196.8 million
and $1,237.0 million for 2010 and 2009, respectively. Operating cash flows are primarily attributable to the receipt of premium and
investment income, offset by payments of claims, commissions, expenses, and income taxes. Premium income growth is dependent not
only on new sales, but on renewals of existing business, renewal price increases, and persistency. Investment income growth is dependent
on the growth in the underlying assets supporting our insurance reserves and on the earned yield. The level of commissions and operating
expenses is attributable to the level of sales and the first year acquisition expenses associated with new business as well as the
maintenance of existing business. The level of paid claims is affected partially by the growth and aging of the block of business and also by
the general economy, as previously discussed in the operating results by segment. Operating cash flows for 2010 and 2009 include pension
contributions of approximately $176.9 million and $79.7 million, respectively.
The fluctuation in the income tax adjustment to reconcile 2011 and 2010 net income to net cash provided by operating activities
was due primarily to decreases in the deferred tax liability related to the 2011 deferred acquisition cost charge and reserve charges for our
long-term care and individual disability closed blocks of business.
Investing Cash Flows
Investing cash inflows consist primarily of the proceeds from the sales and maturities of investments. Investing cash outflows
consist primarily of payments for purchases of investments. Net cash used by investing activities was $410.3 million for the year ended
December 31, 2011, compared to $1,073.7 million and $1,213.9 million for 2010 and 2009, respectively.
Our sales of available-for-sale securities increased in 2011 compared to 2010, but declined in 2010 relative to 2009. Proceeds from
maturities of available-for-sale securities were lower in 2011 compared to 2010 primarily due to a significant decrease in bond calls.
Proceeds from maturities of available-for-sale securities were higher in 2010 compared to 2009 primarily due to a significant increase in
bond calls and bond maturities.
Unum 2011 Annual Report
73
Proceeds from sales and maturities of other investments decreased slightly in 2011 compared to 2010 primarily due to a decrease in
maturities from mortgage loans offset by an increase in distributions received from private equity partnerships and an increase in proceeds
from terminations of derivative contracts within our cash flow hedging programs. Proceeds from sales and maturities of other investments
decreased in 2010 as compared to 2009 primarily due to a decrease in proceeds from terminations of derivative contracts within our cash
flow hedging programs, partially offset by an increase in maturities of commercial mortgage loans.
Purchases of available-for-sale securities were lower in 2011 compared to 2010 as a result of the decline in funds available for
reinvestment due to the decrease in bond calls, as discussed above. Purchases of available-for-sale securities were slightly lower during
2010 relative to 2009. Although investable funds were available in 2010 for reinvestment due to the increase in proceeds from bond calls
and maturities, as previously noted, the deployment of funds was hampered by the lack of available long-term securities which met our
investment objectives.
Purchases of other investments decreased in 2011 compared to 2010 as a result of a decrease in funding of mortgage loans, partially
offset by a slight increase in funding of tax credit partnerships. Purchases of other investments increased during 2010 relative to 2009 as a
result of the funding of tax credit partnerships, as well as a slight increase in the funding of mortgage loans.
Net purchases of short-term investments decreased in 2011 compared to 2010 due to our use of cash to fund the payment for our
debt maturing in 2011 and to also fund the 2011 repurchases of Unum Group common stock. This decline in net purchases was partially
offset by an increase in purchases of short-term investments using cash received under our securities lending program. Net purchases of
short-term investments increased during 2010 relative to 2009 due to the increase in bond calls and maturities, with the proceeds invested
in short-term investments pending the purchase of fixed maturity securities.
Financing Cash Flows
Financing cash flows consist primarily of borrowings and repayments of debt, issuance or repurchase of common stock, and
dividends paid to stockholders. Net cash used by financing activities was $720.4 million for the year ended December 31, 2011, compared
to $141.1 million and $1.5 million for 2010 and 2009, respectively.
During 2011, we made short-term debt repayments of $225.1 million at the maturity date of our remaining 7.625% senior notes.
Short-term debt repayments in 2009 consist of the purchase and retirement of the remaining $132.2 million of our 5.859% notes and the
repayment of $58.3 million of reverse repurchase agreements.
During 2011, 2010, and 2009, Tailwind Holdings made principal payments of $10.0 million each year on its floating rate, senior
secured non-recourse notes and Northwind Holdings made principal payments of $74.4 million, $58.3 million, and $48.0 million,
respectively, on its floating rate, senior secured non-recourse notes. Long-term debt repayments in 2010 also include the purchase and
retirement of $10.0 million of our 7.08% medium-term notes. Long-term debt repayments in 2009 also include $1.2 million aggregate
principal of our 7.19% medium-term notes and $0.6 million aggregate principal of our 6.75% notes.
During 2010, we received proceeds of $400.0 million, less debt issuance costs of $3.0 million and a debt discount of $0.5 million,
from the issuance of $400.0 million of 5.625% senior notes. During 2009, we received proceeds of $350.0 million, less debt issuance costs
of $3.2 million, from the issuance of $350.0 million of 7.125% senior notes.
As of December 31, 2011, the amount outstanding under our securities lending program was $312.3 million. We did not utilize our
securities lending program during 2010 and 2009.
During 2011 and 2010, we repurchased 25.4 million and 16.4 million shares of Unum Group’s common stock at a cost of $619.9 million
and $356.0 million, respectively.
See “Debt” contained herein and Notes 7 and 9 of the “Notes to Consolidated Financial Statements” contained herein for
further information.
74
Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations 2011
Unum
Cash Available from Subsidiaries
Unum Group and certain of its intermediate holding company subsidiaries depend on payments from subsidiaries to pay dividends to
stockholders, to pay debt obligations, and/or to pay expenses. These payments by our insurance and non-insurance subsidiaries may take
the form of dividends, operating and investment management fees, and/or interest payments on loans from the parent to a subsidiary.
Restrictions under applicable state insurance laws limit the amount of dividends that can be paid to a parent company from its
insurance subsidiaries in any 12-month period without prior approval by regulatory authorities. For life insurance companies domiciled in
the United States, that limitation generally equals, depending on the state of domicile, either ten percent of an insurer’s statutory surplus
with respect to policyholders as of the preceding year end or the statutory net gain from operations, excluding realized investment gains
and losses, of the preceding year. The payment of dividends to a parent company from its insurance subsidiaries is generally further limited
to the amount of unassigned statutory surplus.
Unum Group and/or certain of its intermediate holding company subsidiaries may also receive dividends from its United Kingdom-
based affiliate, Unum Limited, subject to applicable insurance company regulations and capital guidance in the United Kingdom.
Northwind Holdings’ and Tailwind Holdings’ ability to meet their debt payment obligations is dependent upon the receipt of dividends
from Northwind Reinsurance Company (Northwind Re) and Tailwind Reinsurance Company (Tailwind Re), respectively. The ability of
Northwind Re and Tailwind Re to pay dividends to their respective parent companies will depend on their satisfaction of applicable
regulatory requirements and on the performance of the business reinsured by Northwind Re and Tailwind Re.
The payment of dividends to the parent company from our subsidiaries also requires the approval of the individual subsidiary’s board
of directors.
The amount available during 2011 for the payment of ordinary dividends from Unum Group’s traditional U.S. insurance subsidiaries
was $622.3 million, of which $484.3 million was declared and paid. The amount available during 2011 from Unum Limited was
£207.5 million, of which £100.0 million was declared and paid. During 2011, Tailwind Re and Northwind Re paid dividends of $19.0 million
and $98.0 million to Tailwind Holdings and Northwind Holdings, respectively.
Although we may not utilize the entire amount of available dividends, based on the restrictions under current law, $634.4 million is
available during 2012 for the payment of ordinary dividends to Unum Group from its traditional U.S. insurance subsidiaries, which excludes
Northwind Re and Tailwind Re, our special purpose financial captive insurance companies. Approximately £187.0 million is available for the
payment of dividends from Unum Limited to Unum Group and/or our U.K. holding companies during 2012, subject to regulatory approval.
Unum Group’s RBC ratio for its traditional U.S. insurance subsidiaries, calculated on a weighted average basis using the NAIC Company
Action Level formula, was approximately 405 percent at the end of 2011. The individual RBC ratios for Northwind Re and Tailwind Re are
calculated using the NAIC Company Action Level formula and have target levels of 200 percent. The RBC ratios for Northwind Re and
Tailwind Re each exceeded the 200 percent target level at the end of 2011. The individual RBC ratio for each of our insurance subsidiaries is
above the range that would require state regulatory action.
The ability of Unum Group and certain of its intermediate holding company subsidiaries to continue to receive dividends from their
insurance subsidiaries generally depends on the level of earnings of those insurance subsidiaries and additional factors such as RBC ratios
and FSA capital adequacy requirements, funding growth objectives at an affiliate level, and maintaining appropriate capital adequacy ratios
to support desired ratings. Insurance regulatory restrictions do not limit the amount of dividends available for distribution from non-
insurance subsidiaries except where the non-insurance subsidiaries are held directly or indirectly by an insurance subsidiary and only
indirectly by Unum Group. We intend to retain a level of capital in our traditional U.S. insurance subsidiaries such that we maintain a
weighted average RBC level above capital adequacy requirements. We also expect Unum Limited to operate above FSA capital adequacy
requirements and minimum solvency margins.
Unum 2011 Annual Report
75
Debt
At December 31, 2011, we had short-term debt of $312.3 million, consisting entirely of securities lending agreements, and long-term
debt, including senior secured notes and junior subordinated debt securities, totaling $2,570.2 million. Our leverage ratio, when calculated
using consolidated debt to total consolidated capital, was 27.6 percent at December 31, 2011, compared to 25.9 percent at December 31,
2010. Our leverage ratio, when calculated excluding the non-recourse debt and associated capital of Tailwind Holdings and Northwind
Holdings and the short-term debt arising from securities lending agreements, was 22.4 percent at December 31, 2011, compared to
22.8 percent at December 31, 2010. The increase in our consolidated debt to total consolidated capital leverage ratio is due primarily to the
securities lending agreements outstanding at December 31, 2011, partially offset by the maturity of $225.1 million of senior notes and our
principal payments on the debt of Northwind Holdings and Tailwind Holdings during 2011. Leverage is measured as total debt to total
capital, which we define as total long-term and short-term debt plus stockholders’ equity, excluding the net unrealized gain or loss on
securities and the net gain or loss on cash flow hedges. We believe that a leverage ratio which excludes the net unrealized gains and losses
on securities and the net gain or loss on cash flow hedges, both of which tend to fluctuate depending on market conditions and general
economic trends, and which also excludes the non-recourse debt and associated capital of Tailwind Holdings and Northwind Holdings and
the short-term debt arising from securities lending is a better indicator of our ability to meet our financial obligations.
We monitor our compliance with our debt covenants. There are no significant financial covenants associated with any of our
outstanding debt obligations. We remain in compliance with all debt covenants and have not observed any current trends that would cause
a breach of any debt covenants.
Purchases and Retirement of Debt
In 2011, we made debt repayments of $225.1 million at the maturity date of our remaining 7.625% senior notes due March 2011. In
2010, we purchased and retired $10.0 million of our 7.08% medium-term notes due 2024. In 2009, we purchased and retired the remaining
$132.2 million of our 5.859% notes due May 2009. We also made repayments of $1.2 million aggregate principal of our 7.19% medium-
term notes due 2028, $0.6 million aggregate principal of our 6.75% notes due 2028, and $58.3 million of reverse repurchase agreements
outstanding at December 31, 2008.
During 2011, 2010, and 2009, Tailwind Holdings made principal payments of $10.0 million each year on its floating rate, senior secured
non-recourse notes due 2036. During 2011, 2010, and 2009, Northwind Holdings made principal payments of $74.4 million, $58.3 million,
and $48.0 million, respectively, on its floating rate, senior secured non-recourse notes due 2037.
Issuance of Debt
In 2010, we issued $400.0 million of unsecured senior notes in a public offering. These notes, due in 2020, bear interest at a fixed
rate of 5.625% and are payable semi-annually. The notes are callable at or above par and rank equally in right of payment with all of our
other unsecured and unsubordinated debt. In addition, these notes are effectively subordinated to any indebtedness of our subsidiaries.
The balance outstanding on these notes was $400.0 million at December 31, 2011.
In 2009, we issued $350.0 million of unsecured senior notes in a public offering. These notes, due in 2016, bear interest at a fixed rate
of 7.125% and are payable semi-annually. The notes are callable at or above par and rank equally in right of payment with all of our other
unsecured and unsubordinated debt. The balance outstanding on these notes was $350.0 million at December 31, 2011.
In 2007, Northwind Holdings issued $800.0 million floating rate, insured, senior, secured notes, due 2037, in a private offering.
Recourse for the payment of principal, interest, and other amounts due on the notes will be limited to the assets of Northwind Holdings,
consisting primarily of the stock of its sole subsidiary Northwind Re, a Vermont special purpose financial captive insurance company.
Northwind Holdings’ ability to meet its payment obligations under the notes will be dependent principally upon its receipt of dividends
from Northwind Re. The ability of Northwind Re to pay dividends to Northwind Holdings will depend on its satisfaction of applicable
regulatory requirements and on the performance of the reinsured claims of Provident, Paul Revere and Unum America (the ceding insurers)
reinsured by Northwind Re. None of Unum Group, the ceding insurers, Northwind Re or any other affiliate of Northwind Holdings is an
obligor or guarantor on the notes. The balance outstanding on these notes was $560.0 million at December 31, 2011.
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Unum 2011 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations 2011
Unum
In 2006, Tailwind Holdings issued $130.0 million floating rate, insured, senior, secured notes, due 2036, in a private offering. Recourse
for the payment of principal, interest, and other amounts due on the notes will be limited to the assets of Tailwind Holdings, consisting
primarily of the stock of its sole subsidiary Tailwind Re, a South Carolina special purpose financial captive insurance company. Tailwind
Holdings’ ability to meet its payment obligations under the notes will be dependent principally upon its receipt of dividends from Tailwind
Re. The ability of Tailwind Re to pay dividends to Tailwind Holdings will depend on its satisfaction of applicable regulatory requirements and
on the performance of the reinsured claims of Unum America reinsured by Tailwind Re. None of Unum Group, Unum America, Tailwind Re
or any other affiliate of Tailwind Holdings is an obligor or guarantor on the notes. The balance outstanding on these notes was $72.5 million
at December 31, 2011.
In 2005, Unum Group repatriated $454.8 million in unremitted foreign earnings from its U.K. subsidiaries, and as part of its repatriation
plan, UnumProvident Finance Company plc, a wholly-owned subsidiary of Unum Group, issued $400.0 million of 6.85% senior debentures,
due 2015, in a private offering. The debentures are fully and unconditionally guaranteed by Unum Group. The aggregate principal amount
outstanding was $296.9 million at December 31, 2011.
In 2002, Unum Group completed two long-term offerings, issuing $250.0 million of 7.375% senior debentures due 2032 and
$150.0 million of 7.25% public income notes due 2032. The public income notes were called and retired in 2007. The 7.375% notes have an
aggregate principal amount outstanding of $39.5 million at December 31, 2011.
In 2001, Unum Group issued $575.0 million of 7.625% senior notes due March 2011. We repaid the remaining $225.1 million of these
notes at the maturity date.
In 1998, Unum Group completed public offerings of $200.0 million of 7.25% senior notes due 2028, $200.0 million of 7.0% senior notes
due 2018, and $250.0 million of 6.75% senior notes due 2028. None of these amounts have been reduced other than the 6.75% notes,
which have an aggregate principal amount outstanding of $165.8 million at December 31, 2011.
In 1998, Provident Financing Trust I (the trust) issued $300.0 million of 7.405% capital securities in a public offering. These capital
securities, which mature in 2038, are fully and unconditionally guaranteed by Unum Group, have a liquidation value of $1,000 per capital
security, and have a mandatory redemption feature under certain circumstances. Unum Group issued 7.405% junior subordinated deferrable
interest debentures, which mature in 2038, to the trust in connection with the capital securities offering. The securities issued by the trust
have an aggregate principal amount outstanding of $226.5 million at December 31, 2011.
Unum Group has medium-term notes with an aggregate principal amount outstanding of $50.8 million at December 31, 2011 which
were initially issued in three separate series in 1990, 1993, and 1996, pursuant to an indenture dated September 15, 1990. The notes are
fixed maturity rate notes with fixed maturity dates ranging between nine months to thirty years from the issuance date.
Interest and Debt Expense
Interest paid on long-term and short-term debt and related securities during 2011, 2010, and 2009, was $145.4 million, $140.7 million,
and $122.0 million, respectively.
Shelf Registration
We have a shelf registration, which we renewed in 2011, with the Securities and Exchange Commission to issue various types of
securities, including common stock, preferred stock, debt securities, depository shares, stock purchase contracts, units and warrants, or
preferred securities of wholly-owned finance trusts. The shelf registration enables us to raise funds from the offering of any securities
covered by the shelf registration as well as any combination thereof, subject to market conditions and our capital needs.
See Note 7 of the “Notes to Consolidated Financial Statements” contained herein for additional information.
Unum 2011 Annual Report
77
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Commitments
The following table summarizes contractual obligations and our reinsurance recoverable by period as of December 31, 2011:
(in millions of dollars)
Payments Due
Short-term Debt
Long-term Debt
Policyholder Liabilities
Pensions and Other Postretirement Benefits
Miscellaneous Liabilities
Operating Leases
Purchase Obligations
Total
Receipts Due
Total
In 1 Year
or Less
After 1 Year
After 3 Years
up to 3 Years
up to 5 Years
After 5 Years
$ 312.3
$ 312.3
$
—
$
—
$
—
4,299.3
41,359.4
1,900.2
736.5
215.0
306.5
137.3
4,499.2
76.5
683.6
28.8
235.5
277.2
6,823.7
181.4
12.5
51.3
65.1
903.0
5,139.6
185.1
9.9
32.6
4.4
2,981.8
24,896.9
1,457.2
30.5
102.3
1.5
$49,129.2
$5,973.2
$7,411.2
$6,274.6
$29,470.2
Reinsurance Recoverable
$ 7,491.6
$ 306.6
$ 716.5
$ 516.5
$ 5,952.0
Excluded from the preceding table are tax liabilities of approximately $81.4 million for which we are unable to make reasonably
reliable estimates of the period of potential cash settlements, if any, with taxing authorities. See Note 6 of the “Notes to Consolidated
Financial Statements” contained herein for additional information.
Short-term and long-term debt includes contractual principal and interest payments and therefore exceeds the amount
shown in the consolidated balance sheets. See Note 7 of the “Notes to Consolidated Financial Statements” contained herein for
additional information.
Policyholder liability maturities and the related reinsurance recoverable represent the projected payout of the current in-force
policyholder liabilities and the expected cash inflows from reinsurers for liabilities ceded and therefore incorporate uncertainties as to the
timing and amount of claim payments. We utilize extensive liability modeling to project future cash flows from the in-force business. The
primary assumptions used to project future cash flows are claim incidence rates for mortality and morbidity, claim resolution rates, persistency
rates, and interest rates. These cash flows are discounted to determine the current value of the projected claim payments. The timing and
amount of payments on policyholder liabilities may vary significantly from the projections above. See our previous discussion of asset and
liability management under “Investments” contained herein and Note 1 of the “Notes to Consolidated Financial Statements” contained
herein for additional information.
Pensions and other postretirement benefit obligations include our defined benefit pension and postretirement plans for our
employees, including non-qualified pension plans. Pension plan obligations, other than the non-qualified plans, represent our expected
contributions to the pension plans. Amounts in the one year or less category equal our expected contributions within the next 12 months.
The remaining years’ contributions are projected based on the expected future contributions as required under the Employee Retirement
Income Security Act (ERISA). Non-qualified pension plan and other postretirement benefit obligations represent the expected benefit
payments related to these plans. The pensions and other postretirement benefit projections reflect expected future service. These
projections are not discounted with respect to interest and therefore exceed the amount recorded in the consolidated balance sheets.
See Note 8 of the “Notes to Consolidated Financial Statements” contained herein and “Critical Accounting Estimates” contained herein
for additional information.
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Unum 2011 Annual Report
2011
Unum
Miscellaneous liabilities include commissions due and accrued, deferred compensation liabilities, state premium taxes payable,
amounts due to reinsurance companies, accounts payable, obligations to return unrestricted cash collateral to our derivatives counterparties,
and various other liabilities that represent contractual obligations. Obligations where the timing of the payment was uncertain are included
in the one year or less category. See Note 4 of the “Notes to Consolidated Financial Statements” contained herein for additional information
on our derivatives.
At December 31, 2011, we had legally binding unfunded commitments of $160.6 million which are recognized as liabilities in our
consolidated balance sheets, to fund tax credit partnership investments with a corresponding recognition of other long-term investments.
These commitments are represented in the purchase obligation line on the preceding schedule and will be funded over the next several years.
Off-Balance Sheet Arrangements
As noted in the preceding commitments table, we have operating lease commitments totaling $215.0 million at December 31, 2011.
Operating leases include noncancelable obligations on certain office space, equipment, and software.
Purchase obligations include off-balance sheet non-binding commitments of $100.9 million to fund certain of our investments in
private placement securities, private equity partnerships, and other partnerships. These are shown in the preceding table based on the
expiration date of the commitments. The funds will be due upon satisfaction of contractual notice from the partnership trustee or issuer of
the private placement securities. The amounts may or may not be funded. Also included are noncancelable obligations with outside parties
for computer data processing services and related functions and software maintenance agreements. The aggregate obligation remaining
under these agreements was $26.7 million at December 31, 2011.
As part of our regular investing strategy, we receive collateral from unaffiliated third parties through transactions which include
both securities lending and also short-term agreements to purchase securities with the agreement to resell them at a later specified date.
For both types of transactions, we require that a minimum of 102 percent of the fair value of the securities loaned or securities purchased
under repurchase agreements be maintained as collateral. Generally, cash is received as collateral under these agreements. In the event
that securities are received as collateral, we are not permitted to sell or re-post them. We also post our fixed maturity securities as collateral
to unaffiliated third parties through transactions including both securities lending and also short-term agreements to sell securities with the
agreement to repurchase them at a later specified date. See “Transfers of Financial Assets” as follows for further discussion.
To help limit the credit exposure of the derivatives, we enter into master netting agreements with our counterparties whereby
contracts in a gain position can be offset against contracts in a loss position. We also typically enter into bilateral, cross-collateralization
agreements with our counterparties to help limit the credit exposure of the derivatives. These agreements require the counterparty in a
loss position to submit acceptable collateral with the other counterparty in the event the net loss position meets or exceeds an agreed
upon amount. Our current credit exposure on derivatives, which is limited to the value of those contracts in a net gain position less
collateral held, was $19.9 million at December 31, 2011. We post fixed maturity securities or cash as collateral to our counterparties. The
carrying value of fixed maturity securities posted as collateral to our counterparties was $114.9 million at December 31, 2011. We had no
cash posted as collateral to our counterparties at December 31, 2011.
Our derivatives counterparties have posted non-cash collateral in various segregated custody accounts to which we have a security
interest in the event of counterparty default. This collateral, which is not reflected in the preceding table, had a fair value of $40.1 million at
December 31, 2011.
Transfers of Financial Assets
To manage our cash position more efficiently, we enter into repurchase agreements with unaffiliated financial institutions. We
generally use repurchase agreements as a means to finance the purchase of invested assets or for short-term general business purposes
until projected cash flows become available from our operations or existing investments. Our repurchase agreements are typically
outstanding for less than 30 days. We post collateral through our repurchase agreement transactions whereby the counterparty commits
to purchase securities with the agreement to resell them to us at a later, specified date. The fair value of collateral posted is generally
102 percent of the cash received.
Unum 2011 Annual Report
79
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
As previously noted, our investment policy also permits us to lend fixed maturity securities to unaffiliated financial institutions in short-
term securities lending agreements, which increase our investment income with minimal risk. We account for all of our securities lending
agreements and repurchase agreements as collateralized financings. We had $312.3 million of securities lending agreements outstanding
which were collateralized by cash at December 31, 2011 and were reported as short-term debt in our consolidated balance sheets. The cash
received as collateral was reinvested in short-term investments. The average balance during 2011 was $175.8 million, and the maximum
amount outstanding at any month end was $389.8 million. In addition, at December 31, 2011, we also had $16.7 million of off-balance
sheet securities lending agreements which were collateralized by securities that we were neither permitted to sell nor control. The average
balance of these off-balance sheet transactions during 2011 was $5.5 million, and the maximum amount outstanding at any month end
was $16.7 million.
We had no repurchase agreements outstanding at December 31, 2011, nor did we utilize any repurchase agreements during 2011.
Our use of repurchase agreements and securities lending agreements can fluctuate during any given period and will depend on our liquidity
position, the availability of long-term investments that meet our purchasing criteria, and our general business needs.
Ratings
AM Best, Fitch, Moody’s, and S&P are among the third parties that assign issuer credit ratings to Unum Group and financial strength
ratings to our insurance subsidiaries. Issuer credit ratings reflect an agency’s opinion of the overall financial capacity of a company to meet
its senior debt obligations. Financial strength ratings are specific to each individual insurance subsidiary and reflect each rating agency’s
view of the overall financial strength (capital levels, earnings, growth, investments, business mix, operating performance, and market
position) of the insuring entity and its ability to meet its obligations to policyholders. Both the issuer credit ratings and financial strength
ratings incorporate quantitative and qualitative analyses by rating agencies and are routinely reviewed and updated on an ongoing basis.
We compete based in part on the financial strength ratings provided by rating agencies. A downgrade of our financial strength ratings
can be expected to adversely affect us and could potentially, among other things, adversely affect our relationships with distributors of our
products and services and retention of our sales force, negatively impact persistency and new sales, particularly large case group sales and
individual sales, and generally adversely affect our ability to compete. A downgrade in the issuer credit rating assigned to Unum Group can
be expected to adversely affect our cost of capital or our ability to raise additional capital.
The table below reflects the issuer credit ratings for Unum Group and the financial strength ratings for each of our traditional insurance
subsidiaries as of the date of this filing.
Issuer Credit Ratings
Financial Strength Ratings
Provident Life and Accident
Provident Life and Casualty
Unum Life of America
First Unum Life
Colonial Life & Accident
Paul Revere Life
Paul Revere Variable
Unum Limited
AM Best
Fitch
Moody’s
S&P
bbb (Good)
BBB (Good)
Baa3 (Adequate) BBB- (Adequate)
A (Excellent)
A (Excellent)
A (Excellent)
A (Excellent)
A (Excellent)
A (Excellent)
B++(Good)
Not Rated
A (Strong)
A (Strong)
A (Strong)
A (Strong)
A (Strong)
A (Strong)
A (Strong)
Not Rated
A3 (Good)
Not Rated
A3 (Good)
A3 (Good)
A3 (Good)
A3 (Good)
A3 (Good)
Not Rated
A- (Strong)
Not Rated
A- (Strong)
A- (Strong)
A- (Strong)
A- (Strong)
Not Rated
A- (Strong)
We maintain an ongoing dialogue with the four rating agencies that evaluate us in order to inform them of progress we are making
regarding our strategic objectives and financial plans, as well as other pertinent issues. A significant component of our communications
involves our annual review meeting with each of the four agencies. We hold other meetings throughout the year regarding our business,
including, but not limited to, quarterly updates.
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2011
Unum
On January 26, 2011, AM Best upgraded its ratings of Unum Group and its domestic operating subsidiaries to bbb and A, respectively,
with the exception of Paul Revere Variable which retained its B++ rating, and revised the outlook for the Company and its subsidiaries to
“stable.” On June 23, 2011, December 19, 2011, and February 6, 2012, Fitch affirmed its A rating of Unum Group and its domestic
subsidiaries and affirmed the senior debt rating at BBB. Fitch’s rating outlook for Unum Group is “stable.” On June 27, 2011, S&P affirmed the
A- financial strength rating and “stable” outlook of Unum Group’s U.K. subsidiary, Unum Limited. On August 4, 2011, Moody’s affirmed the
Baa3 credit rating of Unum Group and the A3 financial strength rating of its domestic subsidiaries and revised the outlook for the Company
and its subsidiaries to “positive.” On August 15, 2011, S&P affirmed the BBB- credit rating of Unum Group and the A- financial strength rating
of its domestic subsidiaries and raised the outlook for the Company and its domestic subsidiaries to “positive.”
There have been no other changes in any of the rating agencies’ outlook statements or ratings during 2011 or during 2012 prior to the
date of this filing.
Agency ratings are not directed toward the holders of our securities and are not recommendations to buy, sell, or hold our securities.
Each rating is subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be regarded as an
independent assessment, not conditional on any other rating. Given the dynamic nature of the ratings process, changes by these or other
rating agencies may or may not occur in the near-term. Based on our ongoing dialogue with the rating agencies concerning our improved
insurance risk profile, our financial flexibility, our operating performance, and the quality of our investment portfolio, we do not expect any
negative actions from any of the four rating agencies related to either Unum Group’s current issuer credit ratings or the financial strength
ratings of its insurance subsidiaries. However, in the event that we are unable to meet the rating agency specific guideline values to
maintain our current ratings, including but not limited to maintenance of our capital management metrics at the threshold values stated
and maintenance of our financial flexibility and operational consistency, we could be placed on a negative credit watch, with a potential for
a downgrade to both our issuer credit ratings and our financial strength ratings.
See “Ratings” contained in Item 1 and “Risk Factors” contained in Item 1A of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2011 for further discussion.
Unum 2011 Annual Report
81
Quantitative and Qualitative Disclosures
About Market Risk
We are subject to various market risk exposures, including interest rate risk and foreign exchange rate risk. The following discussion
regarding our risk management activities includes forward-looking statements that involve risk and uncertainties. Estimates of future
Caution should be used in evaluating our overall market risk from the information presented below, as actual results may differ. See
“Investments” contained herein and Notes 2, 3, and 4 of the “Notes to Consolidated Financial Statements” contained herein for further
discussions of the qualitative aspects of market risk, including derivative financial instrument activity.
Interest Rate Risk
Our exposure to interest rate changes results from our holdings of financial instruments such as fixed rate investments, derivatives,
and interest-sensitive liabilities. Fixed rate investments include fixed maturity securities, mortgage loans, policy loans, and short-term
investments. Fixed maturity securities include U.S. and foreign government bonds, securities issued by government agencies, corporate
bonds, mortgage-backed securities, and redeemable preferred stock, all of which are subject to risk resulting from interest rate fluctuations.
Certain of our financial instruments, fixed maturity securities and derivatives, are carried at fair value in our consolidated balance sheets.
The fair value of these financial instruments may be adversely affected by changes in interest rates. A rise in interest rates may decrease
the net unrealized gain related to these financial instruments, but may improve our ability to earn higher rates of return on new purchases
of fixed maturity securities. Conversely, a decline in interest rates may increase the net unrealized gain, but new securities may be
purchased at lower rates of return. Although changes in fair value of fixed maturity securities and derivatives due to changes in interest
rates may impact amounts reported in our consolidated balance sheets, these changes will not cause an economic gain or loss unless we
sell investments, terminate derivative positions, determine that an investment is other than temporarily impaired, or determine that a
derivative instrument is no longer an effective hedge.
Other fixed rate investments, such as mortgage loans and policy loans, are carried at amortized cost and unpaid balances,
respectively, rather than fair value in our consolidated balance sheets. These investments may have fair values substantially higher or
lower than the carrying values reflected in our balance sheets. A change in interest rates could impact our financial position if we sold our
mortgage loan investments at times of low market value. A change in interest rates would not impact our financial position at repayment
of policy loans, as ultimately the cash surrender values or death benefits would be reduced for the carrying value of any outstanding policy
loans. Carrying amounts for short-term investments approximate fair value, and we believe we have minimal interest rate risk exposure
from these investments.
We believe that the risk of being forced to liquidate investments or terminate derivative positions is minimal, primarily due to the
level of capital at our insurance subsidiaries, the level of cash and marketable securities at our holding companies, and our investment
strategy which we believe provides for adequate cash flows to meet the funding requirements of our business. We may in certain
circumstances, however, need to sell investments due to changes in regulatory or capital requirements, changes in tax laws, rating agency
decisions, and/or unexpected changes in liquidity needs.
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Although our policy benefits are primarily in the form of claim payments and we therefore have minimal exposure to the policy
withdrawal risk associated with deposit products such as individual life policies or annuities, the fair values of liabilities under all insurance
contracts are taken into consideration in our overall management of interest rate risk, which minimizes exposure to changing interest rates
through the matching of investment cash flows with amounts due under insurance contracts. Changes in interest rates and individuals’
behavior affect the amount and timing of asset and liability cash flows. We actively manage our asset and liability cash flow match and our
asset and liability duration match to mitigate interest rate risk. Due to the long duration of our long-term care product, we may be unable to
purchase appropriate assets with cash flows and durations such that the timing and/or amount of our investment cash flows may not
match those of our maturing liabilities. Sustained periods of low interest rates could result in lower than expected profitability or increases
in reserves. We model and test asset and liability portfolios to improve interest rate risk management and net yields. Testing the asset and
liability portfolios under various interest rate and economic scenarios allows us to choose what we believe to be the most appropriate
investment strategy, as well as to prepare for disadvantageous outcomes. This analysis is the precursor to our activities in derivative
financial instruments. We use current and forward interest rate swaps, options on forward interest rate swaps, and forward treasury locks to
hedge interest rate risks and to match asset durations and cash flows with corresponding liabilities.
Short-term and long-term debt are not carried at fair value in our consolidated balance sheets. If we modify or replace existing short-
term or long-term debt instruments at current market rates, we may incur a gain or loss on the transaction. We believe our debt-related risk
to changes in interest rates is relatively minimal. In the near term, we expect that our need for external financing is small, but changes in
our business could increase our need.
We measure our financial instruments’ market risk related to changes in interest rates using a sensitivity analysis. This analysis
estimates potential changes in fair values as of December 31, 2011 and 2010 based on a hypothetical immediate increase of 100 basis
points in interest rates from year end levels. The selection of a 100 basis point immediate parallel change in interest rates should not be
construed as our prediction of future market events, but only as an illustration of the potential effect of such an event.
Unum 2011 Annual Report
83
Quantitative and Qualitative Disclosures
About Market Risk
The hypothetical potential changes in fair value of our financial instruments at December 31, 2011 and 2010 are shown as follows:
(in millions of dollars)
Assets
Fixed Maturity Securities (1)
Mortgage Loans
Policy Loans, Net of Reinsurance Ceded
Liabilities
Unrealized Adjustment to Reserves,
Net of Reinsurance Ceded and Other (2)
Short-term Debt
Long-term Debt
Derivatives (1)
Swaps
Embedded Derivative in Modified
Coinsurance Arrangement
(in millions of dollars)
Assets
Fixed Maturity Securities (1)
Mortgage Loans
Policy Loans, Net of Reinsurance Ceded
Liabilities
Unrealized Adjustment to Reserves,
Net of Reinsurance Ceded and Other (2)
Short-term Debt
Long-term Debt
Derivatives (1)
Swaps
Embedded Derivative in Modified
Coinsurance Arrangement
December 31, 2011
Notional
Hypothetical
Amount of Derivatives
Fair Value
FV + 100 BP
Change in FV
$42,486.7
$38,912.6
$(3,574.1)
1,789.8
286.1
1,716.2
270.0
(73.6)
(16.1)
$ (5,021.3)
$ (2,333.6)
$ 2,687.7
(312.3)
(2,540.2)
(312.3)
(2,400.6)
—
139.6
$1,413.0
$
(36.0)
$ (118.8)
$
(82.8)
(135.7)
(138.4)
(2.7)
December 31, 2010
Notional
Hypothetical
Amount of Derivatives
Fair Value
FV + 100 BP
Change in FV
$40,035.6
$36,576.1
$(3,459.5)
1,685.4
253.9
1,609.5
239.9
(75.9)
(14.0)
$ (2,993.6)
$
(631.6)
$ 2,362.0
(226.8)
(2,483.8)
(226.4)
(2,358.3)
0.4
125.5
$1,681.9
$
(100.5)
$
(190.6)
$
(90.1)
(96.3)
(105.4)
(9.1)
(1) These assets and liabilities are carried at fair value in our consolidated balance sheets. Changes in fair value resulting from changes in interest rates may affect the fair
value at which the item is reported in our consolidated balance sheets. The corresponding offsetting change is reported in other comprehensive income or loss, net of
deferred taxes, except for changes in the fair value of the embedded derivative which is reported as a component of net realized investment gain or loss.
(2) The adjustment to reserves and other for unrealized investment gains and losses reflects the adjustments to deferred acquisition costs and policyholder liabilities that
would be necessary if the unrealized investment gains and losses related to the fixed maturity securities and derivatives had been realized. Changes in this adjustment are
also reported as a component of other comprehensive income or loss, net of deferred taxes.
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The effect of a change in interest rates on asset prices was determined using a duration implied methodology for corporate bonds
and government and government agency securities whereby the duration of each security was used to estimate the change in price for
the security assuming an increase of 100 basis points in interest rates. The effect of a change in interest rates on the mortgage-backed
securities was estimated using a mortgage analytic system which takes into account the impact of changing prepayment speeds resulting
from a 100 basis point increase in interest rates on the change in price of the mortgage-backed securities. These hypothetical prices were
compared to the actual prices for the period to compute the overall change in market value. The changes in the fair values shown in the
chart above for all other items were determined using discounted cash flows analyses. Because we actively manage our investments and
liabilities, actual changes could be less than those estimated above.
As previously discussed herein, in response to the significant decline in interest rates, we have lowered the discount rate on our long-
term care product to reflect the low interest rate environment and our expectation of future investment portfolio yield rates. We will
continue to monitor these issues in accordance with the policies set forth above to ensure appropriate management of these prevailing risks.
Foreign Currency Risk
The functional currency of our U.K. operations is the British pound sterling. We are exposed to foreign currency risk arising from
fluctuations in the British pound sterling to U.S. dollar exchange rates primarily as they relate to the translation of the financial results of our
U.K. operations. Fluctuations in the pound to dollar exchange rate have an effect on our reported financial results. We do not hedge against
the possible impact of this risk. Because we do not actually convert pounds into dollars except for a limited number of transactions, we
view foreign currency translation as a financial reporting issue and not a reflection of operations or profitability in the U.K.
Assuming the pound to dollar exchange rate decreased 10 percent from the December 31, 2011 and 2010 levels, stockholders’ equity
as reported in U.S. dollars as of and for the periods then ended would have been lower by approximately $109.3 million and $106.0 million,
respectively. Assuming the pound to dollar average exchange rate decreased 10 percent from the actual average exchange rates for 2011
and 2010, segment operating income, which excludes net realized investment gains and losses and income tax, as reported in U.S. dollars
would have decreased approximately $18.9 million and $22.5 million, respectively, for the years then ended.
Dividends paid by Unum Limited are generally held at our U.K. finance subsidiary or our U.K. holding company. If these funds are
repatriated to our U.S. holding company, we would at that time be subject to foreign currency risk as the value of the dividend, when
converted into U.S. dollars, would be dependent upon the foreign exchange rate at the time of conversion.
We are also exposed to foreign currency risk related to certain foreign investment securities denominated in local currencies and
U.S. dollar-denominated debt issued by one of our U.K. subsidiaries. We use current and forward currency swaps to hedge or minimize the
foreign exchange risk associated with these instruments.
See “Unum UK Segment” contained herein for further information concerning foreign currency translation.
Risk Management
Effectively taking and managing risks is essential to the success of our Company. To facilitate this effort, we have a formal Enterprise
Risk Management (ERM) program, with a framework comprising the following key components:
• Risk culture and governance
• Risk appetite policy
• Risk identification and prioritization
• Risk and capital modeling
• Risk management activities
• Risk reporting
Unum 2011 Annual Report
85
Quantitative and Qualitative Disclosures
About Market Risk
Through adherence to the objectives highlighted by the key components of our ERM framework, we believe we are better positioned
to fulfill our corporate mission, improve and protect stockholder value, and reduce reputational risk.
Risk Culture and Governance
We employ a decentralized risk management model under which risk-based decisions are made daily on a local level. To achieve long-
term success, we believe risk management must be the responsibility of all employees. The individual and collective decisions of our
employees play a key role in successfully managing our overall risk profile. We strive for a culture of accountability, risk management, and
strict compliance, and we believe these values allow our employees to feel comfortable identifying issues as well as taking ownership for
addressing potential problems.
Our risk culture is reinforced by our system of risk governance. We employ a multi-layered risk control system. Our three lines of
defense model is depicted below.
1st Line: The Business
2nd Line: Risk and Control
3rd Line: Independent Review
All Unum Employees
Risk Committees and Chief Risk Officer
Internal Audit and Internal Controls
Frontline Business Management
Chief Actuary
Audit Committee of Unum Group Board
Compliance Officers and Staff
Unum Group Board
Business units are primarily responsible for managing their principal risks. Our risk committees, chief risk officer (CRO), chief actuary,
and compliance officers and staff serve in risk and control functions responsible for providing risk oversight, or the second line of risk
control. The internal audit team and internal controls team provide a second level of independent review, or our third line of risk control.
The audit committee of Unum Group’s board of directors (the board) oversees the entire ERM governance process, effectively providing
independent review for our third line of risk control.
The board has an active role, as a whole and through its committees, in overseeing management of our risks. The board is responsible
for managing strategic risk and regularly reviews information regarding our capital, liquidity, and operations, as well as the risks associated
with each, and receives an ERM report from our CRO at least annually, or more frequently as appropriate. The audit committee of the board
is responsible for oversight of our risk management process, including financial risk, operational risk, and any other risk not specifically
assigned to another board committee. The CRO provides a report on our risks and risk management processes to the audit committee of
the board at least quarterly. The finance committee of the board is responsible for oversight of risks associated with investments and
related financial matters. The human capital committee of the board is responsible for oversight of risks relating to our compensation plans
and programs. The CRO performs an annual risk assessment of our incentive compensation programs to ensure incentive plans are
balanced and consistent with the risk levels embedded in our financial and business plans. Results of this assessment are presented to our
human capital committee of the board annually, and conclusions from this assessment are reported in our proxy statement. The regulatory
compliance committee of the board is responsible for oversight of risks related to regulatory, compliance, policy, and legal matters, both
current and emerging, and whether of a local, state, federal, or international nature. While each committee is responsible for evaluating
certain risks and overseeing the management of such risks, the entire board is regularly informed through committee reports about such
risks in addition to the risk information it receives directly.
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The executive risk management committee is responsible for overseeing our enterprise-wide risk management program. The CRO,
who is a member of the executive risk management committee, has primary responsibility for our ERM program and is supported by
corporate risk committees and by the risk committees of our three primary operating segments.
Operating segment risk committees for Unum US, Unum UK, and Colonial Life are responsible for oversight of risks specific to their
businesses. These committees are responsible for identifying, measuring, reporting, and managing insurance and operational risks within
their respective areas, consistent with enterprise risk management guidance. Corporate risk committees oversee the operational, global
technology services, investment, and capital management risks on a corporate level.
Risk Appetite Policy
Our risk appetite policy describes the types of risks we are willing to take, as well as the amount of enterprise risk exposure we deem
acceptable in pursuit of our goals, with an objective of clearly defining boundaries for our risk-taking activities.
The starting point of our philosophy and approach to our ERM strategy is our corporate strategy. In contrast to many multi-line peer
companies, we do not offer retirement savings, traditional medical benefits, or property and casualty insurance. Our corporate strategy is
focused on providing group, individual, and voluntary benefits, either as stand-alone products or combined with other coverages, that
create comprehensive benefits solutions for employers. We have market leadership positions in the product lines we offer and have over
160 years of experience. We believe this combination of focused expertise and extensive experience is a competitive advantage that forms
the foundation of our approach to risk management.
Our sound and consistent business practices, strong internal compliance program, and comprehensive risk management strategy
enable us to operate efficiently as well as to identify and address potential areas of risk in our business. We take and manage risks to
achieve our business and strategic objectives, and our risk appetite statement sets boundaries for risk-taking activities that link earnings,
capital, and operational processes, as well as summarizes our most material risk limits and controls. We monitor our risk profile against our
established risk tolerance and limits. Risks falling outside our risk tolerance and limits are reported to the applicable governance group,
where decisions are made pertaining to acceptance of the risk or implementation of remediation plans or corrective actions as deemed
appropriate by that governance group.
Risk Identification and Prioritization
Risk identification and prioritization is an ongoing process, whereby we identify and assess our risk positions and exposures, including
notable risk events. Additionally, we identify emerging risks and analyze how material future risks might affect us. Knowing the potential
risks we face allows us to monitor and manage their potential effects including adjusting our strategies as appropriate and holding capital
levels which provide financial flexibility.
Risk committees have primary responsibility for identifying and prioritizing risks within their respective areas. In addition, we maintain
a risk, ethics, and compliance (REC) leaders program. The goal of the program is to further embed REC management into our culture in a
visible and effective manner. This group assists with the early identification of issues, timely referrals, problem solving, and communication.
Individual employees can report material concerns and identified risks through a variety of options, such as discussion with
management, contacting a REC leader or the ERM team, or utilizing the Company’s anonymous hotline and electronic reporting mechanism.
We face a wide range of risks, and our continued success depends on our ability to identify and appropriately manage our risk exposures.
For additional information on certain risks that may adversely affect our business, operating results, or financial condition see “Cautionary
Statement Regarding Forward-Looking Statements” contained herein and “Risk Factors” contained in Item 1A of our Annual Report on
Form 10-K for the fiscal year ended December 31, 2011.
Unum 2011 Annual Report
87
Quantitative and Qualitative Disclosures
About Market Risk
Risk and Capital Modeling
We assess material risks, including how they affect us and how individual risks interrelate, to provide valuable information to
management in order that they may effectively manage our risks. We use qualitative and quantitative approaches to assess existing and
emerging risks and to develop mitigating strategies to limit our exposure to both.
We utilize stress testing and scenario analysis for risk management and to shape our business, financial, and strategic planning
activities. Both are key components of our risk appetite policy and play an important role in monitoring, assessing, managing, and
mitigating our primary risk exposures.
In particular, stress testing of our capital and liquidity management strategies enables us to identify areas of high exposure, assess
mitigating actions, develop contingency plans, and guide decisions around our target capital and liquidity levels. For example, we
periodically perform stress tests on certain categories of assets or liabilities to support development of capital and liquidity risk contingency
plans. These tests help ensure that we have a buffer to support our operations in uncertain times and financial flexibility to respond to
market opportunities. Stress testing is also central to reserve adequacy testing, cash flow testing, and asset and liability management.
In addition, we aim to constantly improve our capital modeling techniques and methodologies that are used to determine a level of
capital that is commensurate with our risk profile and to ensure compliance with evolving regulatory and rating agency requirements. Our
capital modeling reflects appropriate aggregation of risks and diversification benefits resulting from our mix of products and business units.
Our internal capital modeling and allocation aids us in making significant business decisions including strategic planning, capital
management, risk limit determination, reinsurance purchases, hedging activities, asset allocation, pricing, and corporate development.
Risk Management Activities
We accept and manage strategic, credit, and insurance risks in accordance with our corporate strategy, investment policy, and annual
business plans. The following fundamental principles are embedded in our risk management efforts across our Company.
• We believe in the benefits of specialization and a focused business strategy. We seek profitable risk-taking in areas where we have
established risk management skills and capabilities.
• We seek to manage our exposure to insurance risk through a combination of prudent underwriting with effective risk selection,
maintaining pricing discipline, sound reserving practices, and high quality claims management. Detailed underwriting guidelines and
claim policies are tools used to manage our insurance risk exposure. We also monitor exposures against internally prescribed limits
and practice diversification to reduce potential concentration risk and volatility.
• We maintain a detailed set of investment policies and guidelines, including fundamental credit analysis, that are used to manage our
credit risk exposure and diversify our risks across asset classes and issuers.
• Finally, we foster a risk culture that embeds our corporate values and our code of conduct in our daily operations and preserves
our reputation with customers and other key stakeholders. We monitor a composite set of operational risk metrics that measure
operating effectiveness from the customer perspective.
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Risk Reporting
Regular internal and external risk reporting is an integral part of our ERM framework. Internally, ERM reports are a standard part
of our quarterly senior management and board meetings. The reports summarize our existing and emerging risk exposures, as well as
report against the tolerances and limits defined by our risk appetite policy.
Externally, we are subject to a number of regulatory and rating agency risk examinations, and risk reports are often included. Domestic
and international regulators are currently completing requirements for a new Own Risk and Solvency Assessment (ORSA) standard, which is
intended to become a regular part of reviews of insurers’ ERM programs. ORSA is expected to provide strong evidence of the strengths of
our ERM framework, measurement approaches, key assumptions utilized in assessing our risks, and prospective solvency assessments
under both normal and stressed conditions. During 2012, we will implement actions to prepare for compliance with this evolving standard.
Unum 2011 Annual Report
89
Consolidated Balance Sheets
(in millions of dollars)
Assets
Investments
December 31
2011
2010
Fixed Maturity Securities — at fair value (amortized cost: $36,640.7; $36,546.6)
$42,486.7
$40,035.6
Mortgage Loans
Policy Loans
Other Long-term Investments
Short-term Investments
Total Investments
Other Assets
Cash and Bank Deposits
Accounts and Premiums Receivable
Reinsurance Recoverable
Accrued Investment Income
Deferred Acquisition Costs
Goodwill
Property and Equipment
Other Assets
1,612.3
3,051.4
639.2
1,423.5
1,516.8
2,996.1
529.3
1,163.1
49,213.1
46,240.9
116.6
1,672.2
4,854.6
681.8
2,300.9
201.2
493.3
645.3
53.6
1,665.8
4,827.9
669.8
2,521.1
201.2
476.8
650.6
Total Assets
See notes to consolidated financial statements.
$60,179.0
$57,307.7
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Unum 2011 Annual Report
Consolidated Balance Sheets
(in millions of dollars)
Liabilities and Stockholders’ Equity
Liabilities
Policy and Contract Benefits
Reserves for Future Policy and Contract Benefits
Unearned Premiums
Other Policyholders’ Funds
Income Tax Payable
Deferred Income Tax
Short-term Debt
Long-term Debt
Other Liabilities
Total Liabilities
Commitments and Contingent Liabilities — Note 13
Stockholders’ Equity
Common Stock, $0.10 par
Authorized: 725,000,000 shares
Issued: 358,691,567 and 364,842,919 shares
Additional Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Net Unrealized Gain on Securities Not Other-Than-Temporarily Impaired
Net Unrealized Gain on Securities Other-Than-Temporarily Impaired
Net Gain on Cash Flow Hedges
Foreign Currency Translation Adjustment
Unrecognized Pension and Postretirement Benefit Costs
Retained Earnings
Treasury Stock — at cost: 65,975,613 and 48,269,467 shares
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See notes to consolidated financial statements.
2011
Unum
December 31
2011
2010
$ 1,494.0
$ 1,565.0
43,051.9
39,715.0
433.2
1,625.9
38.2
261.2
312.3
2,570.2
1,815.1
436.7
1,669.7
135.7
417.2
225.1
2,631.3
1,567.6
51,602.0
48,363.3
35.9
2,591.1
605.8
—
408.7
(121.5)
(444.1)
7,031.2
36.5
2,615.4
408.3
2.1
361.0
(110.9)
(318.6)
7,060.8
(1,530.1)
(1,110.2)
8,577.0
8,944.4
$60,179.0
$57,307.7
Unum 2011 Annual Report
91
Consolidated Statements of Income
(in millions of dollars, except share data)
Revenue
Premium Income
Net Investment Income
Realized Investment Gain (Loss)
Year Ended December 31
2011
2010
2009
$ 7,514.2
$ 7,431.4
$ 7,475.5
2,519.6
2,495.5
2,346.6
Total Other-Than-Temporary Impairment Loss on Fixed Maturity Securities
(19.9)
(15.9)
(215.5)
Other-Than-Temporary Impairment Loss Recognized in
Other Comprehensive Income
Net Impairment Loss Recognized in Earnings
Other Net Realized Investment Gain
Net Realized Investment Gain (Loss)
Other Income
Total Revenue
Benefits and Expenses
—
(19.9)
15.0
(4.9)
249.1
—
(15.9)
40.6
24.7
241.6
3.7
(211.8)
223.5
11.7
257.2
10,278.0
10,193.2
10,091.0
Benefits and Change in Reserves for Future Benefits
7,209.5
6,354.1
6,291.6
879.2
143.3
(628.3)
533.8
289.8
808.0
785.5
10,020.8
257.2
230.5
(208.7)
21.8
855.4
141.8
(607.7)
547.1
—
776.3
794.9
8,861.9
1,331.3
301.0
144.2
445.2
837.1
125.4
(593.6)
526.2
—
793.3
818.7
8,798.7
1,292.3
377.9
61.8
439.7
$ 235.4
$ 886.1
$ 852.6
$ 0.78
$ 2.72
$ 0.78
$ 2.71
$ 2.57
$ 2.57
Commissions
Interest and Debt Expense
Deferral of Acquisition Costs
Amortization of Deferred Acquisition Costs
Impairment of Deferred Acquisition Costs
Compensation Expense
Other Expenses
Total Benefits and Expenses
Income Before Income Tax
Income Tax (Benefit)
Current
Deferred
Total Income Tax
Net Income
Net Income Per Common Share
Basic
Assuming Dilution
See notes to consolidated financial statements.
92
Unum 2011 Annual Report
Consolidated Statements of Stockholders’ Equity
2011
Unum
(in millions of dollars)
Common Stock
Balance at Beginning of Year
Common Stock Activity
Retirement of Repurchased Common Shares
Balance at End of Year
Additional Paid-in Capital
Balance at Beginning of Year
Common Stock Activity
Retirement of Repurchased Common Shares
Balance at End of Year
Accumulated Other Comprehensive Income (Loss)
Balance at Beginning of Year
Cumulative Effect of Accounting Principle Change — Note 1
All Other Changes During Year
Balance at End of Year
Retained Earnings
Balance at Beginning of Year
Net Income
Dividends to Stockholders (per common share: $0.395; $0.350; $0.315)
Retirement of Repurchased Common Shares
Cumulative Effect of Accounting Principle Change — Note 1
Balance at End of Year
Treasury Stock
Balance at Beginning of Year
Purchases of Treasury Stock
Balance at End of Year
Total Stockholders’ Equity at End of Year
See notes to consolidated financial statements.
Year Ended December 31
2011
2010
2009
$ 36.5
$ 36.4
$ 36.3
0.2
(0.8)
35.9
0.1
—
36.5
0.1
—
36.4
2,615.4
2,587.4
2,546.9
30.9
(55.2)
28.0
—
40.5
—
2,591.1
2,615.4
2,587.4
341.9
—
107.0
448.9
341.0
—
0.9
341.9
7,060.8
6,289.5
235.4
(121.0)
(144.0)
—
886.1
(114.8)
—
—
(958.2)
(14.3)
1,313.5
341.0
5,527.1
852.6
(104.5)
—
14.3
7,031.2
7,060.8
6,289.5
(1,110.2)
(419.9)
(754.2)
(356.0)
(754.2)
—
(1,530.1)
(1,110.2)
(754.2)
$ 8,577.0
$ 8,944.4
$8,500.1
Unum 2011 Annual Report
93
Consolidated Statements of Cash Flows
(in millions of dollars)
Cash Flows from Operating Activities
Net Income
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Change in Receivables
Change in Deferred Acquisition Costs
Impairment of Deferred Acquisition Costs
Change in Insurance Reserves and Liabilities
Change in Income Taxes
Change in Other Accrued Liabilities
Non-cash Adjustments to Net Investment Income
Net Realized Investment (Gain) Loss
Depreciation
Other, Net
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturity Securities
Proceeds from Maturities of Fixed Maturity Securities
Proceeds from Sales and Maturities of Other Investments
Purchase of Fixed Maturity Securities
Purchase of Other Investments
Net Sales (Purchases) of Short-term Investments
Other, Net
Net Cash Used by Investing Activities
Cash Flows from Financing Activities
Net Short-term Debt Borrowings (Repayments)
Issuance of Long-term Debt
Long-term Debt Repayments
Issuance of Common Stock
Repurchase of Common Stock
Dividends Paid to Stockholders
Other, Net
Net Cash Used by Financing Activities
Effect of Foreign Exchange Rate Changes on Cash
Net Increase (Decrease) in Cash and Bank Deposits
Cash and Bank Deposits at Beginning of Year
Cash and Bank Deposits at End of Year
See notes to consolidated financial statements.
94
Unum 2011 Annual Report
Year Ended December 31
2011
2010
2009
$
235.4
$
886.1
$
852.6
37.0
(94.5)
289.8
1,113.9
(301.7)
68.4
(240.6)
4.9
81.1
—
1.7
(60.6)
—
537.8
164.3
(95.5)
(276.2)
(24.7)
75.4
(11.5)
113.9
(67.4)
—
441.2
59.2
(18.4)
(239.8)
(11.7)
74.5
32.9
1,193.7
1,196.8
1,237.0
1,181.9
1,692.7
131.9
1,122.8
2,192.8
140.3
1,427.2
1,132.5
250.5
(2,760.1)
(3,798.6)
(3,848.8)
(332.8)
(288.1)
(110.1)
(267.7)
199.0
(106.6)
(1,073.7)
(1,213.9)
—
396.9
(78.3)
10.0
(356.0)
(114.8)
1.1
(190.5)
346.8
(59.8)
8.0
—
(104.5)
(1.5)
(1.5)
0.1
21.7
49.9
(720.4)
(141.1)
—
63.0
53.6
—
(18.0)
71.6
$
116.6
$
53.6
$
71.6
(304.1)
(254.6)
(98.0)
(410.3)
87.2
—
(84.4)
14.8
(619.9)
(121.0)
2.9
Consolidated Statements of
Comprehensive Income
2011
Unum
(in millions of dollars)
Net Income
Other Comprehensive Income (Loss)
Change in Net Unrealized Gains on Securities
Before Reclassification Adjustment:
Year Ended December 31
2011
2010
2009
$
235.4
$ 886.1
$ 852.6
Change in Net Unrealized Gains on Securities Not Other-Than-Temporarily
Impaired (net of tax expense of $812.4; $522.6; $1,375.9)
1,544.4
989.0
2,593.1
Change in Net Unrealized Gains on Securities Other-Than-Temporarily
Impaired (net of tax expense (benefit) of $(1.1); $(0.5); $9.3)
(2.1)
(0.9)
17.3
Total Change in Net Unrealized Gains on Securities Before Reclassification
Adjustment (net of tax expense of $811.3; $522.1; $1,385.2)
1,542.3
988.1
2,610.4
Reclassification Adjustment for Net Realized Investment Gain (Loss)
(net of tax expense (benefit) of $13.0; $3.5; $(79.0))
(22.5)
(6.4)
151.0
Change in Net Gain on Cash Flow Hedges
(net of tax expense (benefit) of $25.2; $(5.0); $(45.3))
47.7
(9.8)
(87.7)
Change in Adjustment to Reserves for Future Policy and Contract Benefits, Net of
Reinsurance and Other (net of tax benefit of $703.3; $501.0; $816.6)
(1,324.4)
(950.9)
(1,534.9)
Change in Foreign Currency Translation Adjustment
(net of tax expense of $ — ; $0.6; $ — )
Change in Unrecognized Pension and Postretirement Benefit Costs
(net of tax expense (benefit) of $(67.4); $(12.7); $42.0)
Total Other Comprehensive Income
Comprehensive Income
See notes to consolidated financial statements.
(10.6)
(32.2)
98.9
(125.5)
107.0
12.1
0.9
75.8
1,313.5
$
342.4
$ 887.0
$ 2,166.1
Unum 2011 Annual Report
95
Note 1. Significant Accounting Policies
Basis of Presentation: The accompanying consolidated financial statements of Unum Group and its subsidiaries (the Company) have
been prepared in accordance with U.S. generally accepted accounting principles (GAAP). Such accounting principles differ from statutory
accounting principles (see Note 14). Intercompany transactions have been eliminated. In connection with our preparation of the consolidated
financial statements, we evaluated events that occurred subsequent to December 31, 2011, for recognition or disclosure in our financial
statements and notes to our financial statements.
Description of Business: We are the largest provider of group and individual disability products in the United States and the United
Kingdom. We also provide a complementary portfolio of other insurance products, including life insurance, employer- and employee-paid
group benefits, and other related services. We market our products primarily to employers interested in providing benefits to their employees.
We have three major business segments: Unum US, Unum UK, and Colonial Life. Our other reporting segments are Closed Block and
Corporate. See Note 12 for further discussion of our operating segments.
Use of Estimates: The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions
that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the
future as more information becomes known, which could impact the amounts reported and disclosed herein.
Fixed Maturity Securities: Fixed maturity securities include long-term bonds and redeemable preferred stocks. Fixed maturity securities
not bought and held for the purpose of selling in the near term but for which we do not have the positive intent and ability to hold to
maturity are classified as available-for-sale and reported at fair value. Changes in the fair value of available-for-sale fixed maturity securities,
except for amounts related to other-than-temporary impairment losses recognized in earnings, are reported as a component of other
comprehensive income. These amounts are net of income tax and valuation adjustments to deferred acquisition costs and reserves for future
policy and contract benefits which would have been recorded had the related unrealized gain or loss on these securities been realized.
Interest income is recorded as part of net investment income when earned, using an effective yield method giving effect to
amortization of premium and accretion of discount. Included within fixed maturity securities are mortgage-backed and asset-backed
securities. We recognize investment income on these securities using a constant effective yield based on projected prepayments of the
underlying loans and the estimated economic life of the securities. Actual prepayment experience is reviewed periodically, and effective
yields are recalculated when differences arise between prepayments originally projected and the actual prepayments received and
currently projected. The effective yield is recalculated on a retrospective basis, and the adjustment is reflected in net investment income.
For fixed maturity securities on which collection of investment income is uncertain, we discontinue the accrual of investment income and
recognize investment income when interest and dividends are received. Payment terms specified for fixed maturity securities may include
a prepayment penalty for unscheduled payoff of the investment. Prepayment penalties are recognized as investment income when received.
In determining when a decline in fair value below amortized cost of a fixed maturity security is other than temporary, we evaluate
available information, both positive and negative, in reaching our conclusions. Although available and applicable factors are considered in
our analysis, our expectation of recovering the entire amortized cost basis of the security, whether we intend to sell the security, whether it
is more likely than not that we will be required to sell the security before recovery of its amortized cost, and whether the security is current
on principal and interest payments are the most critical factors in determining whether impairments are other than temporary. The
significance of the decline in value and the length of time during which there has been a significant decline are also important factors, but
we generally do not record an impairment loss based solely on these two factors, since often other more relevant factors will impact our
evaluation of a security. See also Notes 2 and 3.
96
Unum 2011 Annual Report
Notes To Consolidated Financial Statements 2011
Unum
Mortgage Loans: Mortgage loans are generally held for investment and are carried at amortized cost less an allowance for probable
losses. Interest income is accrued on the principal amount of the loan based on the loan’s contractual interest rate. Prepayment penalties
are recognized as investment income when received.
We use a comprehensive rating system to evaluate the investment and credit risk of our mortgage loans and to identify specific
properties for further inspection, analysis, and reevaluation. For mortgage loans on which collection of investment income is uncertain,
we discontinue the accrual of investment income and recognize investment income in the period when an interest payment is received.
We typically do not resume the accrual of interest on mortgage loans on nonaccrual status until there are significant improvements in the
underlying financial condition of the borrower. We consider a loan to be delinquent if full payment is not received in accordance with the
contractual terms of the loan. Mortgage loans are considered impaired when, based on current information and events, it is probable that
we will be unable to collect all amounts due according to the contractual terms of the loan agreement. We establish an allowance for
probable losses on mortgage loans based on a review of individual loans and considering the underlying collateral, the value of which is
periodically assessed. Additions and reductions to our allowance are reported as a component of net realized investment gain or loss.
We do not purchase mortgage loans with existing credit impairments. See also Note 3.
Policy Loans: Policy loans are presented at unpaid balances directly related to policyholders. Interest income is accrued on the
principal amount of the loan based on the loan’s contractual interest rate. Included in policy loans are $2,838.3 million and $2,790.5 million
of policy loans ceded to reinsurers at December 31, 2011 and 2010, respectively.
Other Long-term Investments: Other long-term investments are comprised primarily of freestanding derivatives with a positive
fair value, tax credit partnerships, and private equity partnerships. Freestanding derivatives are more fully described in the derivatives
accounting policy which follows.
Tax credit partnerships in which we have invested were formed for the purpose of investing in the construction and rehabilitation of
low-income housing. Because the partnerships are structured such that there is no return of principal, the primary sources of investment
return from our tax credit partnerships are tax credits and tax benefits derived from passive losses on the investments, both of which may
exhibit variability over the life of the investment. These partnerships are accounted for using either the equity or the effective yield
method, depending primarily on whether the tax credits are guaranteed through a letter of credit, a tax indemnity agreement, or another
similar arrangement. Tax credits received from these partnerships are reported in our consolidated statements of income as either a reduction
of state premium taxes, which are a component of other expenses, or a reduction of income tax. For those partnerships accounted for
under the equity method, the amortization of the principal amount invested in these partnerships is reported as a component of net
investment income. For those partnerships accounted for under the effective yield method, amortization of the principal amount invested
is reported as a component of income tax or other expenses.
Our investments in private equity partnerships are passive in nature. The underlying investments held by these partnerships include
both equity and debt securities and are accounted for using the equity or cost method, depending on the level of ownership and the
degree of our influence over partnership operating and financial policies. For partnerships accounted for under the equity method, our
portion of partnership earnings is reported as a component of net investment income in our consolidated statements of income. For those
partnerships accounted for under the cost method, we record income received from partnership distributions as either a component of net
investment income or of net realized investment gain or loss, in accordance with the source of the funds distributed from the partnership.
Short-term Investments: Short-term investments are carried at cost. Short-term investments include investments maturing within
one year, such as corporate commercial paper and U.S. Treasury bills, bank term deposits, and other cash accounts and cash equivalents
earning interest.
Unum 2011 Annual Report
97
Cash and Bank Deposits: Cash and bank deposits include cash on hand and non-interest bearing cash and deposit accounts.
Derivative Financial Instruments: Derivative financial instruments (including certain derivative instruments embedded in other
contracts) are recognized as either assets or liabilities in our consolidated balance sheets and are reported at fair value. The accounting for
changes in fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship, and further,
on the type of hedging relationship. To qualify for hedge accounting, at the inception of the hedging transaction, we formally document the
risk management objective and strategy for undertaking the hedging transaction, as well as the designation of the hedge as either a fair
value hedge or a cash flow hedge. Included in this documentation is how the hedging instrument is expected to hedge the designated
risk(s) related to specific assets or liabilities on the balance sheet or to specific forecasted transactions as well as a description of the
method that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness and the method that will be
used to measure ineffectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in offsetting
the designated risk(s) of the hedged item. Hedge effectiveness is formally assessed at inception and periodically throughout the life of the
designated hedging relationship, using qualitative and quantitative methods. Qualitative methods include comparison of critical terms of
the derivative to the hedged item. Quantitative methods include regression or other statistical analysis of changes in fair value or cash
flows associated with the hedge relationship. For those derivatives that are designated and qualify as hedging instruments, the derivative
is designated, based upon the exposure being hedged, as one of the following:
• Fair value hedge. Changes in the fair value of the derivative, including amounts measured as ineffectiveness, and changes in the
fair value of the hedged item attributable to the risk being hedged are recognized in current earnings as a component of net realized
investment gain or loss during the period of change in fair value. The gain or loss on the termination of a fair value hedge is
recognized in current earnings as a component of net realized investment gain or loss. When interest rate swaps are used in hedge
accounting relationships, periodic settlements are recorded in the same income statement line as the related settlements of the
hedged items.
• Cash flow hedge. To the extent it is effective, changes in the fair value of the derivative are reported in other comprehensive income
and reclassified into earnings and reported on the same income statement line item as the hedged item and in the same period or
periods during which the hedged item affects earnings. The ineffective portion of the hedge, if any, is recognized in current earnings
as a component of net realized investment gain or loss during the period of change in fair value. The gain or loss on the termination
of an effective cash flow hedge is reported in other comprehensive income and reclassified into earnings and reported on the same
income statement line item as the hedged item and in the same period or periods during which the hedged item affects earnings.
Gains or losses on the termination of ineffective hedges are reported in current earnings as a component of net realized investment
gain or loss. In the event a hedged item is disposed of or the anticipated transaction being hedged is no longer likely to occur, we will
terminate the related derivative and recognize the gain or loss on termination in current earnings as a component of net realized
investment gain or loss. In the event a hedged item is disposed of subsequent to the termination of the hedging transaction, we reclassify
any remaining gain or loss on the cash flow hedge out of accumulated other comprehensive income into current earnings as a component
of the same income statement line item wherein we report the gain or loss on disposition of the hedged item.
Our freestanding derivatives all qualify as hedges and have been designated as either cash flow hedges or fair value hedges. We do
not have any speculative positions in our freestanding derivatives. For a derivative not designated as a hedging instrument, the change in
fair value is recognized in earnings during the period of change. Changes in the fair values of certain embedded derivatives are reported
as a component of net realized investment gain or loss during the period of change.
In our consolidated balance sheets, we do not offset fair value amounts recognized for derivatives executed with the same
counterparty under a master netting agreement and fair value amounts recognized for the right to reclaim cash collateral or the obligation
to return cash collateral arising from those master netting agreements.
98
Unum 2011 Annual Report
Notes To Consolidated Financial Statements 2011
Unum
Fair Value Measurement: All of our fixed maturity securities are reported at fair value. Our derivative financial instruments, including
certain derivative instruments embedded in other contracts, are reported as either assets or liabilities and measured at fair value. We hold
an immaterial amount of equity securities, which are also reported at fair value. We define fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value represents
an exit price, not an entry price. The exit price objective applies regardless of our intent and/or ability to sell the asset or transfer the
liability at the measurement date.
Valuation techniques used for assets and liabilities accounted for at fair value are generally categorized into three types: the market
approach, the income approach, and the cost approach. We use valuation techniques that are appropriate in the circumstances and for
which sufficient data are available. In some cases, a single valuation technique will be appropriate. In other cases, multiple valuation
techniques will be appropriate. If we use multiple valuation techniques to measure fair value, we evaluate and weigh the results, as
appropriate, considering the reasonableness of the range indicated by those results. A fair value measurement is the point within that
range that is most representative of fair value in the circumstances.
The selection of the valuation method(s) to apply considers the definition of an exit price and depends on the nature of the asset or
liability being valued. For assets and liabilities accounted for at fair value, we generally use valuation techniques consistent with the market
approach, and to a lesser extent, the income approach. Inputs to valuation techniques refer broadly to the assumptions that market
participants use in pricing assets or liabilities, including assumptions about risk, for example, the risk inherent in a particular valuation
technique used to measure fair value and/or the risk inherent in the inputs to the valuation technique. Inputs may be observable or
unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability
developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our own assumptions
about the assumptions market participants would use in pricing the asset or liability developed based on the best information available
in the circumstances.
We prioritize the inputs to fair valuation techniques and use unobservable inputs to the extent that observable inputs are not
available. We categorize our assets and liabilities measured at estimated fair value into a three-level hierarchy, based on the significance of
the inputs. The fair value hierarchy gives the highest priority to inputs which are unadjusted and represent quoted prices in active markets
for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). See also Note 2.
Realized Investment Gains and Losses: Realized investment gains and losses are reported as a component of revenue in the
consolidated statements of income and are based upon specific identification of the investments sold. If we determine that the decline in
value of an investment is other than temporary, the investment is written down to fair value, and an impairment loss is recognized in the
current period, either in earnings or in both earnings and other comprehensive income, as applicable. Other-than-temporary impairment
losses on fixed maturity securities which we intend to sell or more likely than not will be required to sell before recovery in value are
recognized in earnings and equal the entire difference between the security’s amortized cost basis and its fair value. For securities which
we do not intend to sell and it is not more likely than not that we will be required to sell before recovery in value, other-than-temporary
impairment losses recognized in earnings generally represent the difference between the amortized cost of the security and the present
value of our best estimate of cash flows expected to be collected, discounted using the effective interest rate implicit in the security at the
date of acquisition. For fixed maturity securities for which we have recognized an other-than-temporary impairment loss through earnings,
if through subsequent evaluation there is a significant increase in expected cash flows, the difference between the new amortized cost
basis and the cash flows expected to be collected is accreted as net investment income.
Deferred Acquisition Costs: Certain costs of acquiring new business that vary with and are primarily related to the production of new
business have been deferred. Such costs include commissions, other agency compensation, certain selection and policy issue expenses,
and certain field expenses. Acquisition costs that do not vary with the production of new business, such as commissions on group products
which are generally level throughout the life of the policy, are excluded from deferral. Deferred acquisition costs are subject to
recoverability testing at the time of policy issue and loss recognition testing in subsequent years.
Unum 2011 Annual Report
99
Deferred acquisition costs related to traditional policies are amortized over the premium paying period of the related policies in
proportion to the ratio of the present value of annual expected premium income to the present value of total expected premium income.
Such amortization is adjusted quarterly to reflect the actual policy persistency as compared to the anticipated experience.
Deferred acquisition costs related to interest-sensitive policies are amortized over the lives of the policies in relation to the present
value of estimated gross profits from surrender charges, mortality margins, investment returns, and expense margins. Adjustments are
made quarterly to reflect actual experience for assumptions which deviate significantly compared to anticipated experience.
Internal replacement transactions wherein the modification does not substantially change the policy are accounted for as
continuations of the replaced contracts. Unamortized deferred acquisition costs from the original policy continue to be amortized over the
expected life of the new policy, and the costs of replacing the policy are accounted for as policy maintenance costs and expensed as
incurred. Internal replacement transactions, principally on group contracts, that result in a policy that is substantially changed are accounted
for as an extinguishment of the original policy and the issuance of a new policy. Unamortized deferred acquisition costs on the original
policy that was replaced are immediately expensed, and the costs of acquiring the new policy are capitalized and amortized in accordance
with our accounting policies for deferred acquisition costs.
Loss recognition is generally performed on an annual basis, or more frequently if appropriate, using best estimate assumptions
as to future experience as of the date of the test. Insurance contracts are grouped for each major product line within a segment when we
perform the loss recognition tests. If loss recognition testing indicates that deferred acquisition costs are not recoverable, the deficiency is
charged to expense.
Goodwill: Goodwill is the excess of the amount paid to acquire a business over the fair value of the net assets acquired. We review the
carrying amount of goodwill for impairment during the fourth quarter of each year, or more frequently if events or changes in circumstances
indicate that the carrying amount might not be recoverable. Goodwill impairment testing compares the fair value of a reporting unit with
its carrying amount, including goodwill. The fair values of the reporting units are determined using discounted cash flow models. The
critical estimates necessary in determining fair value are projected earnings and the discount rate. We set our discount rate assumption
based on an expected risk adjusted cost of capital. If the fair value of the reporting unit to which the goodwill relates is less than the
carrying amount of the unamortized goodwill, the carrying amount is reduced with a corresponding charge to expense.
Property and Equipment: Property and equipment is reported at cost less accumulated depreciation, which is calculated on the
straight-line method over the estimated useful life. The accumulated depreciation for property and equipment was $670.9 million and
$641.6 million as of December 31, 2011 and 2010, respectively.
Value of Business Acquired: Value of business acquired represents the present value of future profits recorded in connection
with the acquisition of a block of insurance policies. The asset is amortized based upon expected future premium income for traditional
insurance policies and estimated future gross profits for interest-sensitive insurance policies. The value of business acquired, which is
included in other assets in our consolidated balance sheets, was $30.3 million and $37.6 million at December 31, 2011 and 2010,
respectively. The accumulated amortization for value of business acquired was $119.3 million and $112.5 million as of December 31, 2011
and 2010, respectively.
The amortization of value of business acquired, which is included in other expenses in the consolidated statements of income, was
$7.4 million, $7.4 million, and $7.8 million for the years ended December 31, 2011, 2010, and 2009, respectively. We periodically review the
carrying amount of value of business acquired using the same methods used to evaluate deferred acquisition costs.
Policy and Contract Benefits: Policy and contract benefits represent amounts paid and expected to be paid based on reported
losses and estimates of incurred but not reported losses for traditional life and accident and health products. For interest-sensitive products,
benefits are the amounts paid and expected to be paid on insured claims in excess of the policyholders’ policy fund balances.
100
Unum 2011 Annual Report
Notes To Consolidated Financial Statements 2011
Unum
Policy and Contract Benefits Liabilities: Policy reserves represent future policy and contract benefits for claims not yet incurred. Policy
reserves for traditional life and accident and health products are determined using the net level premium method. The reserves are
calculated based upon assumptions as to interest, persistency, morbidity, and mortality that were appropriate at the date of issue. Interest
rate assumptions are based on actual and expected net investment returns. Persistency assumptions are based on our actual historical
experience adjusted for future expectations. Morbidity and mortality assumptions are based on actual experience or industry standards
adjusted as appropriate to reflect our actual experience and future expectations. The assumptions vary by plan, year of issue, and policy
duration and include a provision for adverse deviation.
Policy reserves for group single premium annuities have been provided on a net single premium method. The reserves are calculated
based on assumptions as to interest, mortality, and retirement that were appropriate at the date of issue. Mortality assumptions are based
upon industry standards adjusted as appropriate to reflect our actual experience and future expectations. The assumptions vary by year
of issue.
Policy reserves for interest-sensitive products are principally policyholder account values.
We perform loss recognition tests on our policy reserves annually, or more frequently if appropriate, using best estimate assumptions
as of the date of the test, without a provision for adverse deviation. We group the policy reserves for each major product line within a
segment when we perform the loss recognition tests. If the policy reserves determined using these best estimate assumptions are higher
than our existing policy reserves net of any deferred acquisition cost balance, the existing policy reserves are increased or deferred
acquisition costs are reduced to immediately recognize the deficiency.
Claim reserves represent future policy and contract benefits for claims that have been incurred or are estimated to have been incurred
but not yet reported to us. Our claim reserves relate primarily to disability policies and are calculated based on assumptions as to interest
and claim resolution rates that are currently appropriate. Claim resolution rate assumptions are based on our actual experience. The interest
rate assumptions used for discounting claim reserves are based on projected portfolio yield rates, after consideration for defaults and
investment expenses, for the assets supporting the liabilities for the various product lines. Unlike policy reserves, claim reserves are subject
to revision as current claim experience and projections of future experience change.
Policyholders’ Funds: Policyholders’ funds represent customer deposits plus interest credited at contract rates. We control interest rate
risk by investing in quality assets which have an aggregate duration that closely matches the expected duration of the liabilities.
Income Tax: Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial statement purposes and the amounts used for income tax purposes. Deferred taxes have been measured using enacted
statutory income tax rates and laws that are currently in effect. We record deferred tax assets for tax positions taken in the U.S. and other
tax jurisdictions based on our assessment of whether a position is more likely than not to be sustained upon examination based solely
on its technical merits. A valuation allowance is established for deferred tax assets when it is more likely than not that an amount will not
be realized.
Short-term and Long-term Debt: Debt is generally carried at the unpaid principal balance, net of unamortized discount or premium.
Short-term debt consists of debt due within the next twelve months, including that portion of debt otherwise classified as long-term, and
securities lending agreements collateralized by cash. We account for all of our securities lending agreements and repurchase agreements
as collateralized financings, and the carrying amount of the related short-term debt represents our liability to return cash collateral to the
counterparty. Original issue discount or premium as well as debt issue costs are recognized as a component of interest expense over the
period the debt is expected to be outstanding. The carrying amount of long-term debt that is part of a fair value hedge program includes
an adjustment to reflect the effect of the change in fair value attributable to the risk being hedged. Net interest settlements for fair value
hedges on our long-term debt are recognized as a component of interest expense.
Treasury Stock and Retirement of Common Stock: Treasury stock is reflected as a reduction of stockholders’ equity at cost.
When shares are retired, the par value is removed from common stock, and the excess of the repurchase price over par is allocated
between additional paid-in capital and retained earnings.
Unum 2011 Annual Report
101
Revenue Recognition: Traditional life and accident and health products are long-duration contracts, and premium income is
recognized as revenue when due from policyholders. If the contracts are experience rated, the estimated ultimate premium is recognized
as revenue over the period of the contract. The estimated ultimate premium, which is revised to reflect current experience, is based on
estimated claim costs, expenses, and profit margins.
For interest-sensitive products, the amounts collected from policyholders are considered deposits, and only the deductions during the
period for cost of insurance, policy administration, and surrenders are included in revenue. Policyholders’ funds represent funds deposited
by contract holders and are not included in revenue.
Reinsurance: We routinely enter into reinsurance agreements with other insurance companies to spread risk and thereby limit losses
from large exposures. For each of our reinsurance agreements, we determine if the agreement provides indemnification against loss or
liability relating to insurance risk in accordance with applicable accounting standards. If we determine that a reinsurance agreement does
not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, we record the agreement using the deposit
method of accounting.
Reinsurance activity is accounted for on a basis consistent with the terms of the reinsurance contracts and the accounting used for
the original policies issued. Premium income and benefits and change in reserves for future benefits are presented in our consolidated
statements of income net of reinsurance ceded. Ceded liabilities for policy and contract benefits, future policy and contract benefits,
and unearned premiums are reported on a gross basis in our consolidated balance sheets, as are ceded policy loans. Our reinsurance
recoverable includes the balances due from reinsurers under the terms of the reinsurance agreements for these ceded balances as well
as settlement amounts currently due.
Where applicable, gains or losses on reinsurance transactions are deferred and amortized into earnings based upon expected future
premium income for traditional insurance policies and estimated future gross profits for interest-sensitive insurance policies. The deferred
gain on reinsurance included in other liabilities in our consolidated balance sheets at December 31, 2011 and 2010 was $81.0 million and
$100.2 million, respectively.
Under ceded reinsurance agreements wherein we are not relieved of our legal liability to our policyholders, if the assuming reinsurer
is unable to meet its obligations, we remain contingently liable. We evaluate the financial condition of reinsurers and monitor concentration
of credit risk to minimize this exposure. We may also require assets in trust, letters of credit, or other acceptable collateral to support our
reinsurance recoverable balances. In the event that reinsurers do not meet their obligations to us under the terms of the reinsurance
agreements, certain amounts reported in our reinsurance recoverable could become uncollectible, in which case the reinsurance
recoverable balances are stated net of allowances for uncollectible reinsurance.
Premium Tax Expense: Premium tax expense is included in other expenses in the consolidated statements of income. For the years
ended December 31, 2011, 2010, and 2009, premium tax expense was $134.9 million, $129.4 million, and $130.2 million, respectively.
Stock-Based Compensation: The cost of stock-based compensation is generally measured based on the grant-date fair value of the
award. We use the Black-Scholes options valuation model for estimating the fair value of stock options and the Monte-Carlo model for
estimating the fair value of our performance restricted stock units. Nonvested stock awards are valued based on the fair value of common
stock at the grant date, and cash-settled awards are measured each reporting period based on the current stock price. Stock-based awards
that do not require future service are expensed immediately, and stock-based awards that require future service are amortized over the
relevant service period, with an offsetting increase to additional paid-in capital in stockholders’ equity.
Earnings Per Share: We compute basic earnings per share by dividing net income by the weighted average number of common shares
outstanding for the period. Earnings per share assuming dilution is computed by dividing net income by the weighted average number of
shares outstanding for the period plus the shares representing the dilutive effect of stock-based awards. In computing earnings per share
assuming dilution, only potential common shares resulting from stock-based awards that are dilutive (those that reduce earnings per share)
are included. We use the treasury stock method to account for the effect of outstanding stock options, nonvested stock awards, and
performance restricted stock units on the computation of earnings per share assuming dilution.
102
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Notes To Consolidated Financial Statements 2011
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Translation of Foreign Currency: Revenues and expenses of our foreign operations are translated at average exchange rates.
Assets and liabilities are translated at the rate of exchange on the balance sheet dates. The translation gain or loss is generally reported in
accumulated other comprehensive income, net of deferred tax. We do not provide for deferred taxes to the extent unremitted foreign
earnings are deemed permanently invested.
Accounting for Participating Individual Life Insurance: Participating policies issued by one of our subsidiaries prior to its 1986
conversion from a mutual to a stock life insurance company will remain participating as long as the policies remain in-force. A Participation
Fund Account (PFA) was established for the benefit of all such individual participating life and annuity policies and contracts. The assets of
the PFA provide for the benefit, dividend, and certain expense obligations of the participating individual life insurance policies and annuity
contracts. The assets of the PFA were $385.5 million and $364.4 million at December 31, 2011 and 2010, respectively.
Accounting Updates Adopted in 2011:
Accounting Standards Codification (ASC) 310 “Receivables.” In April 2011, the Financial Accounting Standards Board (FASB) issued an
update to provide additional clarification to help creditors in determining whether a creditor has granted a concession as well as whether
a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring.
We adopted this update effective July 1, 2011. The adoption of this update expanded our disclosures but had no effect on our financial
position or results of operations.
Accounting Updates Adopted in 2010:
ASC 310 “Receivables.” In July 2010, the FASB issued an update to require additional disclosures regarding the credit quality of
financing receivables, including the entity’s credit risk exposure, its assessment of risk in estimating its allowance for credit losses, changes
in the allowance for credit losses and the reason for those changes, and troubled debt restructuring. We adopted all of the required
disclosures effective December 31, 2010 except for troubled debt restructuring disclosures which were deferred by the FASB. The adoption
of this update expanded our disclosures but had no effect on our financial position or results of operation.
ASC 810 “Consolidation.” In June 2009, the FASB issued an update to require a qualitative rather than a quantitative analysis to
determine the primary beneficiary of a variable interest entity and require enhanced disclosures about an enterprise’s involvement with a
variable interest entity. We adopted this update effective January 1, 2010. The adoption of this update had no effect on our financial position
or results of operations.
ASC 820 “Fair Value Measurements and Disclosures.” In January 2010, the FASB issued an update to require a number of additional
disclosures regarding fair value measurements. Specifically, the update requires a reporting entity to disclose the amounts of significant
transfers between Level 1 and Level 2 of the three tier fair value hierarchy and the reasons for these transfers, as well as the reasons for
any transfers in or out of Level 3, effective for annual and interim periods beginning after December 15, 2009. The update also requires
information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances, and settlements on a gross basis,
effective for annual and interim periods beginning after December 15, 2010. We adopted this update in its entirety, including early adoption
of the additional Level 3 information, effective January 1, 2010. The adoption of this update expanded our disclosures but had no effect on
our financial position or results of operations.
ASC 860 “Transfers and Servicing.” In June 2009, the FASB issued an update to eliminate the exceptions for qualifying special-purpose
entities from the consolidation guidance and eliminate the exception that permitted sale accounting for certain mortgage securitizations
when a transferor has not surrendered control over the transferred financial assets. In addition, this update clarifies certain requirements for
financial assets that are eligible for sale accounting and requires enhanced disclosures about the risks that a transferor continues to be
exposed to because of its continuing involvement in transferred financial assets. We adopted this update effective January 1, 2010. The
adoption of this update had no effect on our financial position or results of operations.
Unum 2011 Annual Report
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Accounting Updates Adopted in 2009:
ASC 105 “Generally Accepted Accounting Principles.” In June 2009, the FASB established the FASB Accounting Standards Codification
(Codification) as the source of authoritative accounting principles to be applied by nongovernmental entities in the preparation of financial
statements in conformity with GAAP. Securities and Exchange Commission (SEC) rules and interpretive releases, which may not be included
in their entirety within the Codification, will remain as authoritative GAAP for SEC registrants. We adopted Codification effective July 1, 2009.
The adoption of Codification had no effect on our financial position or results of operations.
ASC 320 “Investments — Debt and Equity Securities.” In April 2009, the FASB issued a new accounting standard, now included in
ASC 320, which amends the other-than-temporary impairment guidance for debt securities and expands and increases the frequency of
previously existing disclosures for other-than-temporary impairments. The measure of impairment remains fair value. Under the standard,
an other-than-temporary impairment must be recognized in earnings for a debt security in an unrealized loss position when an entity either
(a) has the intent to sell the debt security or (b) more likely than not will be required to sell the debt security before its anticipated recovery.
The amount of impairment recognized is equal to the difference between amortized cost and fair value. For all debt securities in
unrealized loss positions that do not meet either of these two criteria, the standard requires that an entity analyze its ability to recover the
amortized cost by comparing the present value of cash flows with the amortized cost of the security. If the present value of our best
estimate of cash flows expected to be collected is less than the amortized cost of the security, an other-than-temporary impairment is
recorded. The impairment loss is separated into two components, the portion of the impairment related to credit and the portion related to
factors other than credit. The credit-related portion of an other-than-temporary impairment, which is the difference between the amortized
cost of the security and the present value of cash flows expected to be collected, is recognized in earnings.
Other-than-temporary impairments related to factors other than credit are charged to earnings if it is unlikely that the fair value of the
security will recover prior to its disposal. Otherwise, non-credit-related other-than-temporary impairments are charged to other
comprehensive income, net of tax. We adopted this standard effective April 1, 2009. The cumulative effect of applying the provisions of this
standard increased the April 1, 2009 opening balance of retained earnings $14.3 million, net of tax of $7.7 million, with a corresponding
adjustment to accumulated other comprehensive income (loss).
ASC 715 “Compensation — Retirement Benefits.” In December 2008, the FASB issued a new accounting standard, now included in
ASC 715, to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan.
We adopted this standard effective December 31, 2009. The adoption of this standard expanded our disclosures but had no effect on our
financial position or results of operations.
ASC 815 “Derivatives and Hedging.” In March 2008, the FASB issued a new accounting standard, now included in ASC 815, to provide
additional guidance intended to improve financial reporting about derivative instruments and hedging activities. This standard requires
enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash
flows. We adopted this standard effective January 1, 2009. The adoption of this standard expanded our disclosures but had no effect on our
financial position or results of operations.
ASC 820 “Fair Value Measurements and Disclosures.” In April 2009, the FASB issued a new accounting standard, now included in
ASC 820, to provide additional guidance for estimating fair value but reemphasized that the objective of fair value measurement remained
an exit price. This standard provides guidance for determining whether there has been a significant decrease in the volume and level of
activity in the market and provides factors for companies to consider in identifying transactions that are not orderly. The standard also
discusses the necessity of adjustments to transaction or quoted prices to estimate fair value when it is determined that there has been a
significant decrease in the volume and level of activity or that the transaction is not orderly. We adopted this standard effective April 1,
2009. The adoption of this standard expanded our disclosures but had no material effect on our financial position or results of operations.
In August 2009, the FASB issued an update to provide clarification concerning fair value measurements and disclosures for liabilities
and, in particular, for circumstances in which a quoted price in an active market for an identical liability is not available. We adopted this
update effective December 31, 2009. The adoption of this update had no effect on our financial position or results of operations.
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Notes To Consolidated Financial Statements 2011
Unum
In September 2009, the FASB issued an update to permit a reporting entity to measure the fair value of an investment on the basis
of net asset value per share if the net asset value is calculated in a manner consistent with the measurement principles of U.S. GAAP for
investment companies. This update also requires disclosures by major category of investments about the attributes of investments, such as
the nature of any restrictions on the investor’s ability to redeem its investments, any unfunded commitments, and the investment
strategies of the investees. We adopted this update effective December 31, 2009. The adoption of this update had no effect on our financial
position or results of operations.
ASC 825 “Financial Instruments.” In April 2009, the FASB issued a new accounting standard, now included in ASC 825, which requires
companies to disclose the fair value of certain financial instruments in interim financial statements. This standard also requires companies
to disclose the method or methods and significant assumptions used to estimate the fair value of financial instruments and to discuss
changes, if any, in those methods or assumptions during the period. We adopted this standard effective April 1, 2009. The adoption of this
standard expanded our disclosures but had no effect on our financial position or results of operations.
ASC 855 “Subsequent Events.” In May 2009, the FASB issued a new accounting standard, now included in ASC 855, to provide
subsequent events guidance. This topic was previously addressed only in the auditing literature, and is largely similar to the auditing
guidance with limited exceptions which are not intended to result in significant changes in practice. We adopted this standard effective
June 30, 2009. The FASB issued an update in February 2010 to remove the requirement, for certain entities, to disclose the date through
which subsequent events have been evaluated. The adoptions of this standard and subsequent update had no effect on our financial
position or results of operations.
Accounting Updates Outstanding:
ASC 210 “Balance Sheet — Disclosures about Offsetting Assets and Liabilities.” In December 2011, the FASB issued an update to require
additional disclosures and information about financial instruments and derivative instruments that are either offset on the balance sheet or
are subject to an enforceable master netting arrangement. These disclosures are intended to provide information that will enable users of
financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect
or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. The amendments in this
update are effective for interim and annual periods beginning on or after January 1, 2013. The adoption of this update will expand our
disclosures but will have no effect on our financial position or results of operations.
ASC 220 “Comprehensive Income.” In June 2011, the FASB issued an update related to the financial statement presentation of
comprehensive income. This update will require that non-owner changes in stockholders’ equity be presented either in a single continuous
statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement
should present net income and its components, followed consecutively by a second statement presenting total other comprehensive
income, the components of other comprehensive income, and the total of comprehensive income. In December 2011, the FASB issued an
update to indefinitely defer the effective date pertaining to the presentation of reclassification adjustments and reinstated the previous
requirement to present reclassification adjustments either on the face of the statement or in financial statement footnotes. The
amendments in this update are effective for interim and annual periods beginning after December 15, 2011. The adoption of this update
will modify our financial statement presentation but will have no effect on our financial position or results of operations.
ASC 350 “Intangibles — Goodwill and Other.” In September 2011, the FASB issued an update which gives companies the option to first
assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity
will not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is
more likely than not that its fair value is less than its carrying amount. The amendments in this update are effective for goodwill
impairment tests performed for interim and annual periods beginning after December 15, 2011. The adoption of this update will have no
effect on our financial position or results of operations.
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ASC 820 “Fair Value Measurements and Disclosures.” In May 2011, the FASB issued an update to require additional disclosures
regarding fair value measurements and to provide clarifying guidance on the application of existing fair value measurement requirements.
Specifically, the update requires additional information on Level 1 and Level 2 transfers within the fair value hierarchy; the categorization by
level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position, but for which the fair
value of such items is required to be disclosed; and information about the sensitivity of a fair value measurement in Level 3 of the fair value
hierarchy to changes in unobservable inputs and any interrelationships between those unobservable inputs. The amendments in this
update are effective for interim and annual periods beginning after December 15, 2011. The adoption of this update will expand our
disclosures but will have no effect on our financial position or results of operations.
ASC 860 “Transfers and Servicing.” In April 2011, the FASB issued an update to revise the criteria for assessing effective control for
repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before
their maturity. The determination of whether the transfer of a financial asset subject to a repurchase agreement is a sale is based, in part,
on whether the entity maintains effective control over the financial asset. This update removes from the assessment of effective control the
criterion requiring the transferor to have the ability to repurchase or redeem the financial asset on substantially the agreed terms, even in
the event of default by the transferee, and the related requirement to demonstrate that the transferor possess adequate collateral to fund
substantially all the cost of purchasing replacement financial assets. The amendments in this update are effective for interim and annual
reporting periods beginning on or after December 15, 2011. The adoption of this update will have no effect on our financial position or
results of operations.
ASC 944 “Financial Services — Insurance.” In October 2010, the FASB issued an update to address the diversity in practice regarding
the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify as deferred acquisition costs.
The amendments in the update modify the existing guidance and require that only incremental direct costs associated with the successful
acquisition of a new or renewal insurance contract can be capitalized. All other costs are to be expensed as incurred. The amendments
in the update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011 and permit
retrospective application.
Our retrospective adoption of this update during the first quarter of 2012 is expected to result in a cumulative effect decrease in
stockholders’ equity as of January 1, 2012, 2011, and 2010 of approximately $407 million, $459 million, and $455 million, respectively.
Our net income is expected to be impacted as follows:
Year Ended December 31
2011
2010
2009
(in millions)
per share*
(in millions)
per share*
(in millions)
per share*
$ 235.4
$ 0.78
$886.1
$ 2.71
$852.6
$ 2.57
Net Income, Before Adoption
After-tax Impact of Adoption,
Excluding Impact from Impairment of
Deferred Acquisition Costs — Note 5
(12.1)
(0.04)
(7.4)
(0.02)
(5.3)
(0.02)
After-tax Impairment of Deferred Acquisition Costs
Before Adoption
After Adoption
188.4
(127.5)
0.62
(0.42)
—
—
—
—
—
—
—
—
Net Income, After Adoption
$ 284.2
$ 0.94
$878.7
$ 2.69
$847.3
$ 2.55
*Assuming Dilution
106
Unum 2011 Annual Report
Notes To Consolidated Financial Statements
2011
Unum
Note 2. Fair Values of Financial Instruments
Presented as follows are the carrying amounts and fair values of financial instruments. The carrying values of financial instruments
such as short-term investments, cash and bank deposits, accounts and premiums receivable, and accrued investment income approximate
fair value due to the short-term nature of the instruments. As such, these financial instruments are not included in the following chart.
(in millions of dollars)
Assets
Fixed Maturity Securities
Mortgage Loans
Policy Loans
Other Long-term Investments
Derivatives
Equity Securities
Miscellaneous Long-term Investments
Liabilities
Policyholders’ Funds
December 31
2011
Carrying
Amount
Fair
Value
2010
Carrying
Amount
Fair
Value
$42,486.7
$42,486.7
$40,035.6
$40,035.6
1,612.3
3,051.4
1,789.8
3,124.4
137.7
11.2
490.3
137.7
11.2
490.3
1,516.8
2,996.1
99.1
10.4
419.8
1,685.4
3,044.4
99.1
10.4
419.8
Deferred Annuity Products
$ 641.1
$ 641.1
$ 656.3
$ 656.3
Supplementary Contracts without Life Contingencies
Short-term Debt
Long-term Debt
Other Liabilities
Derivatives
Embedded Derivative in Modified
Coinsurance Arrangement
Unfunded Commitments to Investment Partnerships
502.6
312.3
502.6
312.3
2,570.2
2,540.2
173.7
173.7
135.7
160.6
135.7
160.6
508.5
225.1
2,631.3
199.6
96.3
169.9
508.5
226.8
2,483.8
199.6
96.3
169.9
The methods and assumptions used to estimate fair values of financial instruments are discussed as follows.
Fair Value Measurements for Financial Instruments Not Carried at Fair Value
Mortgage Loans: Fair values are estimated using discounted cash flow analyses and interest rates currently being offered
for similar loans to borrowers with similar credit ratings and maturities. Loans with similar characteristics are aggregated for purposes
of the calculations.
Policy Loans: Fair values for policy loans, net of reinsurance ceded, are estimated using discounted cash flow analyses and
interest rates currently being offered to policyholders with similar policies. The carrying amounts of ceded policy loans of $2,838.3 million
and $2,790.5 million as of December 31, 2011 and 2010, respectively, are reported on a gross basis in our consolidated balance sheets
and approximate fair value.
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Miscellaneous Long-term Investments: Carrying amounts approximate fair value.
Policyholders’ Funds: Policyholders’ funds are comprised primarily of deferred annuity products and supplementary contracts without
life contingencies. The carrying amounts approximate fair value.
Fair values for insurance contracts other than investment contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in our overall management of interest rate risk, which minimizes
exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.
Short-term and Long-term Debt: Fair values for short-term and long-term debt other than securities lending agreements are
obtained from independent pricing services or discounted cash flow analyses based on current incremental borrowing rates for similar
types of borrowing arrangements. Carrying amounts for securities lending agreements approximate fair value.
Unfunded Commitments to Investment Partnerships: Unfunded equity commitments represent legally binding amounts that we
have committed to certain investment partnerships subject to the partnerships meeting specified conditions. When these conditions are
met, we are obligated to invest these amounts in the partnerships. Carrying amounts approximate fair value.
Fair Value Measurements for Financial Instruments Carried at Fair Value
We report fixed maturity securities, derivative financial instruments, and equity securities at fair value in our consolidated balance
sheets. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing
observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively
quoted prices in active markets generally have more pricing observability and less judgment utilized in measuring fair value. An active
market for a financial instrument is a market in which transactions for an asset or a similar asset occur with sufficient frequency and volume
to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and
should be used to measure fair value whenever available. Conversely, financial instruments rarely traded or not quoted have less
observability and are measured at fair value using valuation techniques that require more judgment. Pricing observability is generally
impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not
yet established, the characteristics specific to the transaction, and overall market conditions.
Valuation techniques used for assets and liabilities accounted for at fair value are generally categorized into three types. The market
approach uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities. The income
approach converts future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount. The cost approach is
based upon the amount that currently would be required to replace the service capacity of an asset, or the current replacement cost.
We use valuation techniques that are appropriate in the circumstances and for which sufficient data are available that can be obtained
without undue cost and effort. In some cases, a single valuation technique will be appropriate (for example, when valuing an asset or
liability using quoted prices in an active market for identical assets or liabilities). In other cases, multiple valuation techniques will be
appropriate. If we use multiple valuation techniques to measure fair value, we evaluate and weigh the results, as appropriate, considering
the reasonableness of the range indicated by those results. A fair value measurement is the point within that range that is most
representative of fair value in the circumstances.
The selection of the valuation method(s) to apply considers the definition of an exit price and depends on the nature of the asset or
liability being valued. For assets and liabilities accounted for at fair value, we generally use valuation techniques consistent with the market
approach, and to a lesser extent, the income approach. We believe the market approach valuation technique provides more observable
data than the income approach, considering the type of investments we hold. Our fair value measurements could differ significantly based
on the valuation technique and available inputs. When markets are less active, brokers may rely more on models with inputs based on the
information available only to the broker. In weighing a broker quote as an input to fair value, we place less reliance on quotes that do not
reflect the result of market transactions. We also consider the nature of the quote, particularly whether the quote is a binding offer. If prices
in an inactive market do not reflect current prices for the same or similar assets, adjustments may be necessary to arrive at fair value.
108
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Notes To Consolidated Financial Statements 2011
Unum
When relevant market data is unavailable, which may be the case during periods of market uncertainty, the income approach can, in
suitable circumstances, provide a more appropriate fair value. During 2011, we have applied valuation techniques on a consistent basis to
similar assets and liabilities and consistent with those techniques used at year end 2010.
We use observable and unobservable inputs in measuring the fair value of our financial instruments. Inputs that may be used include
the following:
• Broker market maker prices and price levels
• Trade Reporting and Compliance Engine (TRACE) pricing
• Prices obtained from external pricing services
• Benchmark yields (Treasury and interest rate swap curves)
• Transactional data for new issuance and secondary trades
• Security cash flows and structures
• Recent issuance/supply
• Sector and issuer level spreads
• Security credit ratings/maturity/capital structure/optionality
• Corporate actions
• Underlying collateral
• Prepayment speeds/loan performance/delinquencies/weighted average life/seasoning
• Public covenants
• Comparative bond analysis
• Derivative spreads
• Relevant reports issued by analysts and rating agencies
• Audited financial statements
We review all prices obtained to ensure they are consistent with a variety of observable market inputs and to verify the validity of a
security’s price. The overall valuation process for determining fair values may include adjustments to valuations obtained from our pricing
sources when they do not represent a valid exit price. These adjustments may be made when, in our judgment and considering our
knowledge of the financial conditions and industry in which the issuer operates, certain features of the financial instrument require that an
adjustment be made to the value originally obtained from our pricing sources. These features may include the complexity of the financial
instrument, the market in which the financial instrument is traded, counterparty credit risk, credit structure, concentration, or liquidity.
Additionally, an adjustment to the price derived from a model typically reflects our judgment of the inputs that other participants in the
market for the financial instrument being measured at fair value would consider in pricing that same financial instrument.
The parameters and inputs used to validate a price on a security may be adjusted for assumptions about risk and current market
conditions on a quarter to quarter basis, as certain features may be more significant drivers of valuation at the time of pricing. Changes to
inputs in valuations are not changes to valuation methodologies; rather, the inputs are modified to reflect direct or indirect impacts on
asset classes from changes in market conditions.
Fair values for derivatives other than embedded derivatives in modified coinsurance arrangements are based on market quotes or
pricing models and represent the net amount of cash we would have paid or received if the contracts had been settled or closed as of the
last day of the period. We analyze credit default swap spreads relative to the average credit spread embedded within the London Interbank
Offered Rate (LIBOR) setting syndicate in determining the effect of credit risk on our derivatives’ fair values. If counterparty credit risk for a
derivative asset is determined to be material and is not adequately reflected in the LIBOR-based fair value obtained from our pricing
sources, we adjust the valuations obtained from our pricing sources. In regard to our own credit risk component, we adjust the valuation of
derivative liabilities wherein the counterparty is exposed to our credit risk when the LIBOR-based valuation of our derivatives obtained from
pricing sources does not effectively include an adequate credit component for our own credit risk.
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Fair values for our embedded derivative in a modified coinsurance arrangement are estimated using internal pricing models and
represent the hypothetical value of the duration mismatch of assets and liabilities, interest rate risk, and third-party credit risk embedded
in the modified coinsurance arrangement.
Certain of our investments do not have readily determinable market prices and/or observable inputs or may at times be affected by
the lack of market liquidity. For these securities, we use internally prepared valuations combining matrix pricing with vendor purchased
software programs, including valuations based on estimates of future profitability, to estimate the fair value. Additionally, we may obtain
prices from independent third-party brokers to aid in establishing valuations for certain of these securities. Key assumptions used by us to
determine fair value for these securities include risk free interest rates, risk premiums, performance of underlying collateral (if any), and
other factors involving significant assumptions which may or may not reflect those of an active market.
At December 31, 2011, approximately 10.9 percent of our fixed maturity securities were valued using active trades from TRACE pricing
or broker market maker prices for which there was current market activity in that specific security (comparable to receiving one binding
quote). The prices obtained were not adjusted, and the assets were classified as Level 1, the highest category of the three-level fair value
hierarchy classification wherein inputs are unadjusted and represent quoted prices in active markets for identical assets or liabilities.
The remaining 89.1 percent of our fixed maturity securities were valued based on non-binding quotes or other observable and
unobservable inputs, as discussed below.
• Approximately 71.1 percent of our fixed maturity securities were valued based on prices from pricing services that generally use
observable inputs such as prices for securities or comparable securities in active markets in their valuation techniques. These assets
were classified as Level 2. Level 2 assets or liabilities are those valued using inputs (other than prices included in Level 1) that are
either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for
the duration of the instrument’s anticipated life.
• Approximately 4.1 percent of our fixed maturity securities were valued based on one or more non-binding broker price levels, if
validated by observable market data, or on TRACE prices for identical or similar assets absent current market activity. When only one
price is available, it is used if observable inputs and analysis confirms that it is appropriate. These assets, for which we were able to
validate the price using other observable market data, were classified as Level 2.
• Approximately 13.9 percent of our fixed maturity securities were valued based on prices of comparable securities, matrix pricing,
market models, and/or internal models or were valued based on non-binding quotes with no other observable market data. These
assets were classified as either Level 2 or Level 3, with the categorization dependent on whether there was other observable market
data. Level 3 is the lowest category of the fair value hierarchy and reflects the judgment of management regarding what market
participants would use in pricing assets or liabilities at the measurement date. Financial assets and liabilities categorized as Level 3
are generally those that are valued using unobservable inputs to extrapolate an estimated fair value.
We consider transactions in inactive or disorderly markets to be less representative of fair value. We use all available observable
inputs when measuring fair value, but when significant other unobservable inputs and adjustments are necessary, we classify these assets
or liabilities as Level 3.
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Notes To Consolidated Financial Statements 2011
Unum
The categorization of fair value measurements by input level is as follows:
December 31, 2011
Quoted Prices
in Active Markets
for Identical Assets
or Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
(in millions of dollars)
Assets
Fixed Maturity Securities
United States Government and
Government Agencies and Authorities
$ 326.6
$ 977.8
$
—
$ 1,304.4
States, Municipalities, and Political Subdivisions
Foreign Governments
Public Utilities
Mortgage/Asset-Backed Securities
All Other Corporate Bonds
Redeemable Preferred Stocks
Total Fixed Maturity Securities
Other Long-term Investments
Derivatives
Interest Rate Swaps
Foreign Exchange Contracts
Total Derivatives
Equity Securities
Liabilities
Other Liabilities
Derivatives
Interest Rate Swaps
Foreign Exchange Contracts
Embedded Derivative in Modified
Coinsurance Arrangement
Total Derivatives
107.3
—
718.0
—
3,469.5
—
4,621.4
—
—
—
—
—
—
—
—
$
1,416.2
1,376.7
9,576.4
2,941.5
20,415.1
20.2
36,723.9
134.2
3.5
137.7
—
68.1
—
338.9
31.7
665.5
37.2
1,141.4
—
—
—
11.2
1,591.6
1,376.7
10,633.3
2,973.2
24,550.1
57.4
42,486.7
134.2
3.5
137.7
11.2
$ 32.9
$
140.8
—
173.7
—
—
135.7
135.7
$ 32.9
140.8
135.7
309.4
Unum 2011 Annual Report
111
December 31, 2010
Quoted Prices
in Active Markets
for Identical Assets
or Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(in millions of dollars)
Assets
Fixed Maturity Securities
United States Government and
Government Agencies and Authorities
$ 102.8
$ 998.9
$
Total
$ 1,101.7
1,245.2
1,409.3
9,684.2
3,385.5
23,154.7
55.0
40,035.6
98.4
0.7
99.1
10.4
943.3
1,408.6
8,670.5
3,384.8
18,154.3
33.3
33,593.7
98.4
0.7
99.1
8.9
—
—
—
173.6
0.7
829.7
21.7
1,025.7
—
—
—
1.5
$ 39.1
160.5
$
—
—
$ 39.1
160.5
—
199.6
96.3
96.3
96.3
295.9
States, Municipalities, and Political Subdivisions
Foreign Governments
Public Utilities
Mortgage/Asset-Backed Securities
All Other Corporate Bonds
Redeemable Preferred Stocks
Total Fixed Maturity Securities
Other Long-term Investments
Derivatives
Interest Rate Swaps
Foreign Exchange Contracts
Total Derivatives
Equity Securities
Liabilities
Other Liabilities
Derivatives
Interest Rate Swaps
Foreign Exchange Contracts
Embedded Derivative in Modified
Coinsurance Arrangement
Total Derivatives
301.9
0.7
840.1
—
4,170.7
—
5,416.2
—
—
—
—
—
—
—
—
$
112
Unum 2011 Annual Report
Notes To Consolidated Financial Statements
2011
Unum
Transfers of assets between Level 1 and Level 2 are as follows:
Year Ended December 31
2011
2010
Transfers into
Level 1 from
Level 2 from
Level 1 from
Level 2 from
Level 2
Level 1
Level 2
Level 1
(in millions of dollars)
Fixed Maturity Securities
United States Government and Government
Agencies and Authorities
$ 169.8
$
—
$ 95.9
$
States, Municipalities, and Political Subdivisions
Foreign Governments
Public Utilities
All Other Corporate Bonds
Redeemable Preferred Stocks
47.7
—
362.1
1,426.5
—
274.9
0.7
534.2
2,452.7
—
36.2
0.7
483.2
1,940.1
—
—
33.7
—
673.6
1,676.6
5.5
Total Fixed Maturity Securities
$2,006.1
$3,262.5
$2,556.1
$2,389.4
Transfers between Level 1 and Level 2 occurred due to the change in availability of either a TRACE or broker market maker price.
Depending on current market conditions, the availability of these Level 1 prices can vary from period to period. For fair value
measurements of financial instruments that were transferred either into or out of Level 1 or 2, we reflect the transfers using the fair
value at the beginning of the period.
Unum 2011 Annual Report
113
Changes in assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are as follows:
Year Ended December 31, 2011
Total Realized and
Unrealized Investment
Gains (Losses) Included in
Other
(in millions of dollars)
of Year
Earnings
Income or Loss Purchases
Sales
Into
Out of
of Year
Beginning
Comprehensive
Level 3 Transfers
End
Fixed Maturity Securities
States, Municipalities, and
Political Subdivisions
$
—
$
—
$ 2.5
$ 28.0
$
—
$ 37.6
$
— $ 68.1
Public Utilities
Mortgage/Asset-Backed Securities
All Other Corporate Bonds
Redeemable Preferred Stocks
173.6
0.7
829.7
21.7
Total Fixed Maturity Securities
1,025.7
Equity Securities
1.5
Embedded Derivative in Modified
0.2
—
(2.4)
—
(2.2)
(0.6)
26.9
(0.8)
8.9
1.2
38.7
(1.7)
Coinsurance Arrangement
(96.3)
(39.4)
—
34.8
31.9
(3.2)
(0.1)
259.9
(153.3)
—
—
133.6
(81.4)
250.1
(473.0)
—
—
14.3
—
338.9
31.7
665.5
37.2
228.3
(84.7)
561.9
(626.3)
1,141.4
3.0
—
—
—
9.0
—
11.2
—
—
(135.7)
Year Ended December 31, 2010
Total Realized and
Unrealized Investment
Gains (Losses) Included in
Other
(in millions of dollars)
of Year
Earnings
Income or Loss Purchases
Sales
Into
Out of
of Year
Beginning
Comprehensive
Level 3 Transfers
End
Fixed Maturity Securities
Public Utilities
Mortgage/Asset-Backed Securities
All Other Corporate Bonds
Redeemable Preferred Stocks
Total Fixed Maturity Securities
Equity Securities
Embedded Derivative in Modified
$ 264.3
$ (1.0)
$11.0
$
—
$ (7.5)
$120.5
$(213.7) $ 173.6
4.7
580.0
20.4
869.4
1.5
—
(5.5)
—
(6.5)
—
0.3
53.7
1.3
66.3
0.1
—
(4.3)
—
—
105.3
(58.3)
444.6
(290.1)
—
—
—
—
0.7
829.7
21.7
105.3
(70.1)
565.1
(503.8)
1,025.7
—
—
(0.1)
—
—
—
—
—
1.5
(96.3)
Coinsurance Arrangement
(117.4)
21.1
—
114
Unum 2011 Annual Report
Notes To Consolidated Financial Statements
2011
Unum
Realized and unrealized investment gains and losses presented in the preceding tables represent gains and losses only for the time
during which the applicable financial instruments were classified as Level 3. The transfers between levels resulted primarily from a change
in observability of three inputs used to determine fair values of the securities transferred: (1) transactional data for new issuance and
secondary trades, (2) broker/dealer quotes and pricing, primarily related to changes in the level of activity in the market and whether the
market was considered orderly, and (3) comparable bond metrics from which to perform an analysis. For fair value measurements of
financial instruments that were transferred either into or out of Level 3, we reflect the transfers using the fair value at the beginning of the
period. Gains (losses) for the years ended December 31, 2011 and 2010 which are included in earnings and are attributable to the change
in unrealized gains or losses relating to assets or liabilities valued using significant unobservable inputs and still held at each year end were
$(39.4) million and $21.1 million, respectively. These amounts relate entirely to the changes in fair value of an embedded derivative in a
modified coinsurance arrangement which are reported as realized investment gains and losses.
Note 3. Investments
Fixed Maturity Securities
At December 31, 2011 and 2010, all fixed maturity securities were classified as available-for-sale. The amortized cost and fair values of
securities by security type are shown as follows.
(in millions of dollars)
United States Government and
Government Agencies and Authorities
States, Municipalities, and Political Subdivisions
Foreign Governments
Public Utilities
Mortgage/Asset-Backed Securities
All Other Corporate Bonds
Redeemable Preferred Stocks
Total Fixed Maturity Securities
December 31, 2011
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gain
Loss
Fair
Value
$ 1,005.8
$ 299.7
$ 1.1
$ 1,304.4
1,377.8
1,139.4
9,015.7
2,634.6
21,411.6
55.8
222.6
237.3
1,646.2
344.1
3,314.8
3.5
8.8
—
28.6
5.5
1,591.6
1,376.7
10,633.3
2,973.2
176.3
24,550.1
1.9
57.4
$36,640.7
$6,068.2
$222.2
$42,486.7
There were no other-than-temporary impairments recognized in accumulated other comprehensive income as of December 31, 2011.
Unum 2011 Annual Report
115
(in millions of dollars)
United States Government and
December 31, 2010
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gain
Loss
Fair
Value
Other-Than-
Temporary
Impairments
in AOCI (1)
Government Agencies and Authorities
$ 981.7
$ 128.6
$ 8.6
$ 1,101.7
$ —
States, Municipalities, and Political Subdivisions
Foreign Governments
Public Utilities
Mortgage/Asset-Backed Securities
All Other Corporate Bonds
Redeemable Preferred Stocks
1,271.0
1,248.6
8,874.2
3,047.8
21.5
160.7
854.3
338.3
21,067.5
2,221.3
55.8
1.7
47.3
—
44.3
0.6
134.1
2.5
1,245.2
1,409.3
9,684.2
3,385.5
23,154.7
55.0
—
—
—
—
3.9
—
Total Fixed Maturity Securities
$36,546.6
$3,726.4
$237.4
$40,035.6
$3.9
(1) Accumulated Other Comprehensive Income (Loss)
The following charts indicate the length of time our fixed maturity securities had been in a gross unrealized loss position.
(in millions of dollars)
United States Government and
December 31, 2011
Less Than 12 Months
12 Months or Greater
Gross
Unrealized
Gross
Unrealized
Fair Value
Loss
Fair Value
Loss
Government Agencies and Authorities
$
—
$ —
$ 6.3
$ 1.1
States, Municipalities, and Political Subdivisions
Public Utilities
Mortgage/Asset-Backed Securities
All Other Corporate Bonds
Redeemable Preferred Stocks
Total Fixed Maturity Securities
51.6
192.0
94.2
1,703.9
—
1.3
7.9
4.8
65.5
—
75.3
142.2
19.6
684.9
20.9
7.5
20.7
0.7
110.8
1.9
$2,041.7
$79.5
$949.2
$142.7
116
Unum 2011 Annual Report
Notes To Consolidated Financial Statements
2011
Unum
December 31, 2010
Less Than 12 Months
12 Months or Greater
Gross
Unrealized
Gross
Unrealized
Fair Value
Loss
Fair Value
Loss
(in millions of dollars)
United States Government and
Government Agencies and Authorities
$ 23.9
$ 3.1
$ 10.9
$ 5.5
States, Municipalities, and Political Subdivisions
Public Utilities
Mortgage/Asset-Backed Securities
All Other Corporate Bonds
Redeemable Preferred Stocks
Total Fixed Maturity Securities
660.6
1,073.8
34.5
1,667.2
7.6
28.4
41.0
0.1
48.3
0.4
100.3
41.0
45.5
1,071.7
20.7
18.9
3.3
0.5
85.8
2.1
$3,467.6
$121.3
$1,290.1
$116.1
The following is a distribution of the maturity dates for fixed maturity securities. The maturity dates have not been adjusted for
possible calls or prepayments.
(in millions of dollars)
1 year or less
Over 1 year through 5 years
Over 5 years through 10 years
Over 10 years
Mortgage/Asset-Backed Securities
Total
Amortized
Cost
$ 715.1
5,161.5
9,630.5
18,499.0
34,006.1
2,634.6
December 31, 2011
Unrealized Gain Position
Gross Gain
$ 16.0
449.8
1,266.3
3,992.0
5,724.1
344.1
Fair Value
$ 701.4
4,949.0
9,903.8
21,082.2
36,636.4
2,859.4
Unrealized Loss Position
Gross Loss
Fair Value
$ 0.1
$ 29.6
20.7
52.8
143.1
216.7
5.5
641.6
940.2
1,265.7
2,877.1
113.8
Total Fixed Maturity Securities
$36,640.7
$6,068.2
$39,495.8
$222.2
$2,990.9
(in millions of dollars)
1 year or less
Over 1 year through 5 years
Over 5 years through 10 years
Over 10 years
Mortgage/Asset-Backed Securities
Total
Amortized
Cost
$ 685.7
4,740.6
9,501.6
18,570.9
33,498.8
3,047.8
December 31, 2010
Unrealized Gain Position
Unrealized Loss Position
Gross Gain
$ 10.9
394.1
931.6
2,051.5
3,388.1
338.3
Fair Value
$ 532.6
4,886.3
9,415.0
17,138.5
31,972.4
3,305.5
Gross Loss
$ 0.4
5.5
37.1
193.8
236.8
0.6
Fair Value
$ 163.6
242.9
981.1
3,290.1
4,677.7
80.0
Total Fixed Maturity Securities
$36,546.6
$3,726.4
$35,277.9
$237.4
$4,757.7
Unum 2011 Annual Report
117
At December 31, 2011, the fair value of investment-grade fixed maturity securities was $39,675.8 million, with a gross unrealized gain
of $5,951.6 million and a gross unrealized loss of $140.3 million. The gross unrealized loss on investment-grade fixed maturity securities
was 63.1 percent of the total gross unrealized loss on fixed maturity securities. Unrealized losses on investment-grade fixed maturity
securities principally relate to changes in interest rates or changes in market or sector credit spreads which occurred subsequent to the
acquisition of the securities.
At December 31, 2011, the fair value of below-investment-grade fixed maturity securities was $2,810.9 million, with a gross unrealized
gain of $116.6 million and a gross unrealized loss of $81.9 million. The gross unrealized loss on below-investment-grade fixed maturity
securities was 36.9 percent of the total gross unrealized loss on fixed maturity securities. Generally, below-investment-grade fixed maturity
securities are more likely to develop credit concerns than investment-grade securities. At December 31, 2011, the unrealized losses in our
below-investment-grade fixed maturity securities were generally due to credit spreads in certain industries or sectors and, to a lesser
extent, credit concerns related to specific securities. For each specific security in an unrealized loss position, we believe that there are
positive factors which mitigate credit concerns and that the securities for which we have not recorded an other-than-temporary impairment
will recover in value.
As of December 31, 2011, we held 92 individual investment-grade fixed maturity securities and 55 individual
below-investment-grade fixed maturity securities that were in an unrealized loss position, of which 42 investment-grade fixed maturity
securities and 22 below-investment-grade fixed maturity securities had been in an unrealized loss position continuously for over one year.
In determining when a decline in fair value below amortized cost of a fixed maturity security is other than temporary, we evaluate the
following factors:
• Whether we expect to recover the entire amortized cost basis of the security
• Whether we intend to sell the security or will be required to sell the security before the recovery of its amortized cost basis
• Whether the security is current as to principal and interest payments
• The significance of the decline in value
• The time period during which there has been a significant decline in value
• Current and future business prospects and trends of earnings
• The valuation of the security’s underlying collateral
• Relevant industry conditions and trends relative to their historical cycles
• Market conditions
• Rating agency and governmental actions
• Bid and offering prices and the level of trading activity
• Adverse changes in estimated cash flows for securitized investments
• Changes in fair value subsequent to the balance sheet date
• Any other key measures for the related security
We evaluate available information, including the factors noted above, both positive and negative, in reaching our conclusions.
In particular, we also consider the strength of the issuer’s balance sheet, its debt obligations and near term funding requirements, cash flow
and liquidity, the profitability of its core businesses, the availability of marketable assets which could be sold to increase liquidity, its
industry fundamentals and regulatory environment, and its access to capital markets. Although available and applicable factors are
considered in our analysis, our expectation of recovering the entire amortized cost basis of the security, whether we intend to sell the
security, whether it is more likely than not we will be required to sell the security before recovery of its amortized cost, and whether the
security is current on principal and interest payments are the most critical factors in determining whether impairments are other than
temporary. The significance of the decline in value and the length of time during which there has been a significant decline are also
important factors, but we generally do not record an impairment loss based solely on these two factors, since often other more relevant
factors will impact our evaluation of a security.
118
Unum 2011 Annual Report
Notes To Consolidated Financial Statements 2011
Unum
While determining other-than-temporary impairments is a judgmental area, we utilize a formal, well-defined, and disciplined process
to monitor and evaluate our fixed income investment portfolio, supported by issuer specific research and documentation as of the end of each
period. The process results in a thorough evaluation of problem investments and the recording of losses on a timely basis for investments
determined to have an other-than-temporary impairment.
If we determine that the decline in value of an investment is other than temporary, the investment is written down to fair value,
and an impairment loss is recognized in the current period, either in earnings or in both earnings and other comprehensive income, as
applicable. For those fixed maturity securities with an unrealized loss for which we have not recognized an other-than-temporary
impairment, we believe we will recover the entire amortized cost, we do not intend to sell the security, and we do not believe it is more
likely than not we will be required to sell the security before recovery of its amortized cost. There have been no defaults in the repayment
obligations of any securities for which we have not recorded an other-than-temporary impairment.
Other-than-temporary impairment losses on fixed maturity securities which we intend to sell or more likely than not will be required
to sell before recovery in value are recognized in earnings and equal the entire difference between the security’s amortized cost basis and
its fair value. For securities which we do not intend to sell and it is not more likely than not that we will be required to sell before recovery
in value, other-than-temporary impairment losses recognized in earnings generally represent the difference between the amortized cost of
the security and the present value of our best estimate of cash flows expected to be collected, discounted using the effective interest rate
implicit in the security at the date of acquisition. The determination of cash flows is inherently subjective, and methodologies may vary
depending on the circumstances specific to the security. The timing and amount of our cash flow estimates are developed using historical
and forecast financial information from the issuer, including its current and projected liquidity position. We also consider industry analyst
reports and forecasts, sector credit ratings, future business prospects and earnings trends, issuer refinancing capabilities, actual and/or
potential asset sales by the issuer, and other data relevant to the collectibility of the contractual cash flows of the security. We take into
account the probability of default, expected recoveries, third party guarantees, quality of collateral, and where our debt security ranks in
terms of subordination. We may use the estimated fair value of collateral as a proxy for the present value of cash flows if we believe the
security is dependent on the liquidation of collateral for recovery of our investment. For fixed maturity securities for which we have
recognized an other-than-temporary impairment loss through earnings, if through subsequent evaluation there is a significant increase in
expected cash flows, the difference between the new amortized cost basis and the cash flows expected to be collected is accreted as net
investment income.
The following table presents the before-tax credit related portion of other-than-temporary impairments on fixed maturity
securities still held as of the dates shown for which a portion of the other-than-temporary impairment was recognized in other
comprehensive income.
(in millions of dollars)
Balance at Beginning of Year
Credit Losses Remaining in Retained Earnings Related
to the Adoption of Accounting Standard
Impairment Recognized on Securities not Previously Impaired
Additional Impairment Recognized on Securities
Previously Impaired
Sales or Maturities of Securities
Reduction for Credit Loss Impairments Previously Recognized
due to Change in Intent to Sell
Balance at End of Year
Year Ended December 31
2011
$ 8.5
—
—
—
2010
$18.3
—
—
—
(8.5)
(9.8)
—
$ —
—
$ 8.5
2009
$ —
30.8
38.4
4.4
(38.3)
(17.0)
$ 18.3
At December 31, 2011, we had non-binding commitments of $35.0 million to fund private placement fixed maturity securities.
Unum 2011 Annual Report
119
Variable Interest Entities
We invest in variable interests issued by variable interest entities. These investments include tax credit partnerships, private equity
partnerships, and special purpose entities. For those variable interests that are not consolidated in our financial statements, we are not the
primary beneficiary because we have neither the power to direct the activities that are most significant to economic performance nor the
responsibility to absorb a majority of the expected losses. The determination of whether we are the primary beneficiary is performed at
the time of our initial investment and at the date of each subsequent reporting period.
As of December 31, 2011, the carrying amount of our variable interest entity investments that are not consolidated under the provisions
of GAAP was $428.3 million, comprised of $329.9 million of tax credit partnerships and $98.4 million of private equity partnerships. These
variable interest entity investments are reported as other long-term investments in our consolidated balance sheets.
Additionally, we recognize a liability for all legally binding unfunded commitments to these partnerships, with a corresponding
recognition of an invested asset. Our liability for legally binding unfunded commitments to the tax credit partnerships was $160.6 million
at December 31, 2011. Contractually, we are a limited partner in these investments, and our maximum exposure to loss is limited to the
carrying value of our investment. We also had non-binding commitments of $65.4 million to fund certain private equity partnerships at
December 31, 2011.
We are the sole beneficiary of a special purpose entity which is consolidated under the provisions of GAAP. This entity is a securitized
asset trust containing a highly rated bond for principal protection, nonredeemable preferred stock, and several partnership equity
investments. We contributed the bond and partnership investments into the trust at the time it was established. The trust supports our
investment objectives and allows us to maintain our investment in the partnerships while at the same time protecting the principal of the
investment. There are no restrictions on the assets held in this trust, and the trust is free to dispose of the assets at any time. Because the
assets in the trust are not liquid investments, we periodically provide funding to the underlying partnerships in the trust upon satisfaction
of contractual notice from the partnerships. The fair values of the bond, nonredeemable preferred stock, and partnerships were
$121.3 million, $0.1 million, and $8.0 million, respectively, as of December 31, 2011. The bonds are reported as fixed maturity securities,
and the nonredeemable preferred stock and partnerships are reported as other long-term investments in our consolidated balance sheets.
At December 31, 2011, we had non-binding commitments to fund approximately $0.5 million to the underlying partnerships. The amount
of funding provided to the partnerships during the years ended December 31, 2011 and 2010 was de minimis.
Mortgage Loans
Our mortgage loan portfolio is well diversified by both geographic region and property type to reduce risk of concentration. All of our
mortgage loans are collateralized by commercial real estate. When issuing a new loan, our general policy is not to exceed a loan-to-value
ratio, or the ratio of the loan balance to the estimated fair value of the underlying collateral, of 75 percent. We update the loan-to-value
ratios at least every three years for each loan, and properties undergo a general inspection at least every two years. Our general policy for
newly issued loans is to have a debt service coverage ratio greater than 1.25 times on a normalized 25 year amortization period.
We update our debt service coverage ratios annually.
120
Unum 2011 Annual Report
Notes To Consolidated Financial Statements 2011
Unum
Mortgage loans by property type and geographic region are as follows:
(in millions of dollars)
Carrying Amount
Percent of Total
Carrying Amount
Percent of total
December 31
2011
2010
Property Type
Apartment
Industrial
Mixed
Office
Retail
Other
Total
Region
New England
Mid-Atlantic
East North Central
West North Central
South Atlantic
East South Central
West South Central
Mountain
Pacific
Total
$ 28.0
1.8%
$ 33.7
502.0
93.5
659.3
322.4
7.1
31.1
5.8
40.9
20.0
0.4
458.2
95.8
634.7
286.9
7.5
2.2%
30.2
6.3
41.9
18.9
0.5
$1,612.3
100.0%
$1,516.8
100.0%
$ 147.0
9.1%
$ 146.8
9.7%
174.1
212.7
151.2
383.8
52.4
160.4
69.5
261.2
10.8
13.2
9.4
23.8
3.3
9.9
4.3
16.2
184.8
171.7
134.6
372.0
26.9
171.8
60.7
247.5
12.2
11.3
8.9
24.5
1.8
11.3
4.0
16.3
$1,612.3
100.0%
$1,516.8
100.0%
We evaluate each of our mortgage loans individually for impairment and assign an internal credit quality rating based on a
comprehensive rating system used to evaluate the credit risk of the loan. The factors we use to derive our internal credit ratings may
include the following:
• Loan-to-value ratio
• Debt service coverage ratio based on current operating income
• Property location, including regional economics, trends and demographics
• Age, condition, and construction quality of property
• Current and historical occupancy of property
• Lease terms relative to market
• Tenant size and financial strength
• Borrower’s financial strength
• Borrower’s equity in transaction
• Additional collateral, if any
Unum 2011 Annual Report
121
Although all available and applicable factors are considered in our analysis, loan-to-value and debt service coverage ratios are the
most critical factors in determining whether we will initially issue the loan and also in assigning values and determining impairment.
We assign an overall rating to each loan using an internal rating scale of Aa (highest quality) to B (lowest quality). We review and adjust,
as needed, our internal credit quality ratings on an annual basis. This review process is performed more frequently for mortgage loans
deemed to have a higher risk of delinquency.
Mortgage loans, sorted by applicable credit quality indicators, are as follows:
(in millions of dollars)
Internal Rating
Aa
A
Baa
Ba
B
Total
Loan-to-Value Ratio
<= 65%
> 65% <= 75%
> 75% <= 85%
> 85% <= 100%
Total
December 31
2011
2010
$ 10.9
$ 19.0
712.6
855.0
20.7
13.1
744.4
732.9
20.5
—
$1,612.3
$1,516.8
$ 578.4
$ 425.3
802.3
165.1
66.5
869.2
161.9
60.4
$1,612.3
$1,516.8
Based on an analysis of the above risk factors, as well as other current information, if we determine that it is probable we will be
unable to collect all amounts due under the contractual terms of the mortgage loan, we establish an allowance for credit loss. If we expect
to foreclose on the property, the amount of the allowance typically equals the excess carrying value of the mortgage loan over the fair
value of the underlying collateral. If we expect to retain the mortgage loan until payoff, the allowance equals the excess carrying value of
the mortgage loan over the expected future cash flows of the loan. The projection of future cash flows or a determination that the borrower
can make the contractual payments is inherently subjective, and methodologies may vary depending on the circumstances specific to the
loan. Additions and reductions to our allowance for credit losses on mortgage loans are reported as a component of net realized investment
gains and losses. There have been no changes to our accounting policies or methodology from the prior period regarding estimating the
allowance for credit losses on our mortgage loans.
The activity in the allowance for credit losses is as follows:
(in millions of dollars)
Balance at Beginning of Year
Provision
Charge-offs, Net of Recoveries
Balance at End of Year
122
Unum 2011 Annual Report
Year Ended December 31
2010
$ 3.2
2.4
(4.1)
$ 1.5
2009
$ —
5.5
(2.3)
$ 3.2
2011
$1.5
—
—
$1.5
Notes To Consolidated Financial Statements
Impaired mortgage loans are as follows:
(in millions of dollars)
With No Related Allowance Recorded
With an Allowance Recorded
Total
(in millions of dollars)
With No Related Allowance Recorded
With an Allowance Recorded
Total
2011
Unum
Recorded
Investment
$ 9.4
13.1
$22.5
Recorded
Investment
$ 9.8
13.1
$22.9
December 31, 2011
Unpaid
Principal Balance
$ 9.4
14.6
$24.0
December 31, 2010
Unpaid
Principal Balance
$ 9.8
14.6
$24.4
Related
Allowance
$ —
1.5
$1.5
Related
Allowance
$ —
1.5
$1.5
For the years ended December 31, 2011, 2010, and 2009, our average investment in impaired mortgage loans was $21.3 million,
$22.9 million, and $7.4 million, respectively. For the years ended December 31, 2011 and 2009, we recognized $0.8 million and $0.1 million
of interest income, respectively, on mortgage loans subsequent to impairment. During 2010, no interest income was recognized on
mortgage loans subsequent to impairment.
Our troubled debt restructurings consist of loan foreclosures or the acceptance of a discounted payoff and/or sale of the loan.
A summary of our troubled debt restructurings is as follows:
(in millions of dollars)
Foreclosure
Carrying Amount
Number of Loans
Payoff/Sale
Carrying Amount
Realized Loss
Number of Loans
Year Ended December 31
2011
2010
2009
$19.9
2
$ 3.2
$ 0.2
1
$7.2
1
$4.7
$1.4
3
$21.1
1
$ 8.4
$ 2.1
2
We had no realized losses on foreclosures for the years ended December 31, 2011, 2010, and 2009.
As of December 31, 2011, we held one mortgage loan that was past due regarding principal and interest payments and for which we
had discontinued the accrual of investment income. This loan was greater than 90 days past due and had a carrying value of $9.4 million.
As of December 31, 2010, none of our mortgage loans were past due regarding principal and interest payments, and none were on
nonaccrual status.
At December 31, 2011, we had no commitments to fund commercial mortgage loans.
Unum 2011 Annual Report
123
Transfers of Financial Assets
To manage our cash position more efficiently, we enter into repurchase agreements with unaffiliated financial institutions.
We generally use repurchase agreements as a means to finance the purchase of invested assets or for short-term general business purposes
until projected cash flows become available from our operations or existing investments. Our repurchase agreements are typically
outstanding for less than 30 days. We post collateral through our repurchase agreement transactions whereby the counterparty commits
to purchase securities with the agreement to resell them to us at a later, specified date. The fair value of collateral posted is generally
102 percent of the cash received.
Our investment policy also permits us to lend fixed maturity securities to unaffiliated financial institutions in short-term securities
lending agreements. These agreements increase our investment income with minimal risk. Our securities lending policy requires that a
minimum of 102 percent of the fair value of the securities loaned be maintained as collateral. Generally, cash is received as collateral under
these agreements and is typically reinvested in short-term investments. In the event that securities are received as collateral, we are not
permitted to sell or re-post them.
We account for all of our securities lending agreements and repurchase agreements as collateralized financings. As of December 31,
2011, the carrying amount of fixed maturity securities loaned to third parties under our securities lending program was $319.1 million,
for which we received collateral in the form of cash and securities of $312.3 million and $16.7 million, respectively. We had no outstanding
securities lending agreements at December 31, 2010. We had no outstanding repurchase agreements at December 31, 2011 or 2010.
Net Investment Income
(in millions of dollars)
Fixed Maturity Securities
Derivative Financial Instruments
Mortgage Loans
Policy Loans
Other Long-term Investments
Short-term Investments
Gross Investment Income
Less Investment Expenses
Less Investment Income on PFA Assets
Less Amortization of Tax Credit Partnerships
Net Investment Income
Year Ended December 31
2011
2010
2009
$2,425.2
$2,401.9
$2,268.5
22.9
100.1
14.1
13.1
2.9
17.2
91.1
13.9
18.5
3.2
13.5
81.0
12.4
11.5
6.9
2,578.3
2,545.8
2,393.8
26.9
17.4
14.4
28.2
18.8
3.3
29.2
18.0
—
$2,519.6
$2,495.5
$2,346.6
124
Unum 2011 Annual Report
Notes To Consolidated Financial Statements
Notes To Consolidated Financial Statements
2011
Unum
Realized Investment Gain and Loss
Realized investment gains and losses reported in our consolidated statements of income are as follows:
(in millions of dollars)
Fixed Maturity Securities
Gross Gains on Sales
Gross Losses on Sales
Other-Than-Temporary Impairment Loss
Mortgage Loans and Other Invested Assets
Gross Gains on Sales
Gross Losses on Sales
Impairment Loss
Embedded Derivative in Modified Coinsurance Arrangement
Other Derivatives
Foreign Currency Transactions
Year Ended December 31
2011
2010
2009
$ 74.0
(24.0)
(19.9)
7.1
(0.5)
(0.6)
(39.4)
—
(1.6)
$ 61.1
(41.3)
(15.9)
7.9
(0.5)
(3.8)
21.1
—
(3.9)
$ 48.6
(83.5)
(211.8)
10.0
(0.4)
(8.1)
243.1
12.3
1.5
Net Realized Investment Gain (Loss)
$ (4.9)
$ 24.7
$ 11.7
Note 4. Derivative Financial Instruments
Purpose of Derivatives
We are exposed to certain risks relating to our ongoing business operations. The primary risks managed by using derivative
instruments are interest rate risk, risk related to matching duration for our assets and liabilities, and foreign currency risk. Historically, we
have utilized current and forward interest rate swaps and options on forward interest rate swaps, current and forward currency swaps,
forward treasury locks, currency forward contracts, and forward contracts on specific fixed income securities. Hedging transactions are
primarily associated with our individual and group long-term care and individual and group disability products. All other product portfolios
are periodically reviewed to determine if hedging strategies would be appropriate for risk management purposes.
Our cash flow hedging programs are as follows:
• Interest rate swaps are used to hedge interest rate risks and to improve the matching of assets and liabilities. An interest rate swap
is an agreement in which we agree with other parties to exchange, at specified intervals, the difference between fixed rate and
variable rate interest amounts. The purpose of these swaps is to hedge the anticipated purchase of fixed maturity securities thereby
protecting us from the potential adverse impact of declining interest rates on the associated policy reserves. We also use interest rate
swaps to hedge the potential adverse impact of rising interest rates in anticipation of issuing fixed rate long-term debt.
• Foreign currency interest rate swaps have historically been used to hedge the currency risk of certain foreign currency-denominated
fixed maturity securities owned for portfolio diversification and to hedge the currency risk associated with certain of the interest
payments and debt repayments of the U.S. dollar-denominated debt issued by one of our U.K. subsidiaries. For hedges of fixed
maturity securities, we agree to pay, at specified intervals, fixed rate foreign currency-denominated principal and interest payments
in exchange for fixed rate payments in the functional currency of the operating segment. For hedges of debt issued, we agree to pay,
at specified intervals, fixed rate foreign currency-denominated principal and interest payments to the counterparty in exchange for
fixed rate U.S. dollar-denominated interest payments.
Unum 2011 Annual Report
125
• Options on forward interest rate swaps are used to hedge the interest rate risk on certain insurance liabilities with minimum interest
rate guarantees. By purchasing options on interest rate swaps, we are able to lock in the minimum investment yields needed to
meet the required interest rate guarantee on the insurance liabilities.
• Forward treasury locks are used to minimize interest rate risk associated with the anticipated purchase or disposal of fixed maturity
securities. A forward treasury lock is a derivative contract without an initial investment where we and the counterparty agree to
purchase or sell a specific U.S. Treasury bond at a future date at a pre-determined price.
• Foreign currency forward contracts are used to minimize foreign currency risks. A foreign currency forward is a derivative without
an initial investment where we and the counterparty agree to exchange a specific amount of currencies, at a specific exchange rate,
on a specific date. We use these forward contracts to hedge the foreign currency risk associated with certain of the debt repayments
of the U.S. dollar-denominated debt issued by one of our U.K. subsidiaries and to hedge the currency risk of certain foreign currency-
denominated fixed maturity securities owned for diversification purposes.
Our fair value hedging programs are as follows:
• Interest rate swaps are used to effectively convert certain of our fixed rate securities into floating rate securities which are used
to fund our floating rate long-term debt. Under these swap agreements, we receive a variable rate of interest and pay a fixed rate
of interest. Additionally, we use interest rate swaps to effectively convert certain fixed rate long-term debt into floating rate
long-term debt. Under these swap agreements, we receive a fixed rate of interest and pay a variable rate of interest.
Derivative Risks
The basic types of risks associated with derivatives are market risk (that the value of the derivative will be adversely impacted
by changes in the market, primarily the change in interest and exchange rates) and credit risk (that the counterparty will not perform
according to the terms of the contract). The market risk of the derivatives should generally offset the market risk associated with the
hedged financial instrument or liability.
To help limit the credit exposure of the derivatives, we enter into master netting agreements with our counterparties whereby
contracts in a gain position can be offset against contracts in a loss position. We also typically enter into bilateral, cross-collateralization
agreements with our counterparties to help limit the credit exposure of the derivatives. These agreements require the counterparty
in a loss position to submit acceptable collateral with the other counterparty in the event the net loss position meets or exceeds an agreed
upon amount. Our current credit exposure on derivatives, which is limited to the value of those contracts in a net gain position less
collateral held, was $19.9 million at December 31, 2011. We held cash collateral of $45.6 million and $39.1 million from our counterparties as
of December 31, 2011 and 2010, respectively. This unrestricted cash collateral is included in short-term investments, and the associated
obligation to return the collateral to our counterparties is included in other liabilities in our consolidated balance sheets. We post either fixed
maturity securities or cash as collateral to our counterparties. The carrying value of fixed maturity securities posted as collateral to our
counterparties was $114.9 million and $158.8 million at December 31, 2011 and 2010, respectively.
We had no cash posted as collateral to our counterparties at December 31, 2011 and 2010.
The majority of our derivative instruments contain provisions that require us to maintain specified issuer credit ratings and financial
strength ratings. Should our ratings fall below these specified levels, we would be in violation of the provisions, and our derivatives
counterparties could terminate our contracts and request immediate payment. The aggregate fair value of all derivative instruments with
credit risk-related contingent features that were in a liability position was $173.7 million and $199.6 million at December 31, 2011
and 2010, respectively.
126
Unum 2011 Annual Report
Notes To Consolidated Financial Statements 2011
Unum
Hedging Activity
The table below summarizes by notional amounts the activity for each category of derivatives.
Receive
Swaps
Receive
Variable/Pay
Fixed/Pay
Fixed
Receive
Fixed/Pay
Variable
Forwards
Total
(in millions of dollars)
Balance at December 31, 2008
Additions
Terminations
Balance at December 31, 2009
Additions
Terminations
Balance at December 31, 2010
Additions
Terminations
Fixed
$174.0
—
—
174.0
250.0
250.0
174.0
—
—
$931.8
$1,160.0
$266.3
$2,532.1
70.9
340.8
661.9
—
44.0
617.9
—
63.9
—
380.0
780.0
350.0
240.0
890.0
—
205.0
5.9
267.4
4.8
115.6
120.4
—
46.9
46.9
76.8
988.2
1,620.7
715.6
654.4
1,681.9
46.9
315.8
Balance at December 31, 2011
$174.0
$554.0
$ 685.0
$
—
$1,413.0
The following table summarizes the timing of anticipated settlements of interest rate swaps outstanding under our cash flow hedging
programs at December 31, 2011, whereby we receive a fixed rate and pay a variable rate. The weighted average variable interest rates
assume current market conditions.
(in millions of dollars)
Notional Value
Weighted Average Receive Rate
Weighted Average Pay Rate
Cash Flow Hedges
2012
$185.0
6.49%
0.58%
2013
$150.0
6.34%
0.58%
Total
$335.0
6.42%
0.58%
As of December 31, 2011 and 2010, we had $335.0 million and $540.0 million, respectively, notional amount of forward starting
interest rate swaps to hedge the anticipated purchase of fixed maturity securities.
As of December 31, 2011 and 2010, we had $554.0 million and $617.9 million, respectively, notional amount of open current and
forward foreign currency swaps to hedge fixed income foreign dollar-denominated securities.
During 2011, we entered into and subsequently terminated $46.9 million notional amount of forward treasury locks used to minimize
interest rate risk associated with the anticipated disposal of certain fixed maturity securities. These treasury locks were terminated at the
time the securities were called and/or sold, and we recognized a gain of $0.4 million on the termination of these hedges. The gain was
recognized in other comprehensive income and subsequently amortized into net investment income. We had no open forward treasury
locks at December 31, 2010.
During 2010, we entered into and subsequently terminated $250.0 million notional amount of forward starting interest rate swaps
used to hedge the interest rate risk associated with the anticipated issuance of long-term debt. The swaps were terminated at the time
the debt was issued. We recognized a loss of $18.5 million on the termination of these hedges. This loss was recognized in other
comprehensive income and is being amortized into earnings as a component of interest and debt expense, which has the effect of
increasing the periodic interest expense on our debt issued in 2010.
Unum 2011 Annual Report
127
During 2010, we entered into and subsequently terminated $115.6 million notional amount of forward treasury locks used to minimize
interest rate risk associated with the anticipated disposal of certain fixed maturity securities. The treasury locks were terminated in 2010 at
the time the securities were called and/or sold. We recognized a loss of $1.0 million on the termination of these hedges. This loss was
recognized as a component of net realized investment gain or loss or of net investment income.
During 2009, we terminated certain currency swaps and forward currency contracts used to hedge the foreign currency risk associated
with the U.S. dollar-denominated debt issued by one of our U.K. subsidiaries due in part to the improbability of the original forecasted
transactions occurring during the time period originally anticipated and also to reduce our counterparty exposure for those transactions still
anticipated to occur as originally forecasted. We recognized a gain of $56.3 million on the termination of these hedges, $42.0 million of
which was recognized in other comprehensive income and $14.3 million as a component of net realized investment gain or loss. The debt
associated with this hedge continues to be outstanding as of December 31, 2010.
We previously owned certain principal protected equity linked trust certificates that contained an embedded derivative with a
notional amount of $50.0 million as of December 31, 2008. This embedded derivative represented forward contracts that were accounted
for as cash flow hedges. The purpose of these forward contracts was to hedge the risk of changes in cash flows related to the anticipated
purchase of certain equity securities. The equity linked trust certificates were subsequently sold in 2009.
For the years ended December 31, 2011 and 2010, there was no material ineffectiveness related to our cash flow hedges. For the year
ended December 31, 2009, we reclassified $12.3 million of net gains into earnings as a result of the discontinuance of cash flow hedges due
to the improbability of the original forecasted transactions occurring during the time period originally anticipated. For the years ended
December 31, 2011, 2010, and 2009, no component of the derivative instruments’ gain or loss was excluded from the assessment
of hedge effectiveness.
As of December 31, 2011, we expect to amortize approximately $35.1 million of net deferred gains on derivative instruments during
the next twelve months. This amount will be reclassified from accumulated other comprehensive income into earnings and reported on the
same income statement line item as the hedged item. The income statement line items that will be affected by this amortization are net
investment income and interest and debt expense. The estimated amortization includes the impact of certain derivative contracts that
have not yet been terminated as of December 31, 2011. Fluctuations in fair values of these derivatives between December 31, 2011 and
the date of termination will vary our projected amortization. Amounts that will be reclassified from accumulated other comprehensive
income into earnings to offset the earnings impact of foreign currency translation of hedged items are not estimable.
As of December 31, 2011, we are hedging the variability of future cash flows associated with forecasted transactions through
the year 2038.
Fair Value Hedges
As of December 31, 2011 and 2010, we had $174.0 million notional amount of receive variable, pay fixed interest rate swaps to hedge
the changes in fair value of certain fixed rate securities held. These swaps effectively convert the associated fixed rate securities into
floating rate securities, which are used to fund our floating rate long-term debt. Changes in the fair value of the derivative and changes in
the fair value of the hedged item attributable to the risk being hedged are recognized in current earnings as a component of net realized
investment gain or loss during the period of change in fair value. For the years ended December 31, 2011, 2010, and 2009, the change in
fair value of the hedged fixed maturity securities attributable to the hedged benchmark interest rate resulted in gains (losses) of
$8.1 million, $7.7 million, and $(15.3) million, respectively, with offsetting gains or losses, as applicable, on the related interest rate swaps.
As of December 31, 2011 and 2010, we had a $350.0 million notional amount receive fixed, pay variable interest rate swap to hedge
the changes in the fair value of certain fixed rate long-term debt. This swap effectively converts the associated fixed rate long-term debt
into floating rate debt and provides for a better matching of interest rates with our short-term investments, which have frequent interest
rate resets similar to a floating rate security. For the years ended December 31, 2011 and 2010, the change in fair value of the hedged fixed
debt attributable to the hedged benchmark interest rate resulted in a gain (loss) of $(23.2) million and $14.4 million, respectively, with an
offsetting gain or loss on the related interest rate swaps.
128
Unum 2011 Annual Report
Notes To Consolidated Financial Statements 2011
Unum
For the years ended December 31, 2011, 2010, and 2009, there was no material ineffectiveness related to our fair value hedges,
and no component of the derivative instruments’ gain or loss was excluded from the assessment of hedge effectiveness. There were no
instances wherein we discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.
Derivatives Not Designated as Hedging Instruments
We have an embedded derivative in a modified coinsurance arrangement for which we include in our realized investment gains and
losses a calculation intended to estimate the value of the option of our reinsurance counterparty to cancel the reinsurance contract with us.
However, neither party can unilaterally terminate the reinsurance agreement except in extreme circumstances resulting from regulatory
supervision, delinquency proceedings, or other direct regulatory action. Cash settlements or collateral related to this embedded derivative
are not required at any time during the reinsurance contract or at termination of the reinsurance contract. There are no credit-related
counterparty triggers, and any accumulated embedded derivative gain or loss reduces to zero over time as the reinsured business
winds down.
Locations and Amounts of Derivative Financial Instruments
The following tables summarize the location and fair values of derivative financial instruments, as reported in our consolidated
balance sheets.
(in millions of dollars)
Designated as Hedging Instruments
Interest Rate Swaps
Foreign Exchange Contracts
Total
Not Designated as Hedging Instruments
December 31, 2011
Asset Derivatives
Liability Derivatives
Balance Sheet
Balance Sheet
Location
Fair Value
Location
Fair Value
Other L-T Investments
$134.2
Other Liabilities
$ 32.9
Other L-T Investments
3.5
Other Liabilities
140.8
$137.7
$173.7
Embedded Derivative in Modified Coinsurance Arrangement
Other Liabilities
$135.7
(in millions of dollars)
Designated as Hedging Instruments
Interest Rate Swaps
Foreign Exchange Contracts
Total
Not Designated as Hedging Instruments
December 31, 2010
Asset Derivatives
Liability Derivatives
Balance Sheet
Balance Sheet
Location
Fair Value
Location
Fair Value
Other L-T Investments
Other L-T Investments
$98.4
0.7
$99.1
Other Liabilities
$ 39.1
Other Liabilities
160.5
$199.6
Embedded Derivative in Modified Coinsurance Arrangement
Other Liabilities
$ 96.3
Unum 2011 Annual Report
129
The following tables summarize the location of and gains and losses on derivative financial instruments designated as cash flow
hedging instruments, as reported in our consolidated statements of income and consolidated statements of comprehensive income.
Year Ended December 31, 2011
Gain Recognized
in OCI on Derivatives
(Effective Portion)
Gain (Loss) Reclassified from
Accumulated OCI into
Income (Effective Portion)
$50.3
—
—
—
22.4
$72.7
$34.8(1)
3.5(2)
(1.6)(3)
(1.1)(1)
10.1(2)
$45.7
Year Ended December 31, 2010
Gain (Loss) Recognized
Gain (Loss) Reclassified from
in OCI on Derivatives
(Effective Portion)
$ 28.1
—
—
—
—
(32.2)
—
$ (4.1)
Accumulated OCI into
Income (Effective Portion)
$ 29.5(1)
7.3(2)
(0.5)(3)
(0.4)(4)
(1.9)(1)
(25.6)(2)
2.3(3)
$ 10.7
(in millions of dollars)
Interest Rate Swaps and Forwards
Interest Rate Swaps
Interest Rate Swaps
Foreign Exchange Contracts
Foreign Exchange Contracts
Total
(1) Gain (loss) recognized in net investment income
(2) Gain recognized in net realized investment gain (loss)
(3) Loss recognized in interest and debt expense
(in millions of dollars)
Interest Rate Swaps and Forwards
Interest Rate Swaps
Interest Rate Swaps
Interest Rate Swaps
Foreign Exchange Contracts
Foreign Exchange Contracts
Foreign Exchange Contracts
Total
(1) Gain (loss) recognized in net investment income
(2) Gain (loss) recognized in net realized investment gain (loss)
(3) Gain (loss) recognized in interest and debt expense
(4) Loss recognized in other income
130
Unum 2011 Annual Report
Notes To Consolidated Financial Statements
2011
Unum
(in millions of dollars)
Interest Rate Swaps
Interest Rate Swaps
Interest Rate Swaps
Foreign Exchange Contracts
Foreign Exchange Contracts
Foreign Exchange Contracts
Total
Year Ended December 31, 2009
Gain (Loss) Recognized
Gain (Loss) Reclassified from
Gain (Loss) Recognized
in OCI on Derivatives
Accumulated OCI into
in Income on Derivatives
(Effective Portion)
Income (Effective Portion)
(Ineffective Portion)
$ 87.7
—
—
(2.1)
(83.1)
42.0
$ 44.5
$ 24.9 (1)
8.1 (2)
(0.1) (4)
(2.8) (1)
(73.4) (2)
1.7 (3)
$(41.6)
$ —
—
—
—
(2.0) (2)
14.3 (2)
$12.3
(1) Gain (loss) recognized in net investment income
(2) Gain (loss) recognized in net realized investment gain (loss)
(3) Gain recognized in interest and debt expense
(4) Loss recognized in other income
The following table summarizes the location of and gains and losses on our embedded derivative in a modified coinsurance
arrangement, as reported in our consolidated statements of income.
(in millions of dollars)
Gain (Loss) Recognized in Net Realized Investment Gain (Loss)
Year Ended December 31
2011
$(39.4)
2010
$21.1
2009
$243.1
Note 5. Liability for Unpaid Claims and Claim Adjustment Expenses
Changes in the liability for unpaid claims and claim adjustment expenses are as follows:
(in millions of dollars)
Balance at January 1
Less Reinsurance Recoverable
Net Balance at January 1
Incurred Related to
Current Year
Prior Years
Interest
All Other Incurred
Foreign Currency
Total Incurred
Paid Related to
Current Year
Prior Years
Total Paid
Net Balance at December 31
Plus Reinsurance Recoverable
Balance at December 31
2011
2010
$24,339.4
2,028.2
$24,585.7
2,179.3
22,311.2
22,406.4
2009
$24,419.0
2,226.3
22,192.7
4,684.4
4,517.9
4,433.3
1,262.9
209.1
(10.9)
6,145.5
(1,588.6)
(4,324.2)
(5,912.8)
22,543.9
2,042.6
1,268.9
(61.3)
(73.9)
5,651.6
(1,514.8)
(4,232.0)
(5,746.8)
22,311.2
2,028.2
1,285.4
(34.7)
206.7
5,890.7
(1,451.6)
(4,225.4)
(5,677.0)
22,406.4
2,179.3
$24,586.5
$24,339.4
$24,585.7
Unum 2011 Annual Report
131
The majority of the net balances are related to disability claims with long-tail payouts on which interest earned on assets backing
liabilities is an integral part of pricing and reserving. Interest accrued on prior year reserves has been calculated on the opening reserve
balance less one-half year’s cash payments at our average reserve discount rate used during 2011, 2010, and 2009.
We generally perform loss recognition tests on our deferred acquisition costs and policy reserves in the fourth quarter of each year, but
more frequently if appropriate, using best estimate assumptions as of the date of the test. Included in our analysis for the long-term care
product line during the fourth quarter of 2011 was a review of our reserve discount rate, mortality, and morbidity assumptions. Our analysis
of reserve discount rate assumptions considered the significant decline in long-term interest rates which occurred late in the third quarter
of 2011 due to the European Union debt crisis and the Federal Reserve Board’s actions, including the announcement of “Operation Twist.”
We also considered an updated industry study for long-term care experience which was made available mid-year 2011 from the Society
of Actuaries. Our analysis of this study, which was completed during the fourth quarter of 2011, showed that lower termination rates than
we had previously assumed were beginning to emerge in industry and in our own company experience. Based on our analysis, as of
December 31, 2011 we lowered the discount rate assumption to reflect the low interest rate environment and our expectation of future
investment portfolio yield rates. We also changed our mortality assumptions to reflect emerging experience due to an increase in life
expectancies which increases the ultimate number of people who will utilize long-term care benefits and also lengthens the amount of
time a claimant receives long-term care benefits. We changed our morbidity assumptions to reflect emerging industry experience as well
as our own company experience. While our morbidity experience is still emerging and is not fully credible, we modified our assumptions
to align more closely with the recently published industry study. Using our revised best estimate assumptions, as of December 31, 2011
we determined that deferred acquisition costs of $289.8 million were not recoverable and that our policy and claim reserves should be
increased by $573.6 million to reflect our current estimate of future benefit obligations. Of this amount, $248.1 million was related to claim
reserves, and approximately $215.0 million can be attributed to prior year incurred claims, thereby impacting the results shown in the
preceding chart.
In December 2011, we analyzed our reserve assumptions for individual disability closed block claim reserves. Claim reserves
supporting our individual disability closed block of business are calculated using assumptions based on actual experience believed to be
currently appropriate. Claim reserves are subject to revision as current claim experience emerges and alters our view of future expectations.
Claim resolution rates, which measure the resolution of claims from recovery, deaths, settlements, and benefit expirations, are very
sensitive to operational and environmental changes and can be volatile. Our claim resolution rate assumption used in determining reserves
is our expectation of the resolution rate we will experience over the life of the block of business. We are now able, with a higher degree
of confidence, to assess our own experience for older ages in our long duration lifetime claim block as our data has become credible. There
is very little industry experience for lifetime disability benefits, as our insurance companies were the primary disability companies in the
insurance industry at the time lifetime disability benefits were offered. These benefits were offered during the 1980s and 1990s, recent
enough such that claimants are just reaching the older ages and providing us with data to build our claim experience base. Emerging
experience indicates a longer life expectancy for our older age, longer duration disabled claimants, which lengthens the time a claimant
receives disability benefits. As a result of this experience, as of December 31, 2011 we adjusted our mortality assumption within our claim
resolution rate assumption and, as a result, increased our claim reserves for our individual disability closed block of business by
$183.5 million. Of this amount, approximately $176.0 million can be attributed to prior year incurred claims, thereby impacting the
results shown in the preceding chart.
“Incurred Related to Prior Years — All Other Incurred,” excluding the 2011 reserve charges discussed in the preceding paragraphs,
declined in 2011 relative to the prior two years. The decrease relates primarily to a continued increased rate of claim recoveries for our
Unum US group long-term disability line of business and our Closed Block individual disability line of business. Throughout the period 2009
to 2011, we had generally stable to improving claims management performance, and our claim resolution rates were fairly consistent with
or slightly favorable to our long-term assumptions. Our claims management performance during 2011 for Unum US group long-term
disability exceeded our long-term assumptions for claim resolution rates. For the Closed Block individual disability line of business, the
claims management performance in 2011 was slightly favorable relative to 2010. Our claim resolution rate assumption used in determining
reserves is our expectation of the resolution rate we will experience over the life of the block of business and will vary from actual
experience in any one period, both favorably and unfavorably.
132
Unum 2011 Annual Report
Notes To Consolidated Financial Statements 2011
Unum
A reconciliation of policy and contract benefits and reserves for future policy and contract benefits as reported in our consolidated
balance sheets to the liability for unpaid claims and claim adjustment expenses is as follows:
(in millions of dollars)
Policy and Contract Benefits
Reserves for Future Policy and Contract Benefits
Total
Less:
Life Reserves for Future Policy and Contract Benefits
Accident and Health Active Life Reserves
Unrealized Adjustment to Reserves for Future Policy and Contract Benefits
2011
$ 1,494.0
43,051.9
December 31
2010
$ 1,565.0
39,715.0
44,545.9
41,280.0
7,454.2
7,259.6
5,245.6
7,380.7
6,451.6
3,108.3
2009
$ 1,736.9
37,740.8
39,477.7
7,247.5
5,999.8
1,644.7
Liability for Unpaid Claims and Claim Adjustment Expenses
$24,586.5
$24,339.4
$24,585.7
The unrealized adjustment to reserves for future policy and contract benefits reflects the changes that would be necessary
to policyholder liabilities if the unrealized investment gains and losses related to the available-for-sale securities had been realized.
Changes in these adjustments are reported as a component of other comprehensive income or loss.
Note 6. Income Tax
Total income tax expense (benefit) is allocated as follows:
(in millions of dollars)
Net Income
Stockholders’ Equity — Additional Paid-in Capital
Stock-Based Compensation
Stockholders’ Equity — Accumulated Other Comprehensive Income (Loss)
Change in Net Unrealized Gains on Securities Not
Other-Than Temporarily Impaired
Change in Net Unrealized Gains and Losses on Securities
Other-Than Temporarily Impaired
Change in Net Gain on Cash Flow Hedges
Change in Adjustment to Reserves for Future Policy
and Contract Benefits, Net of Reinsurance and Other
Change in Foreign Currency Translation Adjustment
Change in Unrecognized Pension and Postretirement Benefit Costs
Stockholders’ Equity — Retained Earnings
Adoption of ASC 320 Update — Note 1
Total
Year Ended December 31
2011
$ 21.8
2010
$ 445.2
2009
$ 439.7
(3.3)
(2.7)
1.5
799.4
519.1
1,454.9
(1.1)
25.2
(703.3)
—
(67.4)
(0.5)
(5.0)
(501.0)
0.6
(12.7)
—
—
1.6
(45.3)
(816.6)
—
42.0
7.7
$ 71.3
$ 443.0
$1,085.5
Unum 2011 Annual Report
133
A reconciliation of the income tax expense (benefit) attributable to income from operations before income tax, computed at
U.S. federal statutory tax rates, to the income tax expense (benefit) as included in our consolidated statements of income, is as follows.
Certain prior year amounts have been reclassified to conform to current year reporting.
2011
35.0%
(14.5)
(0.6)
(7.6)
(3.8)
8.5%
Year Ended December 31
2010
35.0%
0.5
(1.3)
(0.6)
(0.2)
2009
35.0%
0.3
(0.8)
—
(0.5)
33.4%
34.0%
December 31
2011
2010
$257.0
507.8
138.2
903.0
349.8
262.3
29.7
641.8
—
641.8
$261.2
$328.4
392.7
200.6
921.7
317.8
174.2
16.6
508.6
4.1
504.5
$417.2
Statutory Income Tax
Prior Year Tax Settlements
Foreign Items
Tax Credits
Other Items, Net
Effective Tax
Our deferred income tax asset and liability consists of the following:
(in millions of dollars)
Deferred Tax Liability
Deferred Acquisition Costs
Unrealized Gains and Losses
Other
Gross Deferred Tax Liability
Deferred Tax Asset
Invested Assets
Employee Benefits
Other
Gross Deferred Tax Asset
Less Valuation Allowance
Net Deferred Tax Asset
Total Net Deferred Tax Liability
134
Unum 2011 Annual Report
Notes To Consolidated Financial Statements
Our consolidated statements of income include amounts subject to both domestic and foreign taxation. The income and related tax
2011
Unum
expense (benefit) are as follows:
(in millions of dollars)
Income Before Tax
United States — Federal
Foreign
Total
Current Tax Expense
United States — Federal
Foreign
Total
Deferred Tax Expense (Benefit)
United States — Federal
Foreign
Total
Total
Year Ended December 31
2011
2010
2009
$ 83.2
174.0
$257.2
$1,124.7
206.6
$1,331.3
$1,065.2
227.1
$1,292.3
$ 218.4
$ 246.9
$ 283.7
12.1
230.5
(230.5)
21.8
(208.7)
54.1
301.0
148.5
(4.3)
144.2
94.2
377.9
91.4
(29.6)
61.8
$ 21.8
$ 445.2
$ 439.7
Effective April 2011, the U.K. government began decreasing its corporation tax rates at a rate of at least one percent per year, with the
ultimate goal of reducing the rate from 28 percent to 23 percent. The first income tax rate reduction, which was enacted in the third quarter
of 2010 and was effective in April 2011, reduced the tax rate from 28 percent to 27 percent. In the third quarter of 2011, an income tax rate
reduction was enacted which reduced the tax rate from 27 percent to 26 percent, retroactive to April 2011, and from 26 percent to 25 percent,
effective April 2012. We are required to adjust deferred tax assets and liabilities through income on the date of enactment of a rate change,
and as such, we recorded a reduction of $6.8 million and $2.7 million to our income tax expense during 2011 and 2010, respectively.
We consider the unremitted earnings of our foreign operations to be permanently invested and therefore have not provided
U.S. deferred taxes on the cumulative earnings of our non-U.S. affiliates. Deferred taxes are provided for earnings of non-U.S. affiliates
when we plan to remit those earnings. As of December 31, 2011 and 2010, we have not made a provision for U.S. taxes on approximately
$884.2 million and $1,027.7 million, respectively, of the excess of the carrying amount for financial reporting over the tax basis of
investments in foreign subsidiaries that are essentially permanent in duration. The determination of a deferred tax liability related to
investments in these foreign subsidiaries is not practicable.
Our consolidated statements of income include the following changes in unrecognized tax benefits:
(in millions of dollars)
Balance at Beginning of Year
Tax Positions Related to Prior Years
Additions
Subtractions
Settlements with Tax Authorities
Balance at End of Year
Less Tax Attributable to Temporary Items Included Above
Total Unrecognized Tax Benefits that if Recognized
Would Affect the Effective Tax Rate
2011
$138.9
4.4
(11.8)
(44.6)
86.9
(86.9)
December 31
2010
$ 146.8
3.6
(11.5)
—
138.9
(123.7)
2009
$ 149.8
8.5
(11.5)
—
146.8
(131.6)
$
—
$ 15.2
$ 15.2
Unum 2011 Annual Report
135
Included in the balances at December 31, 2011, 2010, and 2009 are $86.9 million, $123.7 million, and $131.6 million, respectively,
of unrecognized tax benefits for tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about
the timing of such deductibility. Other than potential interest and penalties, the disallowance of the shorter deductibility period would not
affect our results of operations but would accelerate the payment of cash to the taxing authority to an earlier period.
We recognize interest expense and penalties, if applicable, related to unrecognized tax benefits in tax expense net of federal income
tax. The total amounts of accrued interest and penalties in our consolidated balance sheets as of December 31, 2011, 2010, and 2009 are
$12.3 million, $25.4 million, and $19.9 million, respectively. A reduction of unrecognized tax benefits occurred during 2011 as a result of a
settlement with the Internal Revenue Service (IRS), described as follows, and resulted in a reduction of interest expense of $13.1 million.
We recognized interest related to unrecognized tax expense in our consolidated statements of income of $5.5 million and $6.5 million
during 2010 and 2009, respectively. There were no changes to our unrecognized tax benefits as a result of settlements or lapses in statutes
of limitations during 2010 and 2009. It is reasonably possible that unrecognized tax benefits could decrease within the next 12 months by
$0 to $73.0 million as a result of additional IRS settlements or lapses in statutes of limitations.
We file federal and state income tax returns in the United States and in foreign jurisdictions. We are under continuous examination by
the IRS with regard to our U.S. federal income tax returns. During the fourth quarter of 2011, the Congressional Joint Committee on Taxation
approved our final settlement with the IRS for tax years 1996 to 2004. The settlement resulted from our administrative appeal of audit
adjustments relating primarily to insurance tax reserves and losses incurred by foreign subsidiaries. As a result of the settlement, we
recognized in our 2011 operating results a reduction in our federal income taxes of $41.3 million as well as interest income of $17.5 million
before tax and $11.4 million after tax. We expect to receive a cash refund of taxes and interest under this settlement of approximately
$60.0 million in 2012.
During 2010, the IRS completed its examination of tax years 2005 and 2006 and issued a revenue agent’s report (RAR) in
December 2010. In January 2011, we filed a protest to the RAR with respect to all significant adverse proposed adjustments.
Included in 2009 operating results is a refund of interest of $0.3 million before tax and $0.2 million after tax attributable
to tax year 1998.
Tax years subsequent to 2006 remain subject to examination by tax authorities in the U.S. Tax years subsequent to 2009 remain
subject to examination in major foreign jurisdictions. We believe sufficient provision has been made for all proposed and potential
adjustments for years that are not closed by the statute of limitations in all major tax jurisdictions and that any such adjustments would
not have a material adverse effect on our financial position, liquidity, or results of operations. However, it is possible that the resolution
of income tax matters could produce quarterly volatility in our results of operations in future periods.
In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were
signed into law. Among other things, the new legislation reduces the tax benefits available to an employer that receives a postretirement
prescription drug coverage subsidy from the federal government under the Medicare Prescription Drug, Improvement and Modernization
Act of 2003. Under the new legislation, to the extent our future postretirement prescription drug coverage expenses are reimbursed under
the subsidy program, the expenses covered by the subsidy will no longer be tax deductible after 2012. Employers that receive the subsidy
were required to recognize the deferred tax effects relating to the future postretirement prescription drug coverage in the period the
legislation was enacted. Our income tax expense for the year ended December 31, 2010 includes a non-cash tax charge of $10.2 million
which was recorded in the first quarter of 2010 to reflect the impact of the tax law change.
As of December 31, 2011, we had no net operating loss carryforward for U.S. income taxes. In 2011, as part of the previously described
IRS settlement, we released the $4.1 million valuation allowance related to basis differences in foreign subsidiaries and net operating loss
carryforwards in foreign jurisdictions for which we previously believed we would not realize a tax benefit.
Total income taxes paid net of refunds during 2011, 2010, and 2009 were $303.5 million, $273.0 million, and $381.6 million, respectively.
136
Unum 2011 Annual Report
Notes To Consolidated Financial Statements Note 7. Debt
Long-term and short-term debt consists of the following:
(in millions of dollars)
Senior Secured Notes, variable due 2037, callable at or above par
Senior Secured Notes, variable due 2036, callable at or above par
Notes @ 7.375% due 2032, callable at or above par
Notes @ 6.75% due 2028, callable at or above par
Notes @ 7.25% due 2028, callable at or above par
Notes @ 5.625% due 2020, callable at or above par
Notes @ 7.125% due 2016, callable at or above par
Notes @ 6.85% due 2015, callable at or above par
Notes @ 7.0% due 2018, non-callable
Medium-term Notes @ 7.0% to 7.2% due 2023 to 2028, non-callable
Junior Subordinated Debt Securities @ 7.405% due 2038
Long-term Debt
Securities Lending Agreements — See Note 3
Notes @ 7.625% due 2011
Short-term Debt
Total
2011
Unum
December 31
2011
2010
$ 560.0
$ 634.4
72.5
39.5
165.8
200.0
399.6
358.8
296.7
200.0
50.8
226.5
82.5
39.5
165.8
200.0
399.5
335.6
296.7
200.0
50.8
226.5
2,570.2
2,631.3
312.3
—
312.3
—
225.1
225.1
$2,882.5
$2,856.4
Collateralized debt, which consists of the senior secured notes, ranks highest in priority, followed by unsecured notes, which consists
of notes and medium-term notes, followed by junior subordinated debt securities. The junior subordinated debt securities due 2038 are
callable under limited, specified circumstances. The remaining callable debt may be redeemed, in whole or in part, at any time.
The aggregate contractual principal maturities are $296.9 million in 2015, $350.0 million in 2016, and $1,915.1 million in 2018
and thereafter.
Senior Secured Notes
In 2007, Northwind Holdings, LLC (Northwind Holdings), a wholly-owned subsidiary of Unum Group, issued $800.0 million of insured,
senior, secured notes due 2037 (the Northwind notes) in a private offering. The Northwind notes bear interest at a floating rate equal to the
three-month LIBOR plus 0.78%.
Northwind Holdings’ ability to meet its obligations to pay principal, interest, and other amounts due on the Northwind notes will be
dependent principally on its receipt of dividends from Northwind Reinsurance Company (Northwind Re), the sole subsidiary of Northwind
Holdings. Northwind Re reinsured the risks attributable to specified individual disability insurance policies issued by or reinsured by
Provident Life and Accident Insurance Company, Unum Life Insurance Company of America (Unum America), and The Paul Revere Life
Insurance Company (collectively, the ceding insurers) pursuant to separate reinsurance agreements between Northwind Re and each of the
ceding insurers. The ability of Northwind Re to pay dividends to Northwind Holdings will depend on its satisfaction of applicable regulatory
requirements and the performance of the reinsured policies.
Unum 2011 Annual Report
137
Recourse for the payment of principal, interest, and other amounts due on the Northwind notes is limited to the collateral for the
Northwind notes and the other assets, if any, of Northwind Holdings. The collateral consists of a first priority, perfected security interest in
(a) the debt service coverage account (Northwind DSCA) that Northwind Holdings is required to maintain in accordance with the indenture
pursuant to which the Northwind notes were issued (the Northwind indenture), (b) the capital stock of Northwind Re and the dividends
and distributions on such capital stock, and (c) Northwind Holdings’ rights under the transaction documents related to the Northwind notes
to which Northwind Holdings is a party. At December 31, 2011, the amount in the Northwind DSCA was $12.7 million. None of Unum Group,
the ceding insurers, Northwind Re, or any other affiliate of Northwind Holdings is an obligor or guarantor with respect to the Northwind notes.
Northwind Holdings is required to repay a portion of the outstanding principal under the Northwind notes at par on the quarterly
scheduled payment dates under the Northwind notes in an amount equal to the lesser of (i) a targeted amortization amount as defined
in the Northwind indenture and (ii) the amount of the remaining available funds in the Northwind DSCA minus an amount equal to the
minimum balance that is required to be maintained in the Northwind DSCA under the Northwind indenture, provided that Northwind
Holdings has sufficient funds available to pay its other expenses, including interest payments on the Northwind notes, and to maintain the
minimum balance in the Northwind DSCA as required under the Northwind indenture. During 2011, 2010, and 2009, Northwind Holdings
made principal payments of $74.4 million, $58.3 million, and $48.0 million, respectively, on the Northwind notes.
In 2006, Tailwind Holdings, LLC (Tailwind Holdings), a wholly-owned subsidiary of Unum Group, issued $130.0 million of insured,
senior, secured notes due 2036 (the Tailwind notes) in a private offering. The Tailwind notes bear interest at a floating rate equal to the
three-month LIBOR plus 0.35%.
Tailwind Holdings’ ability to meet its obligations to pay principal, interest, and other amounts due on the Tailwind notes will be
dependent principally on its receipt of dividends from Tailwind Reinsurance Company (Tailwind Re), the sole subsidiary of Tailwind Holdings.
Tailwind Re reinsured Unum America’s liability with respect to certain specified long-term disability claims incurred between January 1,
1999 and December 31, 2001 that were in payment status on January 1, 2006 pursuant to a reinsurance agreement between Tailwind Re
and Unum America. The ability of Tailwind Re to pay dividends to Tailwind Holdings will depend on its satisfaction of applicable regulatory
requirements and the performance of the reinsured claims.
Recourse for the payment of principal, interest, and other amounts due on the Tailwind notes is limited to the collateral for the
Tailwind notes and the other assets, if any, of Tailwind Holdings. The collateral consists of a first priority, perfected security interest in (a) the
debt service coverage account (Tailwind DSCA) that Tailwind Holdings is required to maintain in accordance with the indenture pursuant to
which the Tailwind notes were issued (the Tailwind indenture), (b) the capital stock of Tailwind Re and the dividends and distributions on
such capital stock, and (c) Tailwind Holdings’ rights under the transaction documents related to the Tailwind notes to which Tailwind
Holdings is a party. At December 31, 2011, the amount in the Tailwind DSCA was $18.2 million. None of Unum Group, Unum America,
Tailwind Re, or any other affiliate of Tailwind Holdings is an obligor or guarantor with respect to the Tailwind notes.
Tailwind Holdings is required to repay a portion of the outstanding principal under the Tailwind notes at par on the quarterly scheduled
payment dates under the Tailwind notes in an amount equal to the lesser of (i) a targeted amortization amount as defined in the Tailwind
indenture and (ii) the amount of the remaining available funds in the Tailwind DSCA minus an amount equal to the minimum balance that
is required to be maintained in the Tailwind DSCA under the Tailwind indenture, provided that Tailwind Holdings has sufficient funds available
to pay its other expenses, including interest payments on the Tailwind notes, and to maintain the minimum balance in the Tailwind DSCA
as required under the Tailwind indenture. During 2011, 2010, and 2009, Tailwind Holdings made principal payments of $10.0 million each
year on the Tailwind notes.
138
Unum 2011 Annual Report
Notes To Consolidated Financial Statements 2011
Unum
Unsecured Notes
In 2010, we issued $400.0 million of unsecured senior notes in a public offering, and we purchased and retired $10.0 million of our
7.08% medium-term notes due 2024.
In 2009, we issued $350.0 million of unsecured senior notes in a public offering. In 2009, we purchased and retired $1.2 million
aggregate principal of our 7.19% medium-term notes due 2028 and $0.6 million aggregate principal of our 6.75% notes due 2028.
In 2005, UnumProvident Finance Company plc, a wholly-owned subsidiary of Unum Group, issued 6.85% senior debentures due 2015.
These debentures are fully and unconditionally guaranteed by Unum Group.
Fair Value Hedge
In 2010, we entered into an interest rate swap to effectively convert our $350.0 million aggregate principal amount of 7.125%
unsecured senior notes into floating rate debt. Under this agreement, we receive a fixed rate of interest and pay a variable rate of interest,
based off of three-month LIBOR. The fair value adjustment of the swap resulted in an increase (decrease) of the carrying amount of the
hedged debt of $8.8 million and $(14.4) million at December 31, 2011 and 2010, respectively.
Junior Subordinated Debt Securities
In 1998, Provident Financing Trust I (the trust) issued $300.0 million of 7.405% capital securities in a public offering. These capital
securities, which mature in 2038, are fully and unconditionally guaranteed by Unum Group, have a liquidation value of $1,000 per capital
security, and have a mandatory redemption feature under certain circumstances. Unum Group issued 7.405% junior subordinated deferrable
interest debentures to the trust in connection with the capital securities offering. The debentures mature in 2038. The sole assets of the
trust are the junior subordinated debt securities.
Short-term Debt
In 2011, the remaining $225.1 million of our 7.625% senior notes due March 2011 matured.
In 2009, the remaining $132.2 million of our outstanding 5.859% notes due May 2009 matured. We also repaid $58.3 million of reverse
repurchase agreements outstanding at December 31, 2008.
Interest and Debt Expense
Interest paid on long-term and short-term debt and related securities during 2011, 2010, and 2009 was $145.4 million, $140.7 million,
and $122.0 million, respectively.
Shelf Registration
We have a shelf registration, which we renewed in 2011, with the Securities and Exchange Commission to issue various types
of securities, including common stock, preferred stock, debt securities, depository shares, stock purchase contracts, units and warrants, or
preferred securities of wholly-owned finance trusts. The shelf registration enables us to raise funds from the offering of any securities
covered by the shelf registration as well as any combination thereof, subject to market conditions and our capital needs.
Unum 2011 Annual Report
139
Note 8 — Pensions and Other Postretirement Benefits
We sponsor several defined benefit pension and other postretirement benefit (OPEB) plans for our employees, including non-qualified
pension plans. The U.S. plans comprise the majority of our total benefit obligation and benefit cost. We maintain a separate defined benefit
plan for eligible employees in our U.K. operation. The U.K. defined benefit pension plan was closed to new entrants on December 31, 2002.
The following tables provide the changes in the benefit obligation and fair value of plan assets and statements of the funded status of
the plans.
Pension Benefits
U.S. Plans
Non U.S. Plans
OPEB
(in millions of dollars)
2011
2010
2011
2010
2011
2010
Change in Benefit Obligation
Benefit Obligation at Beginning of Year
$1,352.7
$1,123.6
$152.9
$173.5
$185.1
$190.6
Service Cost
Interest Cost
Plan Participant Contributions
Actuarial (Gain) Loss
Benefits and Expenses Paid
Change in Foreign Exchange Rates
42.7
77.6
—
138.4
(31.6)
—
36.5
71.1
—
148.6
(27.1)
—
4.8
8.8
—
9.3
(4.1)
(1.3)
4.9
9.5
—
(25.3)
(3.6)
(6.1)
1.9
10.0
3.4
5.6
(15.1)
—
2.6
10.8
3.2
(7.2)
(14.9)
—
Benefit Obligation at End of Year
$1,579.8
$1,352.7
$170.4
$152.9
$190.9
$185.1
Accumulated Benefit Obligation at
December 31
$1,462.2
$1,243.6
$160.9
$141.7
N/A
N/A
Change in Fair Value of Plan Assets
Fair Value of Plan Assets at
Beginning of Year
$1,179.6
$ 888.5
$176.0
$160.8
$ 11.9
$ 11.9
Actual Return on Plan Assets
Employer Contributions
Plan Participant Contributions
Benefits and Expenses Paid
Change in Foreign Exchange Rates
18.5
4.3
—
(31.6)
—
146.3
171.9
—
(27.1)
—
12.5
4.7
—
(4.1)
(1.1)
19.1
5.0
—
(3.6)
(5.3)
Fair Value of Plan Assets at End of Year
$1,170.8
$1,179.6
$188.0
$176.0
Underfunded (Overfunded) Status
$ 409.0
$ 173.1
$ (17.6)
$ (23.1)
0.2
11.3
3.4
(15.1)
—
$ 11.7
$179.2
0.4
11.3
3.2
(14.9)
—
$ 11.9
$173.2
140
Unum 2011 Annual Report
Notes To Consolidated Financial Statements
2011
Unum
The amounts recognized in our consolidated balance sheets for our pension and OPEB plans at December 31, 2011 and 2010
are as follows:
(in millions of dollars)
Current Liability
Noncurrent Liability
Noncurrent Asset
Pension Benefits
U.S. Plans
Non U.S. Plans
OPEB
2011
2010
$
4.5
404.5
—
$
4.2
168.9
—
2011
$
—
—
(17.6)
2010
$
—
—
(23.1)
2011
$ 14.4
164.8
—
2010
$ 14.1
159.1
—
Underfunded (Overfunded) Status
$ 409.0
$ 173.1
$(17.6)
$(23.1)
$179.2
$173.2
Unrecognized Pension and
Postretirement Benefit Costs
Net Actuarial Gain (Loss)
$(673.1)
$(497.5)
Prior Service Credit (Cost)
Deferred Income Tax Asset
Total Included in Accumulated Other
(0.2)
(673.3)
235.7
0.3
(497.2)
174.0
$(25.0)
(0.2)
(25.2)
8.0
$(16.3)
$ (4.1)
$ 1.4
(0.2)
(16.5)
5.8
4.9
0.8
9.9
7.5
8.9
6.4
Comprehensive Income (Loss)
$(437.6)
$(323.2)
$(17.2)
$(10.7)
$ 10.7
$ 15.3
The following table provides the changes recognized in other comprehensive income for the years ended December 31, 2011 and 2010.
(in millions of dollars)
2011
2010
2011
2010
2011
2010
Accumulated Other Comprehensive
Income (Loss) at Beginning of Year
$(323.2)
$(294.1)
$(10.7)
$(39.5)
$15.3
$ 2.9
Pension Benefits
U.S. Plans
Non U.S. Plans
OPEB
Net Actuarial Loss
Amortization
All Other Changes
Prior Service Credit Amortization
Change in Deferred
Income Tax Asset
Accumulated Other Comprehensive
31.9
(207.5)
(0.5)
29.8
(72.8)
(0.5)
—
(8.7)
—
2.4
36.1
—
—
(5.5)
(2.6)
61.7
14.4
2.2
(9.7)
3.5
—
7.0
(2.6)
8.0
Income (Loss) at End of Year
$(437.6)
$(323.2)
$(17.2)
$(10.7)
$10.7
$15.3
Unum 2011 Annual Report
141
Plan Assets
The objective of our pension and OPEB plans is to maximize long-term return, within acceptable risk levels, in a manner that is
consistent with the fiduciary standards of the Employee Retirement Income Security Act (ERISA), while maintaining sufficient liquidity to
pay current benefits and expenses.
Assets for our U.S. pension plans include a diversified blend of domestic and international large cap, mid cap, and small cap equity
securities, U.S. government and agency fixed income securities, corporate fixed income securities, private equity funds of funds, hedge
funds of funds, and cash equivalents. The large cap and mid cap equity securities are comprised of equity index funds that are designed to
track the Standard & Poor’s (S&P) 500 and S&P 400 Mid Cap indices, respectively. Small cap equity securities consist of individual equity
securities as well as index funds that track the Russell 2000 index. International equity investments consist of equity index funds that are
benchmarked against either the Morgan Stanley Capital International (MSCI) Europe Australasia Far East Index or the MSCI All Country World
Index Excluding U.S. These international funds may allocate a certain percentage of their assets to forward currency contracts. It is the
policy of these funds to utilize the contracts solely for the purpose of mitigating exposure to foreign currency risk. Emerging market equity
investments consist of equity index funds that are benchmarked against the MSCI Emerging Markets Index. U.S. government and agency
fixed income securities are comprised of treasury bonds and U.S. agency asset-backed securities. Corporate fixed income securities consist
of investment-grade and below-investment-grade corporate bonds as well as certain asset-backed securities. Alternative investments,
which include private equity funds of funds and hedge funds of funds, utilize proprietary strategies that are intended to have a low
correlation to the U.S. stock market. The target allocations for invested assets are 60 percent equity securities, 30 percent fixed income
securities, and 10 percent alternative investments. Prohibited investments include, but are not limited to, unlisted securities, futures
contracts, options, short sales, and investments in securities issued by the Company or its affiliates.
Assets for our U.K. pension plan are primarily invested in a pooled diversified growth fund. This fund invests in assets such as global
equities, hedge funds, commodities, below-investment-grade fixed income securities, and currencies. The objectives of the fund are to
generate capital appreciation over the course of a complete economic and market cycle and to deliver equity-like returns in the medium-
to-long term while maintaining approximately two thirds of the volatility of equity markets. Performance of this fund is measured against
the U.K. inflation rate plus four percent. The remaining assets in the U.K. plan are invested in leveraged interest rate and inflation swap
funds of varying durations designed to broadly match the interest rate and inflation sensitivities of the plan’s liabilities. The current target
allocation for the assets is 75 percent diversified growth assets and 25 percent interest rate and inflation swap funds. There are no
categories of investments that are specifically prohibited by the U.K. plan, but there are general guidelines that ensure prudent investment
action is taken. Such guidelines include the prevention of the plan from using derivatives for speculative purposes and limiting the
concentration of risk in any one type of investment.
Assets for life insurance benefits payable to certain former retirees covered under the OPEB plan are invested in life insurance contracts
issued by one of our insurance subsidiaries. The terms of these contracts are consistent in all material respects with those the subsidiary
offers to unaffiliated parties that are similarly situated. There are no categories of investments specifically prohibited by the OPEB plan.
We believe our investment portfolios are well diversified by asset class and sector, with no potential risk concentrations in any
one category.
142
Unum 2011 Annual Report
Notes To Consolidated Financial Statements Notes To Consolidated Financial Statements
2011
Unum
The categorization of fair value measurements by input level for the invested assets in our U.S. pension plans is as follows:
(in millions of dollars)
Invested Assets
Equity Securities:
U.S. Large Cap
U.S. Mid Cap
U.S. Small Cap
International
Emerging Markets
Fixed Income Securities:
U.S. Government and Agencies
Corporate
Alternative Investments:
Private Equity Funds of Funds
Hedge Funds of Funds
Cash Equivalents
Total
(in millions of dollars)
Invested Assets
Equity Securities:
U.S. Large Cap
U.S. Mid Cap
U.S. Small Cap
International
Emerging Markets
Fixed Income Securities:
U.S. Government and Agencies
Corporate
Alternative Investments:
Private Equity Funds of Funds
Hedge Funds of Funds
Cash Equivalents
Total
December 31, 2011
Quoted Prices
in Active Markets
for Identical Assets
or Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
—
—
131.1
80.3
—
145.7
71.8
—
—
6.2
$237.4
$ —
$ 237.4
96.4
45.0
85.1
51.6
9.5
139.4
—
—
—
—
—
—
—
—
—
23.7
44.3
—
96.4
176.1
165.4
51.6
155.2
211.2
23.7
44.3
6.2
$435.1
$664.4
$68.0
$1,167.5
December 31, 2010
Quoted Prices
in Active Markets
for Identical Assets
or Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
—
—
146.9
—
—
119.9
69.5
—
—
8.8
$243.5
98.1
50.7
191.2
64.0
9.7
113.7
—
—
—
$345.1
$770.9
$ —
$ 243.5
—
—
—
—
—
—
15.0
46.0
—
$61.0
98.1
197.6
191.2
64.0
129.6
183.2
15.0
46.0
8.8
$1,177.0
Unum 2011 Annual Report
143
Level 1 equity and fixed income securities consist of individual holdings and funds that are valued based on unadjusted quoted prices
from active markets for identical securities. Level 2 equity securities consist of funds that are valued based on the net asset value (NAV) of
the underlying holdings. These investments have no unfunded commitments and no specific redemption restrictions. Level 2 fixed income
securities are valued using observable inputs through market corroborated pricing.
Alternative investments are valued based on the NAV of the underlying holdings in a period ranging from one month to one quarter
in arrears. We evaluate the need for adjustments to the NAV based on market conditions and discussions with fund managers in the period
subsequent to the valuation date and prior to issuance of the financial statements. We made no adjustments to the NAV for 2011 or 2010.
The hedge funds of funds have no redemption restrictions. The private equity funds of funds cannot be redeemed by investors, and
distributions are received following the maturity of the underlying assets. It is estimated that these underlying assets will begin to mature
between five and eight years from the date of initial investment.
Changes in our U.S. pension plans’ assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3)
during the years ended December 31, 2011 and 2010 are as follows:
Year Ended December 31, 2011
Actual Return on Plan Assets
Level 3 Transfers
Beginning
Held at
Sold During
(in millions of dollars)
Private Equity Funds of Funds
Hedge Funds of Funds
Total
of Year
$15.0
46.0
$61.0
Year End
the Year
Purchases
Sales
$ 3.0
(1.6)
$ 1.4
$ —
(0.1)
$ 6.5
6.9
$(0.1)
$13.4
$(0.8)
(6.9)
$(7.7)
Into
$—
—
$—
Out of
$—
—
$—
Year Ended December 31, 2010
Actual Return on Plan Assets
Level 3 Transfers
Beginning
Held at
Sold During
(in millions of dollars)
Private Equity Funds of Funds
Hedge Funds of Funds
Total
of Year
$ 8.2
37.8
$46.0
Year End
the Year
Purchases
Sales
$0.6
2.8
$3.4
$—
—
$—
$ 6.2
5.4
$11.6
$—
—
$—
Into
$—
—
$—
Out of
$—
—
$—
End
of Year
$23.7
44.3
$68.0
End
of Year
$15.0
46.0
$61.0
144
Unum 2011 Annual Report
Notes To Consolidated Financial Statements
2011
Unum
The categorization of fair value measurements by input level for the assets in our U.K. pension plan is as follows:
(in millions of dollars)
Plan Assets
Diversified Growth Assets
Fixed Interest and Index-linked Securities
Cash Equivalents
Total Plan Assets
(in millions of dollars)
Plan Assets
Diversified Growth Assets
U.K. Fixed Interest Corporate Bonds
U.K. Index-linked Government Bonds
Cash Equivalents
Total Plan Assets
December 31, 2011
Quoted Prices
in Active Markets
for Identical Assets
or Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$ —
—
0.8
$0.8
$123.7
63.5
—
$187.2
$—
—
—
$—
December 31, 2010
Quoted Prices
in Active Markets
for Identical Assets
or Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$ —
—
—
0.2
$0.2
$106.6
61.1
8.1
—
$175.8
$—
—
—
—
$—
Total
$123.7
63.5
0.8
$188.0
Total
$106.6
61.1
8.1
0.2
$176.0
Level 2 assets consist of funds that are valued based on the NAV of the underlying holdings. These investments have no unfunded
commitments and no specific redemption restrictions.
The categorization of fair value measurements by input level for the assets in our OPEB plan is as follows:
(in millions of dollars)
Assets
Life Insurance Contracts
(in millions of dollars)
Assets
Life Insurance Contracts
December 31, 2011
Quoted Prices
in Active Markets
for Identical Assets
or Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$—
$—
$11.7
$11.7
December 31, 2010
Quoted Prices
in Active Markets
for Identical Assets
or Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$—
$—
$11.9
$11.9
The fair value is represented by the actuarial present value of future cash flows of the contracts.
Unum 2011 Annual Report
145
Changes in our OPEB plan assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the
years ended December 31, 2011 and 2010 are as follows:
(in millions of dollars)
Life Insurance Contracts
(in millions of dollars)
Life Insurance Contracts
Year Ended December 31, 2011
Beginning of
Actual Return
Net Benefits and
Year
$11.9
on Plan Assets
Contributions
Expenses Paid
$0.2
$14.7
$(15.1)
Year Ended December 31, 2010
Beginning of
Actual Return
Net Benefits and
Year
$11.9
on Plan Assets
Contributions
Expenses Paid
$0.4
$14.5
$(14.9)
End of
Year
$11.7
End of
Year
$11.9
For the years end December 31, 2011 and 2010, the actual return on plan assets relates solely to investments still held at the reporting
date. There were no transfers into or out of level 3 during 2011 or 2010.
Measurement Assumptions
We use a December 31 measurement date for each of our plans. The weighted average assumptions used in the measurement of our
benefit obligations as of December 31 and our net periodic benefit costs for the years ended December 31 are as follows:
Benefit Obligations
Discount Rate
Rate of Compensation Increase
Net Periodic Benefit Cost
Discount Rate
Expected Return on Plan Assets
Rate of Compensation Increase
Pension Benefits
U.S. Plans
Non U.S. Plans
OPEB
2011
2010
2011
2010
2011
2010
5.40%
4.00%
5.80%
7.50%
4.00%
5.80%
4.00%
6.40%
7.50%
4.00%
4.90%
3.85%
5.60%
6.70%
4.50%
5.60%
4.50%
5.70%
6.90%
4.50%
5.20%
—
5.60%
5.75%
—
5.60%
—
5.90%
5.75%
—
We set the discount rate assumption annually for each of our retirement-related benefit plans at the measurement date to reflect the
yield of a portfolio of high quality fixed income debt instruments matched against the projected cash flows for future benefits.
Our long-term rate of return on plan assets assumption is an estimate, based on statistical analysis, of the average annual assumed
return that will be produced from the plan assets until current benefits are paid. The market-related value equals the fair value of assets,
determined as of the measurement date. Our expectations for the future investment returns of the asset categories were based on a
combination of historical market performance and evaluations of investment forecasts obtained from external consultants and economists.
The methodology underlying the return assumption included the various elements of the expected return for each asset class such as
long-term rates of return, volatility of returns, and the correlation of returns between various asset classes. The expected return for the total
portfolio was calculated based on the plan’s strategic asset allocation. Investment risk is measured and monitored on an ongoing basis
through annual liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews. Risk tolerance is
established through consideration of plan liabilities, plan funded status, and corporate financial condition.
The expected return assumption for the life insurance reserve for our OPEB plan at December 31, 2011 and 2010 was 5.75 percent,
which was based on full investment in fixed income securities with an average book yield of 6.27 percent and 6.21 percent in 2011 and
2010, respectively.
146
Unum 2011 Annual Report
Notes To Consolidated Financial Statements
2011
Unum
Our rate of compensation increase assumption is generally based on periodic studies of compensation trends.
For measurement purposes at December 31, 2011 and 2010, the annual rate of increase in the per capita cost of covered postretirement
health care benefits assumed for the next calendar year was 8.50 percent and 9.00 percent, respectively, for benefits payable to both
retirees prior to Medicare eligibility as well as Medicare eligible retirees. The rate was assumed to change gradually to 5.00 percent by the
end of 2019 and remain at that level thereafter.
The medical and dental premium used to determine the per retiree employer subsidy are capped. If the cap is not reached by the year
2015, the caps are then set equal to the year 2015 premium. Certain of the current retirees and all future retirees are subject to the cap.
Net Periodic Benefit Cost
The following table provides the components of the net periodic benefit cost for the plans described above for the years ended
December 31.
(in millions of dollars)
2011
2010
2009
2011
2010
2009
2011
Pension Benefits
U.S. Plans
Non U.S. Plans
OPEB
2010
2009
Service Cost
Interest Cost
$ 42.7
$ 36.5
$ 29.6
$ 4.8
$ 4.9
$ 4.9
$ 1.9
$ 2.6
$ 2.9
77.6
71.1
64.0
8.8
9.5
8.7
10.0
10.8
Expected Return on Plan Assets
(87.6)
(70.5)
(52.8)
(12.2)
(10.7)
(9.4)
(0.7)
(0.6)
11.3
(0.7)
Amortization of:
Net Actuarial Loss
Prior Service Credit
31.9
29.8
41.1
(0.5)
(0.5)
(0.5)
—
—
2.4
—
2.4
—
—
—
—
(2.6)
(2.6)
(2.8)
Total
$ 64.1
$ 66.4
$ 81.4
$ 1.4
$ 6.1
$ 6.6
$ 8.6
$10.2
$10.7
A one percent increase or decrease in the assumed health care cost trend rate at December 31, 2011 would have increased
(decreased) the service cost and interest cost by $0.2 million and $(0.2) million, respectively, and the postretirement benefit obligation by
$3.8 million and $(3.0) million, respectively.
Our OPEB plan currently receives a subsidy from the federal government under the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Medicare Act). This act allows an employer to choose whether to coordinate prescription drug benefits
under a retiree medical plan with the Medicare prescription drug benefit or to keep the company plan design as it is and receive a subsidy
from the federal government. When the Medicare Act became effective in 2006, we initially elected to receive the subsidy from the federal
government with plans to defer our coordination with the new prescription drug benefit until a later date. This anticipated change was
reflected in the net periodic benefit cost. In 2009, we amended the plan design to stop the deferral of coordination of benefits and elected
to continue receiving the existing subsidy from the federal government. This election resulted in a $4.4 million prior service credit that
began amortization in 2010. We received subsidy payments of $1.3 million and $1.4 million in 2011 and 2010, respectively. Our expected
benefit payments in future years have been reduced by the amount of subsidy payments we expect to receive.
The unrecognized net actuarial loss and prior service credit included in accumulated other comprehensive income and expected to
be amortized and included in net periodic pension cost during 2012 is $45.9 million before tax and $29.9 million after tax. The prior service
credit expected to be amortized and included as a reduction to net periodic cost for our OPEB plan during 2012 is $2.6 million before tax
and $1.7 million after tax.
Unum 2011 Annual Report
147
Benefit Payments
The following table provides expected benefit payments, which reflect expected future service, as appropriate.
Pension Benefits
OPEB
(in millions of dollars)
U.S. Plans
Non U.S. Plans
Gross
Subsidy Payments
Net
Year
2012
2013
2014
2015
2016
2017–2021
Funding Policy
$ 33.3
37.2
41.8
46.4
52.5
366.7
$ 4.6
5.1
5.3
5.8
5.9
37.1
$16.0
16.4
16.6
16.7
16.6
79.1
$ 1.6
1.8
1.9
2.1
2.2
12.7
$14.4
14.6
14.7
14.6
14.4
66.4
The funding policy for our U.S. qualified defined benefit plan is to contribute annually an amount at least equal to the minimum annual
contribution required under ERISA and other applicable laws, but generally not greater than the maximum amount that can be deducted
for federal income tax purposes. We made voluntary contributions to our U.S. qualified defined benefit pension plan of $67.0 million and
$100.0 million during the first and fourth quarters of 2010, respectively. The fourth quarter of 2010 contribution was made in lieu of our
planned 2011 contribution, and we made no additional contributions to our U.S. qualified defined benefit plan during 2011. We expect to
make a voluntary contribution of approximately $53.0 million to our U.S. qualified defined benefit plan during 2012. The funding policy for
our U.S. non-qualified defined benefit pension plan is to contribute the amount of the benefit payments made during the year. Our
expected return on plan assets and discount rate will not affect the cash contributions we are required to make to our U.S. pension and
OPEB plans because we have met all minimum funding requirements required under ERISA.
We contribute to our U.K. plan in accordance with a schedule of contributions which requires that we contribute to the plan at the rate
of at least 24.8 percent of pensionable salaries for active members of the plan, plus 0.4 percent of pensionable salaries for all employees
(including active members of the plan) who are entitled to lump sum death in service benefits under the plan, sufficient to meet the
minimum funding requirement under U.K. legislation. We made contributions of $4.7 million and $5.0 million in 2011 and 2010,
respectively, or approximately £2.9 million and £3.2 million. We expect to make contributions of approximately £2.9 million during 2012.
Our OPEB plan represents a non-vested, non-guaranteed obligation, and current regulations do not require specific funding levels for
these benefits, which are comprised of retiree life, medical, and dental benefits. It is our practice to use general assets to pay medical and
dental claims as they come due in lieu of utilizing plan assets for the medical and dental benefit portions of our OPEB plan.
Note 9. Stockholders’ Equity and Earnings Per Common Share
Common Stock
In May 2010, our board of directors authorized the repurchase of up to $500.0 million of Unum Group’s common stock. The share
repurchase program had an expiration date of May 2011. For the year ended December 31, 2010, we repurchased 16.4 million shares at a
cost of $356.0 million, including commissions of $0.3 million, under this share repurchase program.
In February 2011, our board of directors authorized the repurchase of up to $1.0 billion of Unum Group’s common stock, in addition to
the amount remaining to be repurchased under the $500.0 million authorization. The $1.0 billion share repurchase program has an
expiration date of August 2012.
148
Unum 2011 Annual Report
Notes To Consolidated Financial Statements
2011
Unum
In February 2011, we repurchased 7.1 million shares, at a cost of $200.0 million, using an accelerated repurchase agreement with a
financial counterparty. As part of this transaction, we simultaneously entered into a forward contract indexed to the price of Unum Group
common stock, which subjected the transaction to a future price adjustment. Under the terms of the repurchase agreement, we were to
receive, or be required to pay, a price adjustment based on the volume weighted average price of Unum Group common stock during the
term of the agreement, less a discount. Any price adjustment payable to us was to be settled in shares of Unum Group common stock. Any
price adjustment we would have been required to pay would have been settled in either cash or common stock at our option. The final
price adjustment settlement occurred in March 2011, resulting in the delivery to us of 0.6 million additional shares. In total, we repurchased
7.7 million shares pursuant to the accelerated repurchase agreement, which completed the $500.0 million repurchase authorization and
initiated the $1.0 billion repurchase program.
In addition to these repurchases, for the year ended December 31, 2011, we repurchased an additional 17.7 million shares on the open
market at a cost of $419.9 million, including commissions of $0.3 million. The dollar value of shares remaining under the $1.0 billion
repurchase program was $524.7 million at December 31, 2011.
Pursuant to these repurchase programs, we retired 7.7 million shares during 2011. All other repurchased shares have been classified as
treasury stock and accounted for using the cost method.
Preferred Stock
Unum Group has 25,000,000 shares of preferred stock authorized with a par value of $0.10 per share. No preferred stock has been
issued to date.
Earnings Per Common Share
Net income per common share is determined as follows:
(in millions of dollars, except share data)
Numerator
Net Income
Denominator (000s)
Weighted Average Common Shares — Basic
Dilution for Assumed Exercises of Stock Options
and Nonvested Stock Awards
Year Ended December 31
2011
2010
2009
$235.4
$886.1
$852.6
302,399.8
325,839.0
331,266.2
1,171.2
1,382.1
870.0
Weighted Average Common Shares — Assuming Dilution
303,571.0
327,221.1
332,136.2
Net Income Per Common Share
Basic
Assuming Dilution
$ 0.78
$ 0.78
$2.72
$2.71
$ 2.57
$ 2.57
We use the treasury stock method to account for the effect of outstanding stock options, nonvested stock awards, and performance
restricted stock units on the computation of dilutive earnings per share. Under this method, these potential common shares will each have
a dilutive effect, as individually measured, when the average market price of Unum Group common stock during the period exceeds the
exercise price of the stock options, the grant price of the nonvested stock awards, and/or the threshold stock price of performance
restricted stock units. For further discussion of stock-based awards see Note 10.
The outstanding stock options have exercise prices ranging from $11.37 to $26.29, the nonvested stock awards have grant prices
ranging from $10.59 to $26.31, and the performance restricted stock units had a threshold stock price of $26.00.
Unum 2011 Annual Report
149
In computing earnings per share assuming dilution, only potential common shares that are dilutive (those that reduce earnings
per share) are included. Potential common shares not included in the computation of dilutive earnings per share because their impact
would be antidilutive, based on current market prices, approximated 2.1 million, 3.5 million, and 7.1 million shares of common stock
for the years ended December 31, 2011, 2010, and 2009, respectively.
Note 10. Stock-Based Compensation
Description of Stock Plans
Under the stock incentive plan of 2007 (the 2007 Plan), up to 35.00 million shares of common stock are available for awards to
our employees, officers, consultants, and directors. Awards may be in the form of stock options, stock appreciation rights, restricted stock,
restricted stock units, performance units, and other stock-based awards. Each full value award, defined as any award other than a stock
option or stock appreciation right, is counted as 2.7 shares. The exercise price for stock options issued cannot be less than the fair value of
the underlying common stock as of the grant date. Stock options generally have a term of eight years after the date of grant and vest after
three years. At December 31, 2011, approximately 18.25 million shares were available for future grants under the 2007 Plan.
Under the broad-based stock plan of 2001 (the 2001 Plan), up to 2.00 million shares of common stock were available for stock option
awards to our employees, officers, consultants, and brokers, excluding certain senior officers and directors. The 2001 Plan was terminated
in December 2007 for purposes of any further grants, and no shares were available at December 31, 2011. Stock options under the 2001
Plan had a maximum term of ten years after the date of grant and generally vested after three years.
Under the stock plan of 1999 (the 1999 Plan), an aggregate of up to 17.50 million shares of common stock were available for awards
to our employees, officers, brokers, and directors. Awards could be in the form of stock options, stock appreciation rights, stock awards,
dividend equivalent awards, or any other right or interest relating to stock. The 1999 Plan was terminated in May 2007 for purposes of any
further grants, other than reload grants, for which 250,000 shares were available at December 31, 2011. Stock options under the 1999 Plan
have a maximum term of ten years after the date of grant and generally vest after three years.
We issue new shares of common stock for all of our stock plan vestings and exercises.
Nonvested Stock Awards
Activity for nonvested stock awards classified as equity is as follows:
Outstanding at December 31, 2010
Granted
Vested
Forfeited
Outstanding at December 31, 2011
Shares (000s)
Weighted Average Grant Date Fair Value
2,099
715
(1,106)
(47)
1,661
$16.85
26.13
17.35
19.21
20.36
Nonvested stock awards vest over a one to three year service period, beginning at the date of grant, and the compensation cost
is recognized ratably during the vesting period. Forfeitable dividend equivalents on nonvested stock awards are accrued in the form
of additional restricted stock units. Compensation cost for nonvested stock awards subject to accelerated vesting upon retirement is
recognized over the implicit service period.
The weighted average grant date fair value per share for nonvested stock awards granted during 2011, 2010, and 2009 was $26.13,
$20.91, and $12.32, respectively. The total fair value of shares vested during 2011, 2010, and 2009 was $19.2 million, $19.0 million, and
$17.5 million, respectively. At December 31, 2011, we had $11.5 million of unrecognized compensation cost related to nonvested stock
awards that will be recognized over a weighted average period of 0.7 years.
150
Unum 2011 Annual Report
Notes To Consolidated Financial Statements
Notes To Consolidated Financial Statements
2011
Unum
Cash-Settled Awards
Activity for cash-settled awards classified as a liability is as follows:
Outstanding at December 31, 2010
Granted
Vested
Outstanding at December 31, 2011
Shares (000s)
Weighted Average Grant Date Fair Value
102
85
(34)
153
$20.79
26.22
20.79
23.80
Cash-settled awards vest over a one to three year service period, beginning at the date of grant, and the compensation cost is recognized
ratably during the vesting period. Forfeitable dividend equivalents on cash-settled awards are accrued in the form of additional units.
Compensation cost for cash-settled awards subject to accelerated vesting upon retirement is recognized over the implicit service period.
The amount payable per unit awarded is equal to the price per share of Unum Group’s common stock at settlement of the award,
and as such, we measure the value of the award each reporting period based on the current stock price. The effects of changes in the stock
price during the service period are recognized as compensation cost over the service period. Changes in the amount of the liability due to
stock price changes after the service period are compensation cost of the period in which the changes occur.
The weighted average grant date fair value per unit for cash-settled awards granted during 2011 and 2010 was $26.22 and $20.79,
respectively. The total fair value of cash-settled awards vested and paid during 2011 was $0.7 million and $0.9 million, respectively.
No cash-settled awards were granted prior to 2010, and none vested prior to 2011. There is no unrecognized compensation cost related to
the cash-settled awards, other than future changes in the liability due to future stock price changes, as the units do not require additional
future service.
Performance Restricted Stock Units (PRSUs)
In 2007, we issued approximately 1.25 million PRSUs with a grant date fair value of $15.99. Vesting for this grant was contingent
upon meeting various company threshold performance and stock price conditions by December 31, 2011. Forfeitable dividend equivalents
on PRSUs were accrued in the form of additional restricted stock units.
We estimated the fair value on the date of initial grant using the Monte-Carlo model. The following assumptions were used to value
the grant:
• Expected volatility of 29 percent, based on our historical daily stock prices.
• Expected life of 4.4 years, which equaled the maximum term.
• Expected dividend yield of 1.24 percent, based on the dividend rate at the date of grant.
• Risk free interest rate of 3.97 percent, based on the yield of treasury bonds at the date of grant.
We used the accelerated method of amortization for the recognition of compensation expense, which treated each of the three
vesting tranches as a separate award over the expected life of the unit. Even though the performance conditions were attained, the stock
price condition was not met at December 31, 2011. As a result, no PRSUs vested under this program.
Unum 2011 Annual Report
151
Stock Options
Stock option activity is summarized as follows:
Outstanding at December 31, 2010
Granted
Exercised
Expired
Outstanding at December 31, 2011
Exercisable at December 31, 2011
Shares
(000s)
3,357
216
(657)
(1,439)
1,477
947
Remaining
Intrinsic
Weighted Average
Contractual
Exercise Price
Term (in years)
Value
(000s)
$22.58
26.29
17.62
27.91
20.13
$19.89
5.0
4.4
$3,811
$2,414
All outstanding stock options at December 31, 2011 are expected to vest. Stock options vest over a one to three year service period,
beginning at the date of grant, and the compensation cost is recognized ratably during the vesting period. Compensation cost for stock
options subject to accelerated vesting upon retirement is recognized over the implicit service period.
The total intrinsic value of options exercised during 2011, 2010, and 2009 was $3.9 million, $3.2 million, and $2.6 million, respectively.
The total fair value of options that vested during 2011, 2010, and 2009 was $2.7 million, $2.5 million, and $2.0 million, respectively.
At December 31, 2011, we had $0.5 million of unrecognized compensation cost related to stock options that will be recognized over a
weighted average period of 0.7 years.
The weighted average grant date fair value of options granted during 2011, 2010, and 2009 was $11.73, $9.04, and $4.45, respectively.
We estimated the fair value on the date of grant using the Black-Scholes valuation model. The following assumptions were used to value
the 2011, 2010, and 2009 grants:
• Expected volatility of 53 percent, 55 percent, and 50 percent, respectively, based on our historical daily stock prices.
• Expected life of 5.5 years for 2011, and 5.0 years for both 2010 and 2009, based on historical average years to exercise.
• Expected dividend yield of 1.41 percent, 1.59 percent, and 1.68 percent, respectively, based on the dividend rate at the date of grant.
• Risk free interest rate of 2.37 percent, 2.33 percent, and 1.89 percent, respectively, based on the yield of treasury bonds at the
date of grant.
Expense
Compensation expense for the stock plans, as reported in our consolidated statements of income, is as follows:
(in millions of dollars)
Nonvested Stock Awards and Cash-Settled Awards
Performance Restricted Stock Units
Stock Options
Other
Total Compensation Expense, Before Income Tax
Total Compensation Expense, Net of Income Tax
Year Ended December 31
2010
$20.7
1.5
2.5
0.5
$25.2
$17.2
2009
$22.4
6.8
3.7
1.0
$33.9
$22.0
2011
$19.6
0.4
2.7
0.8
$23.5
$15.3
Cash received under all share-based payment arrangements for the years ended December 31, 2011, 2010, and 2009 was
$14.8 million, $10.0 million, and $8.0 million, respectively.
152
Unum 2011 Annual Report
Notes To Consolidated Financial Statements
Notes To Consolidated Financial Statements
2011
Unum
Note 11. Reinsurance
Our reinsurance recoverable at December 31, 2011 relates to 91 companies. Fourteen major companies account for approximately
92 percent of our reinsurance recoverable at December 31, 2011, and are all companies rated A or better by A.M. Best Company (AM Best)
or are fully securitized by letters of credit or investment-grade fixed maturity securities held in trust. Approximately seven percent of our
reinsurance recoverable relates to business reinsured either with companies rated A- or better by AM Best, with overseas entities with
equivalent ratings or backed by letters of credit or trust agreements, or through reinsurance arrangements wherein we retain the assets
in our general account. The remaining one percent of our reinsurance recoverable is held by companies either rated below A- by AM Best
or not rated.
Reinsurance data is as follows:
(in millions of dollars)
Direct Premium Income
Reinsurance Assumed
Reinsurance Ceded
Net Premium Income
Ceded Benefits and Change in Reserves for Future Benefits
Note 12. Segment Information
Year Ended December 31
2011
2010
2009
$7,521.5
$7,434.3
$7,494.7
216.6
(223.9)
$7,514.2
$ 609.2
241.3
(244.2)
$7,431.4
$ 602.2
239.5
(258.7)
$7,475.5
$ 604.2
We have three major business segments: Unum US, Unum UK, and Colonial Life. Our other segments are the Closed Block segment
and the Corporate Segment. Effective December 31, 2011, we made certain changes to our segment classifications, described as follows.
Prior period segment results have been restated to reflect these changes in reporting classifications.
The Unum US segment includes group long-term and short-term disability insurance, group life and accidental death and
dismemberment products, and supplemental and voluntary lines of business, comprised of recently issued disability insurance and
voluntary benefits products. These products are marketed through our field sales personnel who work in conjunction with independent
brokers and consultants.
The Unum UK segment includes insurance for group long-term disability, group life, and supplemental and voluntary lines of business.
The supplemental and voluntary lines of business are comprised of individual disability, critical illness, and voluntary benefits products.
Unum UK’s products are sold primarily in the United Kingdom through field sales personnel and independent brokers and consultants.
The Colonial Life segment includes insurance for accident, sickness, and disability products, life products, and cancer and critical illness
products marketed to employees at the workplace through an agency sales force and brokers.
The Closed Block segment, which previously included only our closed block of individual disability products, now also includes our
long-term care line of business, previously reported in the Unum US segment, and certain other insurance products which were previously
included in our Corporate and Other segment, which is now named Corporate. The individual disability line of business in our Closed Block
segment generally consists of those policies in-force before the substantial changes in product offerings, pricing, distribution, and
underwriting, which generally occurred during the period 1994 through 1998. A small amount of new business continued to be sold after
these changes, but we stopped selling new individual disability policies in this segment at the beginning of 2004 other than update
features contractually allowable on existing policies. Long-term care includes both the group and individual long-term care product lines.
The other insurance products line of business consists of certain other products no longer actively marketed, including individual life and
corporate-owned life insurance, reinsurance pools and management operations, group pension, health insurance, and individual annuities.
Unum 2011 Annual Report
153
We reclassified our long-term care products from the Unum US segment to the Closed Block segment following completion of a 2011
comprehensive and strategic review of our long-term care business. We had previously discontinued selling individual long-term care in
2009, and in February 2012 we announced that we would discontinue selling group long-term care as well. Because both group and
individual long-term care are now considered closed blocks of business, we reclassified these products to the Closed Block segment.
We also reclassified our other insurance products not actively marketed to the Closed Block segment. The inclusion of all closed blocks of
business into one operating segment aligns with our reporting and monitoring of our closed blocks of business within a discrete segment
and is consistent with our separation of these blocks of business from the lines of business which actively market new products. Included in
2011 segment results for the Closed Block are a charge related to the impairment of long-term care deferred acquisition costs and reserve
charges for our long-term care and individual disability closed blocks of business. See Note 5 for further discussion.
The Corporate segment includes investment income on corporate assets not specifically allocated to a line of business, interest expense
on corporate debt other than non-recourse debt, and certain other corporate income and expense not allocated to a line of business.
In the following segment financial data, “operating revenue” excludes net realized investment gains and losses. “Operating income”
or “operating loss” excludes net realized investment gains and losses and income tax. These are considered non-GAAP financial measures.
These non-GAAP financial measures of “operating revenue” and “operating income” or “operating loss” differ from revenue and income
before income tax as presented in our consolidated statements of income prepared in accordance with GAAP due to the exclusion of
before-tax realized investment gains and losses. We measure segment performance excluding realized investment gains and losses
because we believe that this performance measure is a better indicator of the ongoing businesses and the underlying trends in the
businesses. Our investment focus is on investment income to support our insurance liabilities as opposed to the generation of realized
investment gains and losses, and a long-term focus is necessary to maintain profitability over the life of the business.
Realized investment gains and losses depend on market conditions and do not necessarily relate to decisions regarding the underlying
business of our segments. However, income or loss excluding realized investment gains and losses does not replace net income or net loss
as a measure of overall profitability. We may experience realized investment losses, which will affect future earnings levels since our
underlying business is long-term in nature and we need to earn the assumed interest rates in our liabilities.
A reconciliation of total operating revenue and operating income by segment to revenue and net income as reported in our
consolidated statements of income follows:
(in millions of dollars)
Operating Revenue by Segment
Net Realized Investment Gain (Loss)
Revenue
Operating Income by Segment
Net Realized Investment Gain (Loss)
Income Tax
Net Income
Year Ended December 31
2011
2010
2009
$10,282.9
$10,168.5
$10,079.3
(4.9)
24.7
$10,278.0
$10,193.2
$ 262.1
$ 1,306.6
(4.9)
21.8
24.7
445.2
11.7
$10,091.0
$ 1,280.6
11.7
439.7
$ 235.4
$ 886.1
$ 852.6
154
Unum 2011 Annual Report
Notes To Consolidated Financial Statements
Premium income by major line of business within each of our segments is presented as follows.
2011
Unum
(in millions of dollars)
Unum US
Group Disability
Group Long-term Disability
Group Short-term Disability
Group Life and Accidental Death & Dismemberment
Group Life
Accidental Death & Dismemberment
Supplemental and Voluntary
Individual Disability — Recently Issued
Voluntary Benefits
Unum UK
Group Long-term Disability
Group Life
Supplemental and Voluntary
Colonial Life
Accident, Sickness, and Disability
Life
Cancer and Critical Illness
Closed Block
Individual Disability
Long-term Care
All Other
Total
Year Ended December 31
2011
2010
2009
$1,580.2
455.2
$1,639.4
430.9
$1,726.9
432.8
1,106.7
109.2
464.7
580.0
4,296.0
419.6
203.6
64.4
687.6
695.3
190.7
249.3
1,090.3
106.1
457.9
530.8
4,255.4
421.2
171.6
57.8
650.6
661.0
176.5
238.2
1,057.7
104.9
463.7
492.4
4,278.4
482.4
147.8
55.9
686.1
625.8
165.6
223.7
1,135.3
1,075.7
1,015.1
787.0
608.1
0.2
1,395.3
$7,514.2
847.0
599.2
3.5
1,449.7
$7,431.4
898.5
594.7
2.7
1,495.9
$7,475.5
Unum 2011 Annual Report
155
Selected operating statement data by segment is presented as follows:
(in millions of dollars)
Unum US
Unum UK
Colonial Life
Closed Block
Corporate
Total
Year Ended December 31, 2011
Premium Income
Net Investment Income
Other Income
$4,296.0
951.4
121.6
$687.6
189.9
0.3
$1,135.3
$1,395.3
$
—
$ 7,514.2
132.4
0.5
1,189.7
106.1
56.2
20.6
2,519.6
249.1
Operating Revenue
$5,369.0
$877.8
$1,268.2
$2,691.1
$ 76.8
$10,282.9
Operating Income (Loss)
Interest and Debt Expense
Depreciation and Amortization
$ 819.8
$
1.0
$ 356.5
$192.0
$
—
$ 40.7
$ 282.1
$ —
$ 202.4
$ (921.5)
$(110.3)
$ 262.1
$ 10.5
$ 22.7
$ 131.8
$
0.8
$ 143.3
$ 623.1
Year Ended December 31, 2010
Premium Income
Net Investment Income
Other Income
$4,255.4
941.5
122.8
$650.6
170.5
1.2
$1,075.7
$1,449.7
$
—
$ 7,431.4
122.5
0.7
1,166.4
113.6
94.6
3.3
2,495.5
241.6
Operating Revenue
$5,319.7
$822.3
$1,198.9
$2,729.7
$ 97.9
$10,168.5
Operating Income (Loss)
Interest and Debt Expense
Depreciation and Amortization
Year Ended December 31, 2009
Premium Income
Net Investment Income
Other Income
Operating Revenue
Operating Income (Loss)
Interest and Debt Expense
Depreciation and Amortization
$ 769.1
$ 1.2
$ 360.9
$4,278.4
934.3
118.8
$5,331.5
$ 717.6
$ 2.0
$ 344.7
$208.8
$
—
$ 38.2
$686.1
124.5
2.4
$813.0
$249.6
$
—
$ 42.4
$ 282.2
$
—
$ 200.1
$ 117.6
$ 11.7
$ 31.6
$ (71.1)
$ 1,306.6
$ 128.9
$ 1.1
$ 141.8
$ 631.9
$1,015.1
$1,495.9
$
—
$ 7,475.5
114.3
0.5
1,106.8
131.1
66.7
4.4
2,346.6
257.2
$1,129.9
$2,733.8
$ 71.1
$10,079.3
$ 280.9
$
—
$ 192.0
$ 124.4
$ 16.6
$ 29.6
$ (91.9)
$ 1,280.6
$ 106.8
$ 1.6
$ 125.4
$ 610.3
156
Unum 2011 Annual Report
Notes To Consolidated Financial Statements
2011
Unum
The following table provides the changes in deferred acquisition costs by segment:
(in millions of dollars)
Year Ended December 31, 2011
Beginning of Year
Capitalized
Amortization
Impairment of Long-term Care Deferred Acquisition Costs
Adjustment Related to Unrealized Investment Gains/Losses
Foreign Currency
End of Year
Year Ended December 31, 2010
Beginning of Year
Capitalized
Amortization
Adjustment Related to Unrealized Investment Gains/Losses
Foreign Currency
End of Year
Year Ended December 31, 2009
Beginning of Year
Capitalized
Amortization
Adjustment Related to Unrealized Investment Gains/Losses
Foreign Currency
End of Year
Assets by segment are as follows:
Unum US
Unum UK
Colonial Life
Closed Block
Total
$1,362.2
$ 58.2
$ 805.0
$ 295.7
$2,521.1
333.8
(298.7)
—
(5.0)
—
30.6
(29.2)
—
—
(0.2)
252.9
(189.0)
11.0
(16.9)
—
(289.8)
(19.7)
—
—
—
628.3
(533.8)
(289.8)
(24.7)
(0.2)
$1,392.3
$ 59.4
$ 849.2
$
—
$2,300.9
$1,351.5
$ 58.9
$ 761.2
$ 310.9
$2,482.5
323.2
(307.9)
(4.6)
—
28.3
(27.0)
—
(2.0)
246.4
(187.2)
(15.4)
—
9.8
(25.0)
—
—
607.7
(547.1)
(20.0)
(2.0)
$1,362.2
$ 58.2
$ 805.0
$ 295.7
$2,521.1
$1,341.4
$ 54.7
$ 755.9
$ 320.4
$2,472.4
321.6
(293.8)
(17.7)
—
29.1
(30.5)
—
5.6
229.0
(178.5)
(45.2)
—
13.9
(23.4)
—
—
593.6
(526.2)
(62.9)
5.6
$1,351.5
$ 58.9
$ 761.2
$ 310.9
$2,482.5
(in millions of dollars)
Unum US
Unum UK
Colonial Life
Closed Block
Corporate
Total
December 31
2010
2009
$19,004.1
$18,572.1
3,568.1
3,352.5
31,439.5
2,814.8
3,386.3
3,047.3
29,418.7
2,883.3
$60,179.0
$57,307.7
Revenue is primarily derived from sources in the United States and the United Kingdom. There are no material revenues or assets
attributable to foreign operations other than those reported in our Unum UK segment.
We report goodwill in our Unum US segment and in our Unum UK segment, which are the segments expected to benefit from the
originating business combinations. At both December 31, 2011 and 2010, goodwill was $201.2 million, with $190.0 million attributable to
Unum US and the remainder attributable to Unum UK.
Stockholders’ equity is allocated to the operating segments on the basis of an internal allocation formula that reflects the volume
and risk components of each operating segment’s business and aligns allocated equity with our target capital levels for regulatory and
rating agency purposes. We modify this formula periodically to recognize changes in the views of capital requirements.
Unum 2011 Annual Report
157
Note 13. Commitments and Contingent Liabilities
Commitments
We have noncancelable lease obligations on certain office space and equipment. As of December 31, 2011, the aggregate net
minimum lease payments were $215.0 million payable as follows: $28.8 million in 2012, $28.4 million in 2013, $22.9 million in 2014, $18.7
million in 2015, $13.9 million in 2016, and $102.3 million thereafter. Rental expense for the years ended December 31, 2011, 2010, and
2009 was $36.1 million, $29.3 million, and $30.1 million, respectively.
At December 31, 2011, we had unfunded commitments of $65.4 million for certain of our private equity partnerships, $0.5 million
for underlying partnerships in our investment in a special purpose entity, and $35.0 million for certain private placement fixed maturity
securities. The funds are not legally binding at December 31, 2011 and may or may not be funded during the term of the investments. In
addition, we have a legally binding unfunded commitment of $160.6 million, which is recognized as a liability in our consolidated balance
sheets, to fund tax credit partnership investments.
Contingent Liabilities
We are a defendant in a number of litigation matters. In some of these matters, no specified amount is sought. In others, very large or
indeterminate amounts, including punitive and treble damages, are asserted. There is a wide variation of pleading practice permitted in the
United States courts with respect to requests for monetary damages, including some courts in which no specified amount is required and
others which allow the plaintiff to state only that the amount sought is sufficient to invoke the jurisdiction of that court. Further, some
jurisdictions permit plaintiffs to allege damages well in excess of reasonably possible verdicts. Based on our extensive experience and that
of others in the industry with respect to litigating or resolving claims through settlement over an extended period of time, we believe that
the monetary damages asserted in a lawsuit or claim bear little relation to the merits of the case, or the likely disposition value. Therefore,
the specific monetary relief sought is not stated.
Unless indicated otherwise in the descriptions below, reserves have not been established for litigation and contingencies. An
estimated loss is accrued when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
Claims Handling Matters
We and our insurance subsidiaries, as part of our normal operations in managing disability claims, are engaged in claim litigation
where disputes arise as a result of a denial or termination of benefits. Most typically these lawsuits are filed on behalf of a single claimant
or policyholder, and in some of these individual actions punitive damages are sought, such as claims alleging bad faith in the handling of
insurance claims. For our general claim litigation, we maintain reserves based on experience to satisfy judgments and settlements in the
normal course. We expect that the ultimate liability, if any, with respect to general claim litigation, after consideration of the reserves
maintained, will not be material to our consolidated financial condition. Nevertheless, given the inherent unpredictability of litigation, it is
possible that an adverse outcome in certain claim litigation involving punitive damages could, from time to time, have a material adverse
effect on our consolidated results of operations in a period, depending on the results of operations for the particular period.
From time to time class action allegations are pursued where the claimant or policyholder purports to represent a larger number
of individuals who are similarly situated. Since each insurance claim is evaluated based on its own merits, there is rarely a single act or
series of actions, which can properly be addressed by a class action. Nevertheless, we monitor these cases closely and defend ourselves
appropriately where these allegations are made.
158
Unum 2011 Annual Report
Notes To Consolidated Financial Statements 2011
Unum
Broker Compensation, Quoting Process, and Other Matters
Examinations and Investigations
In November 2009, we were contacted by Florida state insurance regulators to discuss a resolution of their investigation of our
compliance with state and federal laws with respect to producer compensation, solicitation activities, policies sold to state or municipal
entities, and information regarding compensation arrangements with brokers. This investigation commenced in 2005, and, until the
November 2009 contact, we had received no communications from the regulators regarding this matter since December 2007.
In December 2011, the parties reached a settlement to resolve this investigation, the amount of which was immaterial to our consolidated
financial position and results of operations.
Broker-Related Litigation
We and certain of our subsidiaries, along with many other insurance brokers and insurers, were named as defendants in a series
of putative class actions that were transferred to the U.S. District Court for the District of New Jersey for coordinated or consolidated pretrial
proceedings as part of multidistrict litigation (MDL) No. 1663, In re Insurance Brokerage Antitrust Litigation. The plaintiffs in MDL No. 1663
were ordered to file a consolidated amended complaint which alleged, among other things, that the defendants violated federal and state
antitrust laws, the Racketeer Influenced Corrupt Organizations Act (RICO), Employee Retirement Income Security Act (ERISA), and various
state common law requirements by engaging in alleged bid rigging and customer allocation and by paying undisclosed compensation to
insurance brokers to steer business to defendant insurers. After several amendments to the complaint, all claims against us were dismissed,
and the dismissal was affirmed on appeal by the United States Court of Appeals for the Third Circuit.
The only remaining proceeding against us that is part of MDL No. 1663 is Palm Tree Computers Systems, Inc. v. ACE USA, et al., which
was filed in the Florida state Circuit Court on February 16, 2005. The complaint contains allegations similar to those referred to above. The
case was removed to federal court and, on October 20, 2005, the case was transferred to MDL No. 1663. Plaintiffs renewed a motion to
remand the case to the state court in Florida, and that motion was denied without prejudice on October 16, 2009. There have been no further
proceedings in this case subsequent to that date, while the Court considers motions to dismiss filed by other defendants in MDL No. 1663.
Miscellaneous Matters
In September 2008, we received service of a complaint, in an adversary proceeding in connection with the bankruptcy case
In re Quebecor World (USA) Inc., et al. entitled Official Committee of Unsecured Creditors of Quebecor World (USA) Inc., et al., v. American
United Life Insurance Company, et al., filed in the United States Bankruptcy Court for the Southern District of New York. The complaint
alleges that we received preference payments relating to notes held by certain of our insurance subsidiaries and seeks to avoid and recover
such payments plus interest and cost of the action. On July 27, 2011, the Bankruptcy Court ruled in our favor, granting a summary judgment
motion to dismiss the case against us and the other defendants. This decision has been appealed to the United States District Court for the
Southern District of New York.
In October 2010, Denise Merrimon, Bobby S. Mowery, and all others similarly situated vs. Unum Life Insurance Company of America,
was filed in the United States District Court for the District of Maine. This is a putative class action alleging that we breached fiduciary duties
owed to certain beneficiaries under certain group life insurance policies when we paid life insurance proceeds by establishing interest-
bearing retained asset accounts rather than by mailing checks. Plaintiffs seek to represent a class of beneficiaries under group life insurance
contracts that were part of ERISA employee welfare benefit plans and under which we paid death benefits via retained asset accounts.
The plaintiffs’ principal theories in the case are: (1) funds held in retained asset accounts were plan assets, and the proceeds earned by
us from investing those funds belonged to the beneficiaries, and (2) payment of claims using retained asset accounts did not constitute
Unum 2011 Annual Report
159
payment under Maine’s late payment statute, requiring us to pay interest on the undrawn retained asset account funds at an annual rate of
18 percent. On February 3, 2012, the District Court issued an opinion rejecting both of plaintiffs’ principal theories and ordering judgment for
us. At the same time, however, the District Court held that we breached a fiduciary duty to the beneficiaries by failing to pay rates
comparable to the best rates available in the market for demand deposits. The District Court also certified a class of people who, during a
certain period of time, were beneficiaries under certain group life insurance contracts that were part of ERISA employee welfare benefit
plans and were paid death benefits using retained asset accounts. The District Court authorized the parties to make an immediate appeal of
its decision to the First Circuit Court of Appeals, and we plan to do so.
In March 2011, we received a request for information from an independent third party as part of an examination on behalf of 26 states
and the District of Columbia to evaluate our compliance with the unclaimed property laws of the participating states. Industry-wide
practices are currently under review concerning the identification and handling of unclaimed property by insurers, and numerous other
insurers are under similar examination. We are cooperating fully with this examination.
In July 2011, the New York State Insurance Department, now known as the New York State Department of Financial Services, issued
a special request to approximately 160 insurers, including Unum Group’s New York licensed insurance subsidiaries, which requires the
insurers to cross-check their life insurance policies, annuity contracts, and retained asset accounts with the latest version of the Social
Security Master Death Index to identify any matches. Insurers are also requested to investigate the matches to determine if death benefits
are due, to locate the beneficiaries, and to make payments where appropriate. We are cooperating fully with this request. We accrued an
estimated loss contingency in the fourth quarter of 2011, the amount of which was immaterial to our consolidated financial position and
results of operations.
It is possible other state jurisdictions may pursue similar investigations or inquiries or issue directives similar to the New York State
Department of Financial Services’ letter. It is possible that the audits and related activity may result in additional payments to beneficiaries,
the payment of abandoned funds under state law, and/or administrative penalties. We are currently unable to estimate the reasonably
possible amount of any additional payments.
In 2009, a Pennsylvania-based insurance company and its affiliates were ordered into rehabilitation, and the Pennsylvania Insurance
Commissioner, who was appointed as the Rehabilitator, filed petitions for liquidation with the Commonwealth Court of Pennsylvania. Under
Pennsylvania legislation, payment of covered claims and other related insurance obligations are provided, within prescribed limits, by state
guaranty funds. These guaranty funds assess fees on insurance companies that sell insurance within the state, which are generally based
on a company’s pro rata portion of premiums written or received prior to the insolvency. Under Pennsylvania statutes, an insurer is declared
insolvent only after it is placed under an order of liquidation by a court of competent jurisdiction with a finding for insolvency. If and when
the formal order of liquidation is issued, we would then be subject to an assessment and would record a contingent liability net of any
recoverable premium tax offsets. We do not believe our exposure to potential assessment is material to our consolidated financial position
or results of operations.
Summary
Various lawsuits against us, in addition to those discussed above, have arisen in the normal course of business. Further, state insurance
regulatory authorities and other federal and state authorities regularly make inquiries and conduct investigations concerning our compliance
with applicable insurance and other laws and regulations.
Given the complexity and scope of our litigation and regulatory matters, it is not possible to predict the ultimate outcome of all
pending investigations or legal proceedings or provide reasonable estimates of potential losses, except if noted in connection with specific
matters. It is possible that our results of operations or cash flows in a particular period could be materially affected by an ultimate
unfavorable outcome of pending litigation or regulatory matters depending, in part, on our results of operations or cash flows for the
particular period. We believe, however, that the ultimate outcome of all pending litigation and regulatory matters, after consideration of
applicable reserves and rights to indemnification, should not have a material adverse effect on our financial position.
160
Unum 2011 Annual Report
Notes To Consolidated Financial Statements 2011
Unum
Note 14. Statutory Financial Information
Statutory Net Income, Capital and Surplus, and Dividends
Statutory net income for U.S. life insurance companies is reported in conformity with statutory accounting principles prescribed by the
National Association of Insurance Commissioners (NAIC) and adopted by applicable domiciliary state laws. The commissioners of the states
of domicile have the right to permit other specific practices that may deviate from prescribed practices. For the years ended December 31,
2011, 2010, or 2009, none of the states of domicile for our U.S. insurance subsidiaries had adopted accounting practices that differed
materially from statutory accounting principles prescribed by the NAIC.
The statutory operating results of our traditional U.S. insurance subsidiaries, which exclude Tailwind Re and Northwind Re, as well as
the statutory results for these two special purpose financial captive U.S. insurance subsidiaries, are as follows:
(in millions of dollars)
Combined Net Income
Traditional U.S. Insurance Subsidiaries
Tailwind Re and Northwind Re
Combined Net Gain from Operations
Traditional U.S. Insurance Subsidiaries
Tailwind Re and Northwind Re
Statutory capital and surplus is as follows:
(in millions of dollars)
Combined Capital and Surplus
Traditional U.S. Insurance Subsidiaries
Tailwind Re and Northwind Re
Year Ended December 31
2011
2010
2009
$642.9
$ 80.0
$664.0
$ 80.4
$628.8
$ 79.1
$645.7
$ 79.2
$639.2
$ 87.2
$741.2
$ 87.2
December 31
2011
2010
$3,461.3
$1,226.5
$3,395.1
$1,276.9
Restrictions under applicable state insurance laws limit the amount of dividends that can be paid to a parent company from its
insurance subsidiaries in any 12-month period without prior approval by regulatory authorities. For life insurance companies domiciled in
the United States, that limitation generally equals, depending on the state of domicile, either ten percent of an insurer’s statutory surplus
with respect to policyholders as of the preceding year end or the statutory net gain from operations, excluding realized investment gains
and losses, of the preceding year.
The payment of dividends to a parent company from its insurance subsidiaries is generally further limited to the amount of unassigned
statutory surplus. Based on the restrictions under current law, $634.4 million is available during 2012 for the payment of ordinary dividends
to Unum Group from its traditional U.S. insurance subsidiaries, which exclude Tailwind Re and Northwind Re. The ability of Tailwind Re and
Northwind Re to pay dividends to their respective parent companies, Tailwind Holdings and Northwind Holdings, wholly-owned
subsidiaries of Unum Group, will depend on their satisfaction of applicable regulatory requirements and on the performance of the business
reinsured by Tailwind Re and Northwind Re.
We also have the ability to receive dividends from our United Kingdom insurance subsidiary, Unum Limited, subject to applicable
insurance company regulations and capital guidance in the United Kingdom. Approximately £187.0 million is available for the payment of
dividends from Unum Limited during 2012, subject to regulatory approval.
Unum 2011 Annual Report
161
Deposits
At December 31, 2011 and 2010, our U.S. insurance subsidiaries had on deposit with U.S. regulatory authorities securities with a book
value of $294.3 million and $293.6 million, respectively, held for the protection of policyholders.
Note 15. Quarterly Results of Operations (Unaudited)
The following is a summary of our unaudited quarterly results of operations for 2011 and 2010:
(in millions of dollars, except share data)
4th
3rd
2nd
1st
2011
Premium Income
Net Investment Income
Net Realized Investment Gain (Loss)
Total Revenue
Income (Loss) Before Income Tax
Net Income (Loss)
Net Income (Loss) Per Common Share
Basic
Assuming Dilution
$1,888.5
$1,881.2
$1,875.0
$1,869.5
634.6
7.4
2,604.8
(704.3)
(425.4)
(1.45)
(1.45)
629.2
(23.9)
2,545.6
293.3
205.6
0.69
0.69
637.1
(3.6)
2,564.5
338.0
229.8
0.75
0.75
618.7
15.2
2,563.1
330.2
225.4
0.72
0.72
(in millions of dollars, except share data)
4th
3rd
2nd
1st
2010
Premium Income
Net Investment Income
Net Realized Investment Gain (Loss)
Total Revenue
Income Before Income Tax
Net Income
Net Income Per Common Share
Basic
Assuming Dilution
$1,868.2
$1,850.2
$1,849.8
$1,863.2
634.3
27.5
2,593.1
335.5
225.8
0.71
0.71
618.4
1.1
2,527.9
326.5
220.8
0.68
0.68
629.8
(29.5)
2,510.6
308.1
209.7
0.63
0.63
613.0
25.6
2,561.6
361.2
229.8
0.69
0.69
Items incurring during the fourth quarter of 2011 that affected the comparability of our financial results by quarter are as follows:
• A deferred acquisition costs impairment charge of $289.8 million before tax and $188.4 million after tax related to our long-term
care business.
• A reserve charge of $573.6 million before tax and $372.8 million after tax related to our long-term care business.
• A reserve charge of $183.5 million before tax and $119.3 million after tax related to our individual disability closed block business.
• An income tax benefit of $41.3 million due to a final settlement with the IRS with respect to our appeal of audit adjustments for the
tax years 1996 to 2004.
• An income tax charge of $18.6 million related to the repatriation of £150.0 million of dividends from our U.K. subsidiaries.
See Notes 5 and 6 for further discussion of the above items.
162
Unum 2011 Annual Report
Notes To Consolidated Financial Statements
Report of Independent
Registered Public Accounting Firm
The Board of Directors and Stockholders
Unum Group
2011
Unum
We have audited the accompanying consolidated balance sheets of Unum Group and subsidiaries as of December 31, 2011 and 2010,
and the related consolidated statements of income, stockholders’ equity, cash flows, and comprehensive income for each of the three years
in the period ended December 31, 2011. Our audits also included the financial statement schedules listed in the index at Item 15(a)(2).
These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Unum Group and subsidiaries at December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also in our
opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present
fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Unum Group and subsidiaries’ internal control over financial reporting as of December 31, 2011, based on criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our
report dated February 24, 2012 expressed an unqualified opinion thereon.
Chattanooga, Tennessee
February 24, 2012
Unum 2011 Annual Report
163
Management’s Annual Report on
Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined
in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting encompasses
the processes and procedures management has established to (i) maintain records that, in reasonable detail, accurately and fairly reflect the
Company’s transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with U.S. generally accepted accounting principles; (iii) provide reasonable assurance that receipts and
expenditures are appropriately authorized; and (iv) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, any
projection of the evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We assessed the effectiveness of our internal control over financial reporting, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and concluded that, as of
December 31, 2011, we maintained effective internal control over financial reporting.
164
Unum 2011 Annual Report
Report of Independent
Registered Public Accounting Firm
The Board of Directors and Stockholders
Unum Group
2011
Unum
We have audited Unum Group and subsidiaries’ internal control over financial reporting as of December 31, 2011, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Unum Group and subsidiaries’ management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
“Management’s Annual Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Unum Group and subsidiaries maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2011, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Unum Group and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements
of income, stockholders’ equity, cash flows, and comprehensive income for each of the three years in the period ended December 31, 2011,
and our report dated February 24, 2012 expressed an unqualified opinion thereon.
Chattanooga, Tennessee
February 24, 2012
Unum 2011 Annual Report
165
Cautionary Statement Regarding
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Act) provides a “safe harbor” to encourage companies to provide prospective
information, as long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ materially from those included in the forward-looking statements. Certain
information contained in this Annual Report or in any other written or oral statements made by us in communications with the financial
community or contained in documents filed with the Securities and Exchange Commission (SEC), may be considered forward-looking statements
within the meaning of the Act. Forward-looking statements are those not based on historical information, but rather relate to our outlook,
future operations, strategies, financial results, or other developments. Forward-looking statements speak only as of the date made. We
undertake no obligation to update these statements, even if made available on our website or otherwise. These statements may be made
directly in this document or may be made part of this document by reference to other documents filed by us with the SEC, a practice which is
known as “incorporation by reference.” You can find many of these statements by looking for words such as “will,” “may,” “should,” “could,”
“believes,” “expects,” “anticipates,” “estimates,” “intends,” “projects,” “goals,” “objectives,” or similar expressions in this document or in
documents incorporated herein.
These forward-looking statements are subject to numerous assumptions, risks, and uncertainties, many of which are beyond our control.
We caution readers that the following factors, in addition to other factors mentioned from time to time, may cause actual results to differ
materially from those contemplated by the forward-looking statements:
• Unfavorable economic or business conditions, both domestic and foreign.
• Legislative, regulatory, or tax changes, both domestic and foreign, including the effect of potential legislation and increased regulation
in the current political environment.
• Sustained periods of low interest rates.
• Changes in claim incidence, recovery rates, mortality rates, and offsets due to, among other factors, the rate of unemployment and
consumer confidence, the emergence of new diseases, epidemics, or pandemics, new trends and developments in medical
treatments, the effectiveness of claims management operations, and changes in government programs.
• Fluctuation in insurance reserve liabilities.
• Investment results, including, but not limited to, realized investment losses resulting from defaults, contractual terms of derivative
contracts, and impairments that differ from our assumptions and historical experience.
• The lack of appropriate investments in the market which can be acquired to match our liability cash flows and duration.
• Changes in interest rates, credit spreads, and securities prices.
• Increased competition from other insurers and financial services companies due to industry consolidation or other factors.
• Changes in demand for our products due to, among other factors, changes in societal attitudes, the rate of unemployment, and
consumer confidence.
• Changes in accounting standards, practices, or policies.
• Changes in our financial strength and credit ratings.
• Rating agency actions, state insurance department market conduct examinations and other inquiries, other governmental investigations
and actions, and negative media attention.
• Effectiveness in managing our operating risks and the implementation of operational improvements and strategic growth initiatives.
• Actual experience that deviates from our assumptions used in pricing, underwriting, and reserving.
• Actual persistency and/or sales growth that is higher or lower than projected.
• Effectiveness of our risk management program.
• The level and results of litigation.
• Currency exchange rates.
• Ability of our subsidiaries to pay dividends as a result of regulatory restrictions.
• Ability and willingness of reinsurers to meet their obligations.
• Changes in assumptions related to intangible assets such as deferred acquisition costs, value of business acquired, and goodwill.
• Ability to recover our systems and information in the event of a disaster or unanticipated event and to protect our systems and
information from unauthorized access and deliberate attacks.
• Events or consequences relating to political instability, terrorism, or acts of war, both domestic and foreign.
All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly
qualified in their entirety by the cautionary statements contained or referred to in this section.
166
Unum 2011 Annual Report
Appendix
Reconciliation of Non-GAAP Financial Measures
2011
Unum
(in millions)
Year Ended December 31, 2011
Core Operations
Closed Block
Corporate
Total
Year Ended December 31, 2007*
Core Operations
Closed Block
Corporate
Total
Average
Allocated
Equity
Adjusted
After-tax
After-Tax Operating Special Item
Adjustments
Income (Loss)
After-Tax
Operating
Income (Loss)
Return
on Equity
$ 6,020.2
$876.1
$
—
$ 876.1
14.6%
2,195.1
(347.6)
91.0
(70.3)
(680.5)
22.7
(589.5)
(47.6)
$ 7,867.7
$896.8
$(657.8)
$ 239.0
11.4%
$ 5,608.6
$782.0
$ (43.1)
$ 738.9
13.9%
2,739.3
(1,313.6)
88.3
(84.1)
8.6
(36.1)
96.9
(120.2)
$ 7,034.3
$786.2
$ (70.6)
$ 715.6
11.2%
December 31
(in millions)
2011
2010
2007*
2006
Total Stockholders’ Equity, As Reported
$8,577.0
$8,944.4
$8,039.9
$7,718.8
Net Unrealized Gain on Securities
Net Gain on Cash Flow Hedges
605.8
408.7
410.4
361.0
356.1
182.5
534.8
194.2
Total Stockholders’ Equity, As Adjusted
$7,562.5
$8,173.0
$7,501.3
$6,989.8
Average Equity, As Adjusted
$7,867.7
$7,034.3
*Average adjusted for cumulative effect of accounting principle changes of $422.5 million effective January 1, 2007.
(in millions)
After-tax Operating Income, As Adjusted
Deferred Acquisition Costs and Reserve Charges for Closed Block, Net of Tax
Regulatory Reassessment Charges, Net of Tax
Special Tax Items and Debt Extinguishment Costs
After-tax Operating Income
Net Realized Investment Loss, Net of Tax
Income from Continuing Operations
Income from Discontinued Operations
Net Income
Year Ended December 31
2011
$ 896.8
(680.5)
—
22.7
239.0
(3.6)
235.4
—
2007
$786.2
—
(34.5)
(36.1)
715.6
(43.2)
672.4
6.9
$ 235.4
$679.3
Unum 2011 Annual Report
167
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168
Unum 2011 Annual Report
Shareholder Information
CORPORATE OFFICES
1 Fountain Square
Chattanooga, TN 37402
423 294 1011
2211 Congress Street
Portland, ME 04122
207 575 2211
1200 Colonial Life Blvd.
Columbia, SC 29210
803 798 7000
Milton Court
Dorking, Surrey RH4 3LZ
England
011 44 1306 887766
18 Chestnut Street
Worcester, MA 01608
774 437 4441
PRINCIPAL SUBSIDIARIES
CONTACT INFORMATION
Provident Life and
Accident Insurance Company
Chattanooga, Tennessee
Unum Life Insurance
Company of America
Portland, Maine
Colonial Life & Accident
Insurance Company
Columbia, South Carolina
Unum Limited
Dorking, England
The Paul Revere Life
Insurance Company
Worcester, Massachusetts
First Unum Life Insurance Company
New York, New York
Provident Life and Casualty
Insurance Company
Chattanooga, Tennessee
Provident Investment Management, LLC
Chattanooga, Tennessee
Investor Relations
Thomas A.H. White
Senior Vice President, Investor Relations
1 Fountain Square
Chattanooga, TN 37402
423 294 8996
Corporate Information
Susan N. Roth
Corporate Secretary
1 Fountain Square
Chattanooga, TN 37402
800 718 8824
Transfer Agent
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
800 446 2617
COMMON STOCK INFORMATION
Common stock of Unum Group is traded
on the New York Stock Exchange.
The stock symbol is UNM.
STOCK PERFORMANCE
The following graph shows a five year comparison
of cumulative total returns for our common stock’s
historical performance, the S&P 500 Index, and the
Insurance Index (non-weighted average of “total
returns” from the S&P Life & Health Index and the
S&P Multi-line Index). Past performance is not an
indication of future results.
$150
$125
$100
$75
$50
$25
0
2006
Unum Group
$100.00
Insurance Index
$100.00
S&P 500
$100.00
2007
$115.95
$ 99.05
$105.49
2008
$91.97
$31.21
$66.46
2009
$98.31
$39.31
$84.05
2010
$123.91
$ 48.84
$ 96.71
2011
$109.52
$ 37.17
$ 98.75
MARKET PRICE AND DIVIDENDS
Quarterly market prices and dividends declared and paid per share of common stock are as follows:
High
Low
Dividend
High
Low
Dividend
2011
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
$27.04
$24.36
$0.0925
27.16
26.41
25.00
24.29
20.24
19.72
0.0925
0.1050
0.1050
2010
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
As of February 22, 2012, there were 13,443 registered holders of common stock.
$25.00
$18.56
$0.0825
26.42
23.57
24.59
20.98
19.30
21.34
0.0825
0.0925
0.0925
Unum 2011 Annual Report
15
© 2012 Unum Group. All rights reserved. Unum is a registered
trademark and marketing brand of Unum Group and its
insuring subsidiaries.
This product is printed on paper whose fiber has been certified by an
independent 3rd party as coming from responsible fiber sources.
Unum Group
1 Fountain Square
Chattanooga, TN 37402
www.unum.com
16
Unum 2011 Annual Report