Aligned with
Opportunity
2013 ANNUAL REPORT
Financial Highlights
Unum Group
Income Per Share(1)
After-tax Operating Income(2)
Net Realized Investment Gain (Loss)
Non-operating Retirement-related Loss
Unclaimed Death Benefits Reserve Increase, Net of Tax
Group Life Waiver of Premium Benefit Reserve
2013
2012
2011
2010
2009
$ 3.32
$ 3.15
$ 2.98
$ 2.73
$ 2.64
0.02
(0.08)
(0.24)
0.13
(0.11)
—
(0.01)
(0.07)
—
—
0.05
(0.06)
—
—
(0.09)
—
—
—
Reduction, Net of Tax
0.21
—
Deferred Acquisition Costs and Reserve Charges
for Closed Block, Net of Tax
Special Tax Items
Net Income
Book Value Per Share
Total Stockholders’ Equity
Net Unrealized Gain on Securities
Net Gain on Cash Flow Hedges
Foreign Currency Translation Adjustment
Unrecognized Pension and Postretirement Benefit Costs
Total Stockholders’ Equity, Excluding Accumulated
—
—
—
—
(2.04)
0.08
—
(0.03)
—
—
$ 3.23
$ 3.17
$ 0.94
$ 2.69
$ 2.55
$ 33.30
$ 31.87
$ 27.91
$ 26.80
$ 24.25
0.52
1.52
(0.18)
(0.88)
3.23
1.48
(0.26)
(2.13)
2.11
1.39
(0.41)
(1.51)
1.31
1.14
(0.34)
(1.00)
1.16
1.12
(0.23)
(1.00)
Other Comprehensive Income
$ 32.32
$ 29.55
$ 26.33
$ 25.69
$ 23.20
(1) Per share amounts for operating statement data assume dilution.
(2) We analyze our performance using non-GAAP financial measures which exclude certain items and the related tax thereon from net income.
We believe “After-tax Operating Income,” which is a non-GAAP financial measure and excludes certain items as specified above, is a better
performance measure and a better indicator of the profitability and underlying trends in our business. Realized investment gains or losses
depend on market conditions and do not necessarily relate to decisions regarding the underlying business of our company. The amortization
of prior period actuarial gains or losses, a component of the net periodic benefit cost for our pensions and other postretirement benefit plans,
is driven by market performance, as well as plan amendments, and is not indicative of the operational results of our businesses. We also
exclude certain other items specified above 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 and does not replace the comparable GAAP
measures in the determination of overall profitability.
Thomas R. Watjen
President and
Chief Executive Officer
UNUM 2013 ANNUAL REPORT / 1
To Our Shareholders,
Customers and Colleagues
At Unum, we believe two attributes stand
above all others in driving the long-term
success of our business: remaining disciplined
in all that we do and consistently executing
on our plans. While hardly flashy, over the
last 10 years these two traits have helped
us build strong, trusted relationships with
our clients while enabling us to produce
industry-leading returns in our core businesses
and generate excess capital.
In 2013, we benefited once again from this straightforward approach
to our business as we grew our operating earnings per share for
the eighth consecutive year, enhanced our position in our markets,
maintained a strong financial foundation, and returned significant
capital to our shareholders.
Make no mistake, this remains a challenging environment, with the
slow economic recovery, persistently low interest rates, and improving,
but still tepid, business confidence continuing to create headwinds
for our company. This is nothing new, though, and our results over
the past few years show that we can effectively operate in this
environment by staying focused on the things we can control, while
also aggressively taking the actions needed to capitalize on what
I believe is unprecedented opportunity in our business.
2013 PERFORMANCE
I continue to be very pleased with our overall results. Unum US, our
largest principal operating business, saw improved profitability as we
remained focused on disciplined underwriting and pricing, often at the
expense of top-line growth. Colonial Life’s operating performance was
strong as well, with solid risk results and sound expense management
driving another good year for this business. And Unum UK showed
nice improvement over 2012 as the re-pricing and re-positioning
actions in our group life business began to have a positive impact
on our results.
2 / UNUM 2013 ANNUAL REPORT
Some History is
Worth Repeating
A message from Tom Watjen
While a lot has happened since our founding
more than 165 years ago, one thing hasn’t
changed over that period — our commitment
to protecting the livelihoods of individuals and
their families. Today, more than 25 million
individuals at 170,000 companies rely on
our products and services, and last year
we paid more than $6 billion in financial
support to help keep their aspirations
alive, even in the face of a family tragedy.
We take that responsibility very seriously
today, just as we did in 1848 when our
Unum US predecessor was founded,
and just as we did 75 years ago when
our Colonial Life subsidiary was born —
launching one of the first voluntary benefits
providers in the U.S. — and as we’ve done
since 1970 when our Unum UK predecessor
first offered employee benefits coverage
in that country.
But being in business for a long time doesn’t
entitle you to anything. You must continue
to serve your customers well every day,
you must continue to respond to changes
in the market and invest in your business
and people to maintain a superior product
and service offering, and you must do that
consistently — not just for one quarter or
a year but over the long term. That’s what
our customers, distributors, and stakeholders
who depend on this company expect.
Among the year’s highlights*:
• Operating earnings increased to
$3.32 per share up from $3.15 per
share in 2012 — a 5.4 percent
increase that was at the higher end
of our target range and marked the
eighth consecutive year of operating
EPS growth for the company.
• Operating return on equity for our
principal operating businesses reached
14.2 percent, again exceeding the
industry average, while our total
company return on equity was
11.4 percent.
• Our statutory operating earnings,
a measure of enterprise cash flow,
reached near-record levels and
helped us close the year with a
strong capital position and significant
financial flexibility.
• We bought back $319 million of our
shares during the year, bringing the
amount we’ve repurchased since
2007 to $2.5 billion, or 30 percent of
our outstanding shares. Additionally,
we increased our dividend 11.5 percent,
the fifth consecutive year of double-
digit increases.
• Book value per share† — a strong
measure of enterprise growth —
increased 9.4 percent to $32.32, and
has increased 9.2 percent per year
over the past 5 years.
OPERATING EARNINGS
PER SHARE GROWTH
$
2
6
4
.
$
2
7
3
.
$
3
1
5
.
.
$
3
3
2
.
$
2
9
8
Two areas in particular presented
challenges for us, but I am very pleased
with where we ended the year with
both. The first is the challenge we and
the industry face in profitably growing
our business. This is often the case in
a competitive environment, but in the
first half of the year many employers
(especially smaller ones) were faced
with both an uncertain economic
environment and the challenges
of adapting to the Affordable Care
Act — with the result commonly
being an inability to focus on the
types of benefits we offer. As the
year progressed, however, we saw
improving sales trends.
In addition, our Closed Block segment —
consisting of legacy products such as
long-term care insurance that we no
longer sell but still service — continues
to adversely impact our overall returns.
Last year we substantially strengthened
the resources dedicated to this business,
and also took steps to improve our
operating results and better manage
the capital supporting this area. While
this business will never achieve the
returns envisioned when we wrote it
years ago, the Closed Block stabilized
in 2013 and was in line with our
expectations. I’m confident we are
doing all the right things to ensure
that it does not detract from the solid
performance of our ongoing businesses.
* In analyzing performance, the company
sometimes uses non-GAAP financial measures
that differ from what is reported under GAAP.
Refer to the Financial Highlights and pages 40,
41, 156, and 170 for reconciliations of the
3.5
non-GAAP financial measures used in this
3.0
report, including operating income, operating
2.5
2.0
revenue, operating earnings per share,
1.5
operating return on equity and book value
1.0
per share (excluding accumulated other
0.5
comprehensive income, or AOCI), to the
0.0
11
most directly comparable GAAP measures.
10
12
09
13
2009
2013
† Excludes AOCI.
ALIGNING FOR THE FUTURE
As I mentioned earlier, one of the
greatest challenges for all financial
services companies is finding profitable
long-term growth opportunities. We
can always find revenue growth, but
it often comes with a price we’re not
prepared to pay: sacrificing our risk
and financial objectives. I’m extremely
pleased with the way we have balanced
our growth and profitability goals, and
I’m also encouraged that despite a
challenging first few months of the
year, our sales gained momentum,
our premium grew in the U.S., and
we added more than 20,000 new
employer customers in 2013.
But we’re driven by an even bigger
prize — expanding the market for the
essential financial protection products
and services we provide. Consider that:
• Nearly 70 percent of Americans
and 90 percent of British workers
lack adequate disability and financial
protection benefits, yet many of
those same individuals live paycheck-
to-paycheck and are unable to support
themselves and their families if the
unexpected occurs.
• Unfortunately, life-changing events
happen more frequently than we’d
like to expect — research shows that
one out of four 20-year-olds will be
out of work due to a disability over
the course of their working years.
• For many people, the only avenue
when they find themselves in this
situation is government assistance,
CONSOLIDATED OPERATING
RETURN ON EQUITY
.
1
2
9
%
.
1
1
9
%
.
1
2
2
%
.
1
2
3
%
.
1
1
4
%
2009
2013
but most public programs aren’t
equipped to address this challenge
and won’t even allow an individual
to maintain a reasonable standard
of living.
For the vast majority of consumers,
the workplace is the best place to be
educated about these risks and get
access to affordable financial protection.
In fact, 90 percent of disability and more
than 60 percent of all life insurance
coverage is obtained in the workplace
and, despite the challenges faced by
businesses today, 70 percent of all
employers say they still want to take
an active role in helping protect their
employees’ well-being. Unfortunately,
if workers don’t obtain basic financial
protection through their employer, all
too often they won’t get it at all.
While I believe the need for basic
financial protection has never been
greater, our industry has historically
been unable to reach many of those
who need it most. We are convinced,
though, that this is the time for us to
seize the moment, and we are taking
steps to capitalize on this opportunity.
“ At Unum, we believe two attributes stand above all
others in driving the long-term success of our business:
remaining disciplined in all that we do and consistently
executing on our plans.”
UNUM 2013 ANNUAL REPORT / 3
“ There should be no doubt
about Unum’s commitment
to the business of providing
financial protection to individ-
uals — we staked our claim
to it more than a century and
a half ago and have never
wavered in our commitment
to being a leader in it.”
What history often does is present a pretty
clear road map for the future. Companies
come and go in our industry, at times
aggressively seeking to grow their business
while at other times withdrawing or
retrenching as other corporate priorities
overshadow this segment of their business —
or they’ve tried to grow too quickly without
the right resources or long-term strategy.
There should be no doubt about Unum’s
commitment to the business of providing
financial protection to individuals in the
workplace — we staked our claim to it
more than a century and a half ago and
have never wavered in our commitment
to being a leader in it. After all, it’s our
only business.
Admittedly, over those 165 years we’ve
made some mistakes, but we’ve learned
from them and have become a stronger
company as result. One that won’t make
the same mistakes twice and will strive
to maintain its leadership position in its
business. One that will continue to deliver
on its commitments, not by resting on its
laurels but by quietly reinventing itself to
4 / UNUM 2013 ANNUAL REPORT
build from its rich history — through new
product and service offerings, through
continued enhancements to its operating
platform to better leverage its significant
scale advantage, and through maintaining
a culture where everyone takes pride in
doing the right thing to maintain the trust
and confidence of its customers.
As I mentioned earlier, our Colonial Life
subsidiary is celebrating its 75th anniversary
this year. As was the case when Edwin
Averyt and J. Clifton Judy founded the
business in 1939, what really defines a
company’s culture and brand is its people —
and that has never been more true than
today. Our nearly 10,000 people consistently
fulfill our commitments to our customers
and respect our history, but are also unafraid
to drive innovation and change to ensure
we maintain our leadership position in
our markets, take personally the responsi-
bility we have to our communities and
the environment, and, of course, do all
of this in an ethically and financially
responsible manner.
In short, throughout our entire history
we have built a tremendous legacy and
playbook to guide our future — a future
that looks both similar, and different, from
what we have seen up to now. With our
people ready and our playbook still in hand,
I’ve never been more optimistic about the
prospects for our business or more confident
in our company’s ability to build from our
past successes.
In order to do so, we must better
educate the market on the need for
coverage, simplify our products and
services to make them more under-
standable and affordable, and do so
in a way that doesn’t compromise the
risk and financial objectives that have
been so important to our past success.
In our business, complexity is the
enemy — a concept that became even
more apparent with the confusion that
emerged around health care reform.
Consumers are already overwhelmed,
which means we have an even greater
responsibility to focus on simplicity
and to clearly highlight the value our
products represent to the financial
health of individuals and families. We
are continuing to make further invest-
ments in our consumer research and
marketing to better understand, engage
and inform consumers, and in stream-
lining and leveraging our core processes
and technologies across our three
operating businesses.
In short, there has never been a greater
need for the basic financial protections
we provide. To meet it, we must build
from the successes we’ve had in recent
years and continue to leverage our
capabilities across the entire company.
Our size and scale give us a tremendous
advantage as we look to expand the
market, and we fully intend to capitalize
on our unique position.
OUR PEOPLE AND CULTURE —
OUR GREATEST ASSETS
There’s a reason why we’ve been
able to deliver solid operating results
over an extended period of time, why
we haven’t lowered our investment
standards to stretch for yield, why we
haven’t chased underpriced business,
and why we’ve consistently been
BOOK VALUE PER
SHARE GROWTH*
$
2
5
6
9
.
$
2
6
3
3
.
$
2
3
2
0
.
$
2
9
5
5
.
$
3
2
3
2
.
2009
*Excludes AOCI.
2013
recognized for outstanding customer
service. That reason is our people —
our nearly 10,000 employees who
care about this business and take
personal responsibility for doing
their part to ensure that we deliver
on our commitments to customers,
shareholders, regulators, communities,
and to one another.
We are reminded every day that we
work in an important and honorable
business. Last year alone, we paid
more than $6 billion in benefits to
protect the future of individuals and
their families; we helped more than
230,000 people return to work and
restore a more productive lifestyle;
and we enabled more than 25 million
individuals to take personal ownership
for their and their loved ones’ financial
protection. Throughout the company,
we take great pride in the difference
we make in the lives of millions by
protecting them when they need it
most. And we take seriously the
responsibility of maintaining the
financial strength to meet these
obligations, while also creating long-
term shareholder value.
Probably the most important thing we
can do to ensure we maintain this edge
is to continue to invest in our people —
through increased training, broadening
UNUM 2013 ANNUAL REPORT / 5
and deepening our leadership team,
creating succession plans to maintain
continuity and consistency in our per-
formance, developing talent from within
but also providing opportunities for
those from the outside who can bring
new insights and perspectives to the
company, and aligning our recognition
and compensation plans to support
the goals of the company.
We also continually focus on identifying
and developing people with the poten-
tial to fill key leadership positions in the
company. Of our recent officer-level
openings, for instance, 38 percent
were filled by leaders who were being
promoted and 31 percent were filled
through officer rotations, with the
remaining being hired from outside the
company. Within our entire workforce,
we saw 1,400 promotions and nearly
800 people moving into new roles.
Our people are not only the reason
for the “whys” I mentioned earlier,
they’re what gives me confidence we
will continue to be successful in the
years ahead.
On a related note, after 35 years with
the company, Kevin McCarthy is retiring
from Unum. Kevin has served in many
roles over his career, most recently as
CEO of Unum US and COO of Unum
Group. He has meant a lot to me and
to the entire organization, but perhaps
his most important legacy is his com-
mitment to developing talent. Through
Kevin’s efforts and others around the
company, our leadership team is the
deepest it’s been since I became CEO
in 2003, and that, along with the
engagement and commitment of our
people, sets us up well for the future.
“ As we look to 2014, we will stay true to the principles
that have gotten us to where we are today: solid
plans, disciplined execution, a relentless focus on
the customer, and a commitment to attracting and
retaining the best people in the business.”
2014 OUTLOOK
As we look to 2014, we will stay true
to the principles that have gotten us
to where we are today: solid plans,
disciplined execution, a relentless focus
on the customer, and a commitment
to attracting and retaining the best
people in the business.
The external environment will likely
remain somewhat challenging in 2014,
with low interest rates continuing to
present obstacles for financial services
providers. Rather than relying on rates to
rise or counting on something to happen
that we simply can’t control, we have
taken the pricing actions needed to
mitigate the impact of lower rates.
We will continue to pursue growth
opportunities, but we won’t be afraid
to walk away from business that can’t
be written on a profitable basis. Instead,
we will protect the strong margins
and returns we’ve worked so hard to
build in our core business segments,
at the same time investing in those
things that can help us seize the
opportunities to grow the market.
While generating solid, consistent
operating results is our primary focus,
if we execute our plans well — as we’ve
done for the past decade — we will
continue to generate excess capital.
Deploying that capital in a way that
creates long-term value for our share-
holders will remain a critical area of
focus. The formula we will follow is
fairly simple: balance the needs for
capital in our businesses, with returning
capital to our shareholders through
dividends and share buybacks, with
pursuing acquisitions that fit our strate-
gic and financial objectives. We’ve built
a solid track record of putting our capital
to work, and you can expect us to
continue to do so in the future.
In closing, I would like to express my
appreciation to our board of directors
for their support, and offer a special
thank-you to Michael Passarella who
is retiring from the board after eight
years of service. I also want to thank
our leadership team and all of my
colleagues at the company for doing
the things that allow us to continue
to deliver value for our customers
and shareholders. My confidence in
our future has never been stronger.
On behalf of all of us at Unum, thank you
for your continued support.
Thomas R. Watjen
President and Chief Executive Officer
6 / UNUM 2013 ANNUAL REPORT
An Opportunity to Expand
Financial Protection
The pressing need for financial protection, changing
marketplace, and the increasing role employees play
in selecting and paying for products.
UNUM 2013 ANNUAL REPORT / 7
“ Unum is both a market and thought
leader in financial protection benefits.
With employers, consumers, and
policymakers, we are actively engaged
in enhancing the understanding of the
vital importance of financial protection,
as well as helping more people
prepare for the unexpected.”
Mike Simonds, President and CEO, Unum US
“ With solid financial footing and an
excellent reputation, Colonial Life
meets the financial protection needs
of America’s workers. Our market-
leading benefits counseling support
helps employees understand and fill
their coverage gaps, strengthening
their financial safety nets while
controlling costs for employers.”
Randy Horn, President and CEO, Colonial Life
we see a tremendous opportunity to
businesses. And the need is clear.
grow the financial protection benefits
In the U.S., more than one in four of
market, our view is more expansive.
today’s 20-year-olds will be unable
The true opportunity lies in helping
to work due to injury or illness before
a majority of the modern workforce
they turn 67.
plan for unforeseen circumstances
rather than hoping against them.
With 165 years of industry leadership,
we’re in a strong position to expand
60
With government programs on both
a market with clear potential and
Most workers in the U.S. and U.K. lack
50
sides of the Atlantic stretching fewer
help ensure financial security for today’s
access to benefits that can preserve
40
their financial stability in the face of
resources further and further, the
diverse workforce. Our desire to pursue
responsibility for building a personal
these opportunities is driven by our
30
illness or injury. These vulnerable
financial safety net lands squarely on
understanding of the need to protect
individuals and families could lose
20
individuals. Employers play a critical
the financial stability of individuals,
their financial footing with one difficult
10
role in offering meaningful benefits
families, and communities.
diagnosis or sudden accident. So while
to the employees who strengthen their
0
A CHANGING MARKETPLACE
(% Sales* with Employee Contribution)
54%
Employee Paid
46%
Employer Paid
2003
69%
Employee Paid
31%
Employer
Paid
2013
*U.S. Sales excluding IDI-RI and LTC
8 / UNUM 2013 ANNUAL REPORT
Understanding and Serving Consumers
Making essential financial protection benefits accessible to more
people means constantly developing our understanding of consumer
needs and decision-making. Individuals are increasingly asked to
choose whether to enroll in benefits, and they are more often
responsible for paying for them. But the value of financial protection
benefits is not widely understood by most consumers.
UNUM 2013 ANNUAL REPORT / 9
“ A critical underpinning of our strategy
is technology that allows our people
to anticipate customer needs and
deliver outstanding service to them.
Increasing the flexibility, agility, and
simplicity of our systems will allow us
to quickly respond to market demand.
It’s exciting to see our progress in
building a more nimble, consumer-
focused environment.”
Chris Jerome, Executive Vice President,
Global Services
That’s why we invest first and foremost
simplify our business to make financial
in serving and educating our customers,
protection benefits accessible to more
whether we’re making enrollment
people extends across our businesses.
processes easier and faster, simplify-
ing products and claims processes,
That work starts, however, with a
or expanding the options for doing
deep understanding of the needs of
business with us online. Our drive to
our customers. To effectively educate,
serve, and expand the market, we
harness the power of data to help us
better understand and capture the
opportunities in front of us. Along
with that focus comes a significant
investment in digital capabilities and
outreach to consumers.
There’s no denying that consumers of
every age increasingly expect to be
able to do business online, and in
ways that are easy and customized to
“ Information technology is a key to
serving consumers and making it
easier for them to do business with
us. By connecting that technology
and the power of data from every
corner of our business, we can put
information to work to gain insights
and make strategic decisions as
well as provide better service to
our customers.”
Kate Miller, Senior Vice President
and Global CIO
their needs. We are working from a
significant investments that will help
position of strength, so we will continue
us find new and innovative ways
to do many of the things we’ve
to grow our business and connect
always done well. But we are making
with consumers.
10 / UNUM 2013 ANNUAL REPORT
A Financial Foundation
for the Future
Through the economic headwinds we’ve faced over
the last several years, our ability to deliver consistent
results has not wavered. A prudent investment strategy
and a singular focus on meeting the financial protection
needs of workers and their families have supported our
ability to generate capital that provides us tremendous
financial flexibility.
Since 2007, Unum has executed share
repurchases totaling
$2.5 billion.
This flexibility means we can enhance
our service to customers through
investments in technology, product
development and our people. And
customers benefit from our financial
strength, knowing we’ll be here when
they need us.
Our capital management strategy also
delivers real value for shareholders.
Since 2007, we’ve repurchased
$2.5 billion worth of shares, raised
our dividend payments five times
and seen book value per share grow
for five consecutive years. We’ve also
seen upgrades from each of the four
major rating agencies.
“ Our disciplined approach to our markets
and operating our business has enabled
us to generate solid margins and excess
capital over the last several years. We
have been able to channel this into
investments in our business and the
return of capital to our shareholders
through share repurchases and dividends.
Looking ahead, we see this approach
continuing to provide us with a strong
financial foundation, giving us flexibility
for both sustainable capital management
and the pursuit of our growth objectives.”
Rick McKenney, Executive Vice President and CFO
UNUM 2013 ANNUAL REPORT / 11
“ We have a responsibility to make
investment decisions that are in
the best interest of our shareholders
and customers. That means looking
for sensible opportunities that provide
attractive returns over the long term,
matching the needs of our business. It’s
a simple but powerful guiding principle.”
Breege Farrell, Executive Vice President
and Chief Investment Officer
The financial foundation we’ve built
approach to our business, we’ll be
positions us to take advantage of
well-positioned to deliver even
market opportunities when they arise.
greater value and growth in the
We’re patient, though — after all,
years ahead.
we’ve been in business 165 years.
By continuing to meet the needs of
our customers and taking a disciplined
CAPITAL GENERATION
AND DEPLOYMENT
(Dividend Increase)
.
2
3
8
%
.
1
3
5
%
.
1
2
1
%
.
1
0
0
%
2009
.
1
1
5
%
2013
DIVIDEND GROWTH
X . X % C A G R
$
X
X
X
X
.
$
X
X
X
X
.
$
X
X
X
X
.
$
X
X
X
X
.
2013
$
X
X
X
X
.
2009
12 / UNUM 2013 ANNUAL REPORT
The Enduring Value of Discipline
While we are deeply committed to growing our markets and our business, that
growth will never come at the price of the discipline that has served us so
well over the past 10 years. There is nothing to be gained from chasing
growth at the cost of the strong margins and consistent returns that so
reliably deliver results for our stakeholders. So we will pursue opportunities
for growth, but only when they can be profitably pursued.
UNUM 2013 ANNUAL REPORT / 13
“ A strong value proposition and product
innovations continue to help us expand
the market for financial protection
benefits in the U.K., while a disciplined
approach to our business has brought
the kinds of solid and predictable results
that serve our customers and colleagues.
Above all, we’ve stayed focused on
offering a customer experience that is
second to none.”
Peter O’Donnell, President and CEO, Unum UK
Sometimes that means difficult
have significantly increased the
decisions about walking away from
resources committed to this area.
business or holding firm on pricing,
Though we no longer sell the products
despite intense pressures from
in the Closed Block segment, a sub-
competitors. Those decisions aren’t
stantial portion of our capital supports
easy, but they are part of our culture
this business. Our leadership team
of discipline and consistency.
has a sharp focus on managing that
capital and taking deliberate actions
“ Disciplined operational execution
is critical to successfully serving our
Closed Block customers. Applying
that same discipline to the develop-
ment of tools and analytic capabilities
to fully understand how that business
will play out over time will be critical
to our success.”
Jack McGarry, President and CEO,
Closed Block Operations
In addition to our measured approach
to improve operating results.
to pursuing future opportunities, our
business dedicates substantial resources
The start of 2014 finds us with strong
the discipline at the heart of our past
to the thoughtful management of our
market positions, a solid financial base,
success. We believe it’s a healthy way
Closed Block of legacy business. We
and a commitment to maintaining
to build an enduring company.
14 / UNUM 2013 ANNUAL REPORT
A Strong Business Starts
with a Strong Team
Unum’s employees are our brand, and they
live the promise of that brand every day.
They live it through their diligent delivery
on our company’s promise to help people
when they need it most.
UNUM 2013 ANNUAL REPORT / 15
“ Making our people a priority is, and
will remain, essential to our success
in the steadfast delivery on our
commitments. Our greatest strength
as a company undoubtedly lies in
them, and we continually reinforce
our investment in their development
as individuals and leaders.”
Diane Garofalo, Senior Vice President,
Corporate Human Resources
Their expertise, energy, and passion
trustworthy companies, a Best Place
for what they do have made us an
to work in Insurance, and a Best Place
industry leader and an employer
to Work in the states where we have
known for a thriving workplace
home offices.
culture. This culture is one reason
Unum is one of Forbes’ 100 most
Our keen focus on our people never
shifts. At the foundation of our success
is our commitment to attracting, retain-
ing, and developing the best talent in
the industry. Every day, our nearly
10,000 people rise to the challenge of
supporting our business, our clients, and
each other. Emphasizing leadership at
every level, we celebrate and reward
our people and their achievements.
We also invest in our employees by
offering meaningful opportunities to
expand their skills and discover new
strengths and abilities.
“ Our employees are our brand, and
every day they deliver on that promise
to our customers, brokers, shareholders,
and communities. We have created
a culture where doing the right thing
and striving to anticipate and meet the
ever-changing needs of our customers
and the marketplace are at its core.”
Joe Foley, Senior Vice President,
Corporate Marketing and Public Relations
to employees is clear. As the market
From formal professional development
and our business evolve, so do the
programs to peer-to-peer mentoring
opportunities to grow the talent that
and stretch goals, Unum’s commitment
keeps our brand strong.
Unum has been named a
“Best place to work for insurance”
for four of the last five years.
16 / UNUM 2013 ANNUAL REPORT
From left to right: A.S. MacMillan, Jr., Michael J. Passarella, Thomas R. Watjen, Timothy F. Keaney, Gloria C. Larson, William J. Ryan, Ronald E. Goldsberry,
Thomas Kinser, Kevin T. Kabat, Theodore H. Bunting, Jr., Edward J. Muhl, Pamela H. Godwin, E. Michael Caulfield
Directors and Officers
BOARD OF DIRECTORS
William J. Ryan
Chairman of the Board
of the Company;
Retired Chairman,
TD Banknorth Inc.
Theodore H. Bunting, Jr.
Group President, Utility Operations,
Entergy Corporation
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
Vice Chairman and Chief Executive Officer,
Fifth Third Bancorp
Timothy F. Keaney
Vice Chairman,
The Bank of New York Mellon Corporation
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; Theodore H. Bunting, Jr.;
E. Michael Caulfield; Timothy F. Keaney;
Thomas Kinser Finance Committee:
E. Michael Caulfield, Chairperson; Pamela
H. Godwin; Ronald E. Goldsberry; Timothy F.
Keaney Governance Committee: Ronald E.
Goldsberry, Chairperson; Pamela H. Godwin;
Kevin T. Kabat; Gloria C. Larson Human Capital
Committee: Kevin T. Kabat, Chairperson;
Thomas Kinser; A.S. MacMillan, Jr.; Edward J.
Muhl Regulatory Compliance Committee:
Gloria C. Larson, Chairperson; Theodore H.
Bunting, Jr.; 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
Breege A. Farrell
Executive Vice President and
Chief Investment Officer
Randall C. Horn
President and Chief Executive Officer,
Colonial Life
Christopher J. Jerome
Executive Vice President,
Global Services
Jack F. McGarry
President and Chief Executive Officer,
Closed Block Operations
Richard P. McKenney
Executive Vice President and
Chief Financial Officer
Peter O’Donnell
President and Chief Executive Officer,
Unum UK
Michael Q. Simonds
President and Chief Executive Officer,
Unum US
Joseph R. Foley
Senior Vice President,
Corporate Marketing and Public Relations
Diane M. Garofalo
Senior Vice President,
Corporate Human Resources
UNUM 2013 ANNUAL REPORT / 17
2013
Financial Review
Unum Group
18 Selected Financial Data
20
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
80
Quantitative and Qualitative Disclosures
About Market Risk
88 Consolidated Balance Sheets
90 Consolidated Statements of Income
91 Consolidated Statements of Comprehensive Income
92 Consolidated Statements of Stockholders’ Equity
93
Consolidated Statements of Cash Flows
94 Notes to Consolidated Financial Statements
166
Reports of Independent Registered
Public Accounting Firm and Management’s
Annual Report on Internal Control Over
Financial Reporting
169
Cautionary Statement Regarding
Forward-Looking Statements
170 Appendix
18 / UNUM 2013 ANNUAL REPORT
Selected Financial Data
(in millions of dollars, except share data)
2013
2012
2011
2010
2009
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
$ 7,624.7
$ 7,716.1
$ 7,514.2
$ 7,431.4
$ 7,475.5
2,492.1
2,515.2
2,519.6
2,495.5
2,346.6
6.8
230.2
56.2
227.9
(4.9)
249.1
24.7
241.6
11.7
257.2
10,353.8
10,515.4
10,278.0
10,193.2
10,091.0
Benefits and Change in Reserves for Future Benefits (1)
6,595.7
6,722.2
7,209.5
6,354.1
6,291.6
Commissions
Interest and Debt Expense
Other Expenses (2)
Total
Income Before Income Tax
Income Tax
Net Income
Balance Sheet Data
Assets
Long-term Debt
909.5
149.4
1,494.0
9,148.6
1,205.2
347.1
917.2
145.4
1,481.1
9,265.9
1,249.5
355.1
879.2
143.3
855.4
141.8
1,712.7
1,522.0
9,944.7
8,873.3
333.3
49.1
1,319.9
441.2
837.1
125.4
1,553.0
8,807.1
1,283.9
436.6
$ 858.1
$ 894.4
$ 284.2
$ 878.7
$ 847.3
$59,403.6
$62,236.1
$59,555.2
$56,602.7
$53,778.8
$ 2,612.0
$ 2,755.4
$ 2,570.2
$ 2,631.3
$ 2,549.6
Accumulated Other Comprehensive Income
$ 255.0
$ 628.0
$ 461.8
$ 351.4
$ 347.5
Other Stockholders’ Equity
Total Stockholders’ Equity
8,404.1
7,984.6
7,707.9
8,133.5
7,697.5
$ 8,659.1
$ 8,612.6
$ 8,169.7
$ 8,484.9
$ 8,045.0
UNUM 2013 ANNUAL REPORT / 19
(in millions of dollars, except share data)
2013
2012
2011
2010
2009
At or for the Year Ended December 31
Per Share Data
Net Income
Basic
Assuming Dilution
Stockholders’ Equity
Cash Dividends
$ 3.24
$ 3.23
$33.30
$0.550
$ 3.18
$ 3.17
$31.87
$0.470
$ 0.94
$ 0.94
$27.91
$0.395
$ 2.70
$ 2.69
$26.80
$0.350
$ 2.56
$ 2.55
$24.25
$0.315
Weighted Average Common Shares Outstanding
Basic (000s)
Assuming Dilution (000s)
264,725.8
281,355.9
302,399.8
325,839.0
331,266.2
265,949.2
281,756.8
303,571.0
327,221.1
332,136.2
(1) Included is a reserve increase of $573.6 million in 2011 related to our long-term care closed block business and a reserve increase of $183.5 million in 2011 related to our
individual disability closed block business. See Note 6 of the “Notes to Consolidated Financial Statements” contained herein for further discussion.
(2) Includes the net increase in deferred acquisition costs, compensation expense, and other expenses. Included in these expenses is a charge of $196.0 million in 2011
related to the impairment of long-term care closed block deferred acquisition costs. See Note 6 of the “Notes to Consolidated Financial Statements” contained herein
for further discussion.
20 / UNUM 2013 ANNUAL REPORT
The discussion and analysis presented in this section should be read in conjunction with the “Selected Financial Data,” the Consolidated
Financial Statements and notes, and the “Cautionary Statement Regarding Forward-Looking Statements” contained herein.
Executive Summary
Throughout 2013, we remained focused on profitable top-line growth in select markets and a disciplined investment strategy, as we
continued to drive effectiveness in our operating performance and to generate consistent, sustainable capital available for deployment.
A discussion of our operating performance and capital management follows.
2013 Operating Performance and Capital Management
For 2013, we reported net income of $858.1 million, or $3.23 per diluted common share, compared to net income of $894.4 million,
or $3.17 per diluted common share, in 2012. Included in these results are net realized investment gains and losses and non-operating
retirement-related gains or losses. Also included are fourth quarter 2013 adjustments for a reserve increase related to unclaimed death
benefits ($95.5 million before tax and $62.1 million after tax, or $0.24 per diluted common share) and a reserve reduction related to group
life waiver of premium benefits ($85.0 million before tax and $55.2 million after tax, or $0.21 per diluted common share). Adjusting for
these items, after-tax operating income was $882.5 million, or $3.32 per diluted common share, in 2013, compared to $887.5 million, or
$3.15 per diluted common share, in 2012.
Total operating revenue, which excludes net realized investment gains and losses, was 1.1 percent lower in 2013 relative to 2012, with
slight declines in both premium income and net investment income. Total operating income, excluding net realized investment gains and
losses, non-operating retirement-related gains or losses, and income taxes, decreased by 0.7 percent compared to 2012. Operating income,
when also excluding the 2013 reserve adjustments related to unclaimed death benefits and group life waiver of premium benefits,
increased slightly relative to 2012, with favorable earnings in all of our segments other than our Corporate segment. Earnings per share
were also favorably impacted by our capital management strategy of returning capital to shareholders through repurchases of our common
stock. See additional information in “2013 Unclaimed Death Benefits Reserve Increase,” “2013 Group Life Waiver of Premium Benefit
Reserve Reduction,” “Consolidated Operating Results,” and “Reconciliation of Non-GAAP Financial Measures” contained herein.
Our Unum US segment reported an increase in operating income, including the 2013 reserve adjustments related to unclaimed death
benefits and group life waiver of premium benefits, of 2.5 percent in 2013 compared to 2012. Operating income excluding these reserve
adjustments increased 1.4 percent, with growth in premium income and overall favorable risk results. Premium income increased
1.4 percent in 2013 compared to 2012, as we believe the weak pace of economic growth, low levels of employment growth, the competitive
environment, and the distraction caused by political instability and the implementation of healthcare reform continued to pressure our
sales and premium income growth throughout 2013. The benefit ratio for our Unum US segment for 2013 was 71.3 percent, or 71.6 percent
excluding the reserve adjustments, compared to 72.7 percent in 2012. Unum US sales decreased 2.0 percent in 2013 compared to 2012.
Although persistency declined slightly during 2013 relative to 2012, our persistency remains strong and is generally consistent with
our expectations.
Our Unum UK segment reported an increase in operating income, as measured in Unum UK’s local currency, of 1.7 percent in 2013
compared to 2012, with overall favorable risk results. Premium income in local currency declined 18.8 percent in 2013 relative to 2012 due
primarily to reinsurance agreements entered into effective January 1, 2013 to cede an additional portion of our group life business. The
reinsurance agreements significantly decreased premium income and benefit payments for group life during 2013 and also reduced
volatility in this line of business. The decline in the benefit ratio for Unum UK to 74.3 percent in 2013 from 77.9 percent, in 2012 was due
primarily to improved risk results in the group life product line. Unum UK sales in 2013 decreased 18.7 percent, in local currency, in 2013
compared to 2012 due primarily to lower group life sales as we continued to execute our plans to improve new business pricing and
reposition our group life business for better margins and greater stability. Persistency declined, as expected, primarily as a result of pursuing
rate increases on renewing business.
Management’s Discussion and Analysis of Financial Condition and Results of Operations UNUM 2013 ANNUAL REPORT / 21
Our Colonial Life segment reported a decrease in operating income, including the 2013 reserve increase related to unclaimed death
benefits, of 3.5 percent in 2013 compared to 2012. Operating income excluding this reserve adjustment increased 3.9 percent in 2013, with
higher operating revenue and stable risk results. Premium income grew 3.2 percent in 2013 compared to 2012. The 2013 benefit ratio for
Colonial Life was 54.1 percent, and excluding the reserve increase was 52.5 percent, consistent with the level of 2012. Colonial Life sales
increased 1.6 percent in 2013 compared to 2012, driven by higher large case commercial market sales. Persistency in 2013 declined slightly
but remains strong for all lines of business.
Our Closed Block segment reported an increase in operating income of 14.6 percent in 2013 relative to 2012. Net investment income
increased 3.4 percent in 2013 compared to 2012 due to higher invested asset levels. Risk results in 2013 were slightly favorable for both
individual disability and long-term care relative to the prior year.
Our investment portfolio continues to perform well, and our invested asset quality remains strong. The net unrealized gain on our fixed
maturity securities was $4.1 billion at December 31, 2013 compared to $7.2 billion at December 31, 2012, with the decline due primarily to
an increase in U.S. Treasury rates during 2013.
We believe our capital and financial positions are strong. At December 31, 2013, 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 396 percent at December 31, 2012. During 2013, we repurchased 11.2 million shares of Unum Group common
stock at a cost of $318.6 million under our share repurchase program. 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 $514 million at December 31,
2013, relative to $805 million at December 31, 2012. The decline was due primarily to repurchases of our common stock and a capital
contribution related to our 2013 re-domestication of a captive reinsurance subsidiary.
2013 Unclaimed Death Benefits Reserve Increase
Beginning in 2011, a number of state regulators began requiring insurers to cross-check specified insurance policies with the Social
Security Administration’s Death Master File to identify potential matches. If a potential match was identified, insurers were requested to
determine if benefits were due, locate beneficiaries, and make payments where appropriate. We initiated this process where requested,
and in 2012 we began implementing this process in all states on a forward-looking basis. We believe adopting this process, which reflects
an evolving regulatory and industry practice, is in the best interest of our customers. Therefore, in addition to implementing this on a
forward-looking basis, in 2013 we began an initiative to search for potential claims from previous years.
During the fourth quarter of 2013, we completed our assessment of benefits which we estimate will be paid under this initiative, and
as such, established additional reserves for payment of these benefits. Claim reserves were increased $49.1 million for Unum US group life,
$26.3 million for Unum US voluntary life, and $20.1 million for Colonial Life voluntary life, for a total reserve increase of $95.5 million. These
reserve adjustments decreased net income $62.1 million.
Although the legal and regulatory environment continues to evolve, we believe our decision to adopt this claims practice and establish
additional reserves is in the best interests of our customers.
2013 Group Life Waiver of Premium Benefit Reserve Reduction
Within our Unum US segment, we offer group life insurance coverage which consists primarily of renewable term life insurance and
includes a provision for waiver of premium, if disabled. The group life waiver of premium benefit (group life waiver) provides for
continuation of life insurance coverage when an insured, or the employer on behalf of the insured, is no longer paying premium because
the employee is not actively at work due to a disability. The group life waiver claim reserve is the present value of future anticipated death
benefits reflecting the probability of death while remaining disabled. Claim reserves are calculated using assumptions based on past
experience adjusted for current trends and any other factors that would modify past experience and are subject to revision as current claim
experience emerges and alters our view of future expectations.
22 / UNUM 2013 ANNUAL REPORT
The two fundamental assumptions in the development of the group life waiver reserve are mortality and recovery. Our emerging
experience and that which continues to emerge within the industry indicate an increase in life expectancies, which decreases the ultimate
anticipated death benefits to be paid under the group life waiver benefit. Emerging experience also reflects an improvement in claim
recovery rates, which also lessens the likelihood of payment of a death benefit while the insured is disabled.
During the fourth quarter of 2013, we completed a review of our assumptions and modified our mortality and claim recovery
assumptions for our Unum US group life waiver reserves and, as a result, reduced the applicable claim reserves by $85.0 million and
increased net income $55.2 million.
2013 Retirement Benefit Changes
In 2013, we adopted plan amendments which freeze participation and benefit accruals in our defined benefit pension plans in the U.S.
and U.K., effective December 31, 2013 for the U.S. plans and June 30, 2014 for the U.K. plan. As a result of these plan amendments we
recognized a net before-tax curtailment gain of $3.0 million during 2013. Because the amendments eliminate all future service accruals
subsequent to the effective dates of the amendments, we were also required to remeasure the benefit obligations of our pension plans,
which decreased our net pension liability approximately $330 million during 2013, with a corresponding increase in other comprehensive
income, less applicable income tax of approximately $115 million. Concurrent with our amendments to our defined benefit pension plans,
we adopted amendments to increase the benefits under our defined contribution plans commensurate with the effective dates of the
pension plan amendments.
Further discussion is included in “Consolidated Operating Results,” “Reconciliation of Non-GAAP Financial Measures,” “Segment
Results,” “Investments,” “Liquidity and Capital Resources,” and the “Notes to Consolidated Financial Statements” contained herein.
2011 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. 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 2011. 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 $196.0 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 net income $500.3 million.
Management’s Discussion and Analysis of Financial Condition and Results of Operations UNUM 2013 ANNUAL REPORT / 23
2011 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 $119.3 million.
Outlook for 2014
We believe our disciplined approach to providing financial protection products at the workplace puts us in a position of strength as we
seek to capitalize on the growing and largely unfilled need for our products and services. While we anticipate the environment for 2014 will
be somewhat similar to modestly improving from 2013, with below-average economic growth, relatively low interest rates, and continued
political uncertainty, we have strategies in place which we believe will help us navigate this environment.
We believe the need for our products and services remains strong, and we intend to continue protecting our solid margins and returns
through our pricing and risk actions. During 2014, we will continue to invest in our infrastructure and our employees, with a focus on quality
and simplification of processes and product offerings. Our strategy will be centered on maintaining a strong customer focus while providing
an innovative product portfolio of financial protection choices to deepen employee coverages, broaden employer relationships, and open
new markets. We believe that consistent operating results, combined with the implementation of strategic initiatives and the effective
deployment of capital, should allow us to meet our long-term financial objectives.
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.
24 / UNUM 2013 ANNUAL REPORT
Reserves for Policy and Contract Benefits
Reserves for policy and contract benefits are our largest liabilities and represent 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. Reserves for policy and contract benefits
equaled $40.5 billion and $39.9 billion at December 31, 2013 and 2012, respectively, or approximately 79.8 percent and 74.4 percent of our
total liabilities, respectively. Reserves ceded to reinsurers were $6.8 billion and $6.7 billion at December 31, 2013 and 2012, respectively,
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, long-term care,
and other 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
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, 2013
represented approximately 12.1 percent, 0.1 percent, and 9.9 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
Management’s Discussion and Analysis of Financial Condition and Results of Operations UNUM 2013 ANNUAL REPORT / 25
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 41.7 percent of our total gross policy reserves at December 31, 2013, 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, excluding individual disability and individual and group long-term care, which are no longer
actively marketed and are reported in our Closed Block segment represent $5.8 billion on a gross basis, or approximately 36.2 percent of
our total policy reserves. We have ceded $4.6 billion of these other products’ 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.
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.
26 / UNUM 2013 ANNUAL REPORT
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 35.3 percent and 47.2 percent, respectively, of our total claim
reserves at December 31, 2013. 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
3.7 percent of our total claim reserves at December 31, 2013. 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 10.0 percent of our total claim reserves at December 31, 2013,
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 1.7 percent of our total claim reserves at December 31, 2013, 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. Impacting year over year comparability of claim reserves in the following chart are the
2013 reserve adjustments for unclaimed death benefits and group life waiver of premium benefits. See “Executive Summary” and Note 6
of the “Notes to Consolidated Financial Statements” contained herein for further discussion of these reserve adjustments.
Management’s Discussion and Analysis of Financial Condition and Results of Operations UNUM 2013 ANNUAL REPORT / 27
December 31, 2013
Gross
Claim Reserves
%
Incurred
IBNR
%
Total
Total
Reinsurance
Ceded
Total
Net
Policy
Reserves
$
—
—% $ 6,810.3
$ 569.1
30.1% $ 7,379.4 $ 66.6 $ 7,312.8
(in millions of dollars)
Group Disability
Group Life and Accidental
Death & Dismemberment
72.3
0.5
713.2
201.1
3.7
986.6
2.5
984.1
Individual Disability —
Recently Issued
Voluntary Benefits
Unum US Segment
Unum UK Segment
Colonial Life Segment
Individual Disability
Long-term Care
Other
558.3
1,298.4
1,929.0
24.9
1,577.6
859.3
5,791.4
5,783.8
3.5
8.1
12.1
0.1
9.9
5.4
36.3
36.2
1,155.7
48.9
8,728.1
2,286.0
274.1
10,346.8
865.7
234.4
124.4
73.2
967.8
171.7
134.1
281.9
94.8
150.2
5.2
0.5
39.5
10.0
1.7
43.3
3.9
1.6
1,838.4
1,420.5
11,624.9
2,482.6
1,985.8
104.3
29.2
202.6
130.1
13.9
11,488.0
1,545.0
6,751.9
42.6
6,168.4
4,915.2
1,734.1
1,391.3
11,422.3
2,352.5
1,971.9
9,943.0
6,709.3
1,253.2
Closed Block Segment
12,434.5
77.9
11,446.9
526.9
48.8
24,408.3
6,502.8
17,905.5
Subtotal
$15,966.0 100.0% $22,735.1
$1,800.5 100.0%
40,501.6
6,849.4
33,652.2
Adjustment to Reserves
for Unrealized Gain on Securities
Consolidated
4,108.5
263.8
3,844.7
$44,610.1 $7,113.2 $37,496.9
December 31, 2012
Gross
Claim Reserves
%
Incurred
IBNR
%
Total
Total
Reinsurance
Ceded
Total
Net
Policy
Reserves
Group Disability
$
—
—% $ 7,000.8
$ 596.0
30.9%
$ 7,596.8 $ 61.3 $ 7,535.5
Group Life and Accidental
Death & Dismemberment
73.8
0.5
790.1
168.1
3.9
1,032.0
1.0
1,031.0
Individual Disability —
Recently Issued
Voluntary Benefits
Unum US Segment
Unum UK Segment
Colonial Life Segment
Individual Disability
Long-term Care
Other
557.8
1,224.3
3.6
8.0
1,855.9
12.1
25.6
1,490.3
985.7
5,272.5
5,704.5
0.2
9.7
6.4
34.4
37.2
1,093.2
42.4
8,926.5
2,251.7
251.4
126.0
49.4
939.5
142.2
99.4
5.0
0.4
40.2
9.7
1.4
1,777.0
1,316.1
11,721.9
2,419.5
1,841.1
91.2
28.6
182.1
108.3
9.4
1,685.8
1,287.5
11,539.8
2,311.2
1,831.7
10,406.2
297.3
43.6
11,689.2
1,492.7
10,196.5
747.0
258.8
81.3
165.7
3.4
1.7
6,100.8
47.0
6,129.0
4,829.9
6,053.8
1,299.1
Closed Block Segment
11,962.7
78.0
11,412.0
544.3
48.7
23,919.0
6,369.6
17,549.4
Subtotal
$15,334.5 100.0% $22,841.6
$1,725.4
100.0%
39,901.5
6,669.4
33,232.1
Adjustment to Reserves
for Unrealized Gain on Securities
Consolidated
6,277.5
351.5
5,926.0
$46,179.0 $7,020.9 $39,158.1
28 / UNUM 2013 ANNUAL REPORT
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 operational 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. The following section presents 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.
Management’s Discussion and Analysis of Financial Condition and Results of Operations UNUM 2013 ANNUAL REPORT / 29
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. 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 2012 and 2011, claim incidence rates for Unum US group long-term disability were
slightly elevated relative to the level of 2010, but in 2013 incidence rates improved slightly, returning to the level of 2010. We expect that
claim incidence trends for Unum US group long-term disability may continue to somewhat follow general economic conditions and
demographics of the general U.S. workforce.
During 2013 and 2012, claims incidence was elevated for our Closed Block long-term care line of business as compared to the
long-term assumptions we established at the time of loss recognition in 2011. We view the elevated incidence as temporary in nature.
See “2011 Long-term Care Strategic Review” contained herein.
Throughout the period 2011 to 2013, actual new money interest rates varied with the changing market conditions, and the
assumptions we used to discount our reserves during this period generally trended downward slightly for all segments and product lines.
In 2011, long-term interest rates declined significantly due to the European Union debt crisis and the Federal Reserve Board’s actions.
Interest rates improved somewhat in 2013 but continue to remain low relative to historical norms. 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.
During 2013, we updated our mortality and interest rate assumptions for our Closed Block group pension line of business to reflect
recent trends. The updated assumptions resulted in an immaterial increase to our group pension reserves. The retirement rate experience
has 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
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 2012 and 2013 have varied by +3 and -3 percent in our Unum US group long-term disability line of business, between
+8 and -10 percent in our Unum US individual disability — recently issued line of business, and between +4 and -4 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 2011 to 2013, 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.
Regarding experience for our older age, longer duration disabled claimants in our Closed Block individual disability line of business,
the claim resolution rates, primarily as pertaining to life expectancy of the insured, remained relatively consistent during 2013 and 2012
with the mortality assumptions for this particular claim block that we updated in 2011. See “2011 Claim Reserve Increase for Individual
Disability Closed Block Business” contained herein.
30 / UNUM 2013 ANNUAL REPORT
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 +/- 3.3 percent. Using our actual claim reserve balance at December 31, 2013, this variation would have resulted in an approximate
change (either positive or negative) of $240 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 +/- 2.3 percent of our reported balance, which
at December 31, 2013, would have resulted in an approximate change (either positive or negative) of $230 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.
Policy reserves for long-term care are based upon a number of key assumptions, and each assumption has various factors which may
impact the long-term outcome. Key assumptions with respect to morbidity, mortality, persistency, interest rates, and future premium rate
increases must incorporate extended views of expectations for many years into the future. Reserves are highly sensitive to these
estimates. For example, a 25 basis point change in the assumed discount rate over the lifetime of this business would impact reserves by
approximately $400 million, with all other factors held constant. Key assumptions and related impacts are also heavily interrelated in both
their outcome and in their effects on reserves. For example, changes in the view of morbidity and mortality might be mitigated by either
potential future premium rate increases and/or morbidity improvements due to general improvement in health and/or medical
breakthroughs. There is potentially a wide range of outcomes for each assumption and in totality.
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. We closely monitor emerging experience and use these
results to inform our view of long-term assumptions.
Deferred Acquisition Costs (DAC)
We defer incremental direct costs associated with the successful acquisition of new or renewal insurance contracts 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 83 percent of our DAC relates to traditional non interest-sensitive products, and we amortize DAC for these products in
proportion to the premium income we expect to receive over the life of the policies. DAC related to interest-sensitive policies is 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. Key assumptions used in developing the future amortization of DAC are persistency, premium
income, and for our interest-sensitive products, mortality margins and investment returns. We use our own historical experience and
expectation of the future performance of our businesses in determining our assumptions. For traditional products, 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 2013, our key assumptions used to develop the future amortization of acquisition costs deferred during 2013 did not change
materially from those used in 2012. Generally, we do not expect our key assumptions 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.
Management’s Discussion and Analysis of Financial Condition and Results of Operations UNUM 2013 ANNUAL REPORT / 31
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, 2013 and 2012.
(in millions of dollars)
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
Colonial Life
Accident, Sickness, and Disability
Life
Cancer and Critical Illness
Totals
Amortization
Period
Balance Remaining as a %
of Initial Deferral
Year 3
Year 10
Year 15
DAC Balances
at December 31
2013
2012
6
6
20
15
3
3
20
15
25
19
25%
30%
75%
60%
7%
7%
57%
46%
71%
60%
0%
0%
50%
15%
0%
0%
17%
12%
35%
27%
0%
$ 55.9
$ 47.4
0%
49.9
40.7
25%
0%
0%
0%
7%
2%
17%
11%
433.4
512.3
5.1
1.2
28.0
350.6
218.7
174.1
449.1
487.1
4.1
3.2
31.5
328.9
195.4
168.1
$1,829.2
$1,755.5
Amortization of DAC is adjusted to reflect actual experience for assumptions which deviate compared to the anticipated experience.
Any deviations from projections may result in a change to the rate of amortization in the period such events occur. As an example, for our
traditional products, we may experience accelerated amortization if policies terminate earlier than projected, or we may experience a
slower rate of amortization if policies persist longer than projected. Our actual experience has not varied materially from our assumptions
during the last three years.
See Note 1 of the “Notes to Consolidated Financial Statements” contained herein for further discussion of our DAC accounting policy.
Fair Value 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. Fair value is 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 our intent and/or ability to sell the asset or transfer
the liability at the measurement date. We generally use valuation techniques consistent with the market approach, and to a lesser extent,
the income approach. The market approach uses prices and other relevant information from market transactions involving identical or
comparable assets or liabilities and the income approach converts future amounts, such as cash flows or earnings, to a single present
amount, or a discounted amount. We believe the market approach valuation technique provides more observable data than the income
approach, considering the types of investments we hold.
32 / UNUM 2013 ANNUAL REPORT
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. 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.
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. 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.
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.
As of December 31, 2013, 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 1.74 percent for five-year maturities to 3.97 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 0.72 percent for five-year maturities to
2.95 percent for 30-year maturities used at December 31, 2012.
• Current Baa corporate bond spread adjustments ranging from 1.01 percent to 2.10 percent were added to the risk free rate to
reflect additional credit risk and the lack of liquidity. We used spread adjustments ranging from 0.98 percent to 2.23 percent at
December 31, 2012. 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.
As of December 31, 2013, approximately 6.0 percent of our fixed maturity securities were categorized as Level 1, 88.5 percent as
Level 2, and 5.5 percent as Level 3. Level 1 is 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 Level 2 category includes assets or liabilities
valued using inputs (other than those included in the Level 1 category) 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. The Level 3
category 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 using unobservable inputs to extrapolate an estimated fair value.
Rapidly changing credit and equity market conditions can materially impact the valuation of securities, and the period to period
changes in value can vary significantly.
See Note 2 of the “Notes to Consolidated Financial Statements” contained herein.
Management’s Discussion and Analysis of Financial Condition and Results of Operations UNUM 2013 ANNUAL REPORT / 33
Investment Impairments
One of the significant estimates related to investments is our impairment valuation. 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.
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,
the value of which is periodically assessed. 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.
34 / UNUM 2013 ANNUAL REPORT
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.
See Notes 1 and 3 of the “Notes to Consolidated Financial Statements” contained herein.
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. defined benefit 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.S. defined benefit pension plans were closed to new
entrants on December 31, 2013, and the U.K. defined benefit pension plan was closed to new entrants on December 31, 2002. In 2013, we
adopted plan amendments which freeze participation and benefit accruals in our U.S. qualified and non-qualified defined benefit pension
plans, effective December 31, 2013. Also in 2013, we adopted amendments to our U.K. pension plan which freeze participation in the plan
effective June 30, 2014 and which reduce the maximum rate of inflation indexation from 5.0 percent to 2.5 percent for pension benefits
which were earned prior to April 1997 effective at the date of adoption.
Assumptions
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 unless we are required to perform an interim remeasurement as occurred in 2013 due to our pension plans amendments. 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 plan amendments, actual experience being different from our assumptions,
special benefits to terminated employees, and/or changes in benefits provided under the plans.
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 on a portfolio of high quality fixed
income corporate debt instruments that reasonably match the timing and amounts of projected future benefits. A lower discount rate
increases the present value of benefit obligations and increases our costs.
Management’s Discussion and Analysis of Financial Condition and Results of Operations UNUM 2013 ANNUAL REPORT / 35
The discount rate we used to determine our net periodic benefit costs for our U.S. pension plans for 2014 was 5.30 percent and for
2013 was 4.50 percent for the period January 1, 2013 through the date of remeasurement and 5.00 percent for the period from the date of
remeasurement through December 31, 2013. The discount rate used for the net periodic benefit costs for our U.K. pension plan for 2014
was 4.40 percent and for 2013 was 4.50 percent for the period January 1, 2013 through the date of remeasurement and 4.60 percent from
the date of remeasurement through December 31, 2013. The discount rate used in the net periodic benefit cost for our OPEB plan for 2014
and 2013 was 5.00 percent and 4.20 percent, respectively.
Regarding sensitivity analysis, reducing the discount rate assumptions by 50 basis points would have increased our 2013 pension
and OPEB expenses by approximately $16.4 million, before tax, and would have increased our pension and OPEB benefit obligations by
approximately $174.4 million as of December 31, 2013, resulting in an after-tax decrease in stockholders’ equity of approximately
$116.5 million as of December 31, 2013.
An increase in the discount rate assumptions of 50 basis points would have decreased our 2013 pension and OPEB expenses
by approximately $13.9 million, before tax, and would have decreased our pension and OPEB benefit obligations by approximately
$156.4 million as of December 31, 2013, resulting in an after-tax increase in stockholders’ equity of approximately $104.6 million
as of December 31, 2013.
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, corporate, and state and municipal fixed
income securities; private equity direct investments, private equity funds of funds, hedge funds of funds, and cash equivalents. Assets for
our U.K. pension plan are invested in pooled funds, including diversified growth funds, which invest 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.
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 2014 and 2013 was 7.50 percent for both years. The long-term rate of return on asset assumption used for our U.K. pension plan for
2014 was 6.10 percent and for 2013 was 6.20 percent for the period from January 1, 2013 to the date of remeasurement and 6.35 percent
from the date of remeasurement through December 31, 2013. The long-term rate of return on asset assumption used for our OPEB plan was
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.
A change in the long-term rate of return on asset assumptions on the pension plan assets of +/-50 basis points would have changed
our 2013 pension plan expense by approximately $7.9 million before tax, but would not have materially changed our OPEB plan expense.
A lower rate of return on plan assets increases our expense.
36 / UNUM 2013 ANNUAL REPORT
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 2013, the fair value of plan assets in our U.S. qualified defined benefit pension plan increased $237.1 million, or approximately
17.5 percent, while the fair value of plan assets in our U.K. pension plan increased £9.9 million, or approximately 7.8 percent. Although the
effect of these increases in fair value had no impact on our 2013 net periodic pension costs, the favorable rate of return on these plan
assets in 2013 and the increase in the liability discount rate for the U.S. plans will have a favorable impact on our net periodic pension costs
for 2014. 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 $368.7 million and a net unrecognized prior service
credit of $2.4 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, 2013, the unrecognized net loss for these two items
combined was $366.3 million.
The unrecognized gains or losses are amortized as a component of the net benefit cost. Our 2013, 2012, and 2011 pension and OPEB
expense includes $27.9 million, $43.4 million, and $28.8 million, respectively, of amortization of the unrecognized net actuarial loss and
prior service credit (cost). The unrecognized net actuarial loss for our pension plans, which is $379.0 million at December 31, 2013, will be
amortized over the average remaining life expectancy of the plan participants, which is approximately 33 years for U.S. participants and
34 years for U.K. participants, to the extent that it exceeds the 10 percent corridor, as described below. The unrecognized net actuarial gain
of $10.3 million for our OPEB plan will be amortized over the average future working life of OPEB plan participants, estimated at five 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, 2013, $169.1 million of the
actuarial loss was outside of the corridor for the U.S. plan, and £8.7 million was outside of the corridor for the U.K. plan. At December 31, 2013,
none of the actuarial gain 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 $1,590.7 million at December 31, 2013, compared
to $1,353.6 million at December 31, 2012. The effect of the increase in the liability discount rate and fair value of plan assets, as well as the
plan amendment, contributed to the overfunded plan position of $13.4 million at December 31, 2013, compared to an underfunded position
of $454.3 million at December 31, 2012.
The fair value of plan assets in our OPEB plan was $11.4 million at December 31, 2013, compared to $11.5 million at December 31,
2012. 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. We discontinued offering retiree life
insurance to future retirees effective December 31, 2012. We will still provide this benefit to those employees who retired prior to
December 31, 2012.
The fair value of plan assets in our U.K. pension plan was £136.4 million at December 31, 2013, compared to £126.5 million
at December 31, 2012. The U.K. pension plan was in an overfunded position of £10.3 million and £5.3 million at December 31, 2013
and 2012, respectively.
See Note 9 of the “Notes to Consolidated Financial Statements” contained herein for further discussion.
Management’s Discussion and Analysis of Financial Condition and Results of Operations UNUM 2013 ANNUAL REPORT / 37
Income Taxes
We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. In 2011, as
part of an Internal Revenue Service (IRS) settlement, we released a $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.
As of December 31, 2013 and 2012, we had no valuation allowance.
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.
See Note 7 of the “Notes to Consolidated Financial Statements” contained herein.
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 14 of the “Notes to Consolidated Financial Statements” contained herein.
Accounting Developments
In July 2013, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) on insurance
contracts that is intended to bring greater consistency to the accounting for contracts that transfer significant risk between parties and would
require a current measure of insurance contracts, including the use of updated assumptions and discounting. The proposed ASU, which
would supersede existing guidance on accounting for insurance contracts, calls for retrospective application and would prohibit early adoption.
The proposal did not specify an effective date, but instead requested feedback on the appropriate timing.
For additional information on new accounting standards and the impact, if any, on our financial position or results of operations,
see Note 1 of the “Notes to Consolidated Financial Statements” contained herein.
38 / UNUM 2013 ANNUAL REPORT
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
Benefits and Change in Reserves for Future Benefits
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
Year Ended December 31
2013
% Change
2012
% Change
2011
$ 7,624.7
(1.2)%
$ 7,716.1
2.7%
$ 7,514.2
2,492.1
6.8
230.2
10,353.8
6,595.7
909.5
149.4
(466.8)
418.9
—
790.4
751.5
9,148.6
1,205.2
347.1
$ 858.1
(0.9)
(87.9)
1.0
(1.5)
(1.9)
(0.8)
2.8
(0.1)
10.6
—
0.5
(4.0)
(1.3)
(3.5)
(2.3)
(4.1)
2,515.2
56.2
227.9
10,515.4
(0.2)
N.M.
(8.5)
2.3
2,519.6
(4.9)
249.1
10,278.0
6,722.2
(6.8)
7,209.5
917.2
145.4
(467.3)
378.7
—
786.8
782.9
9,265.9
1,249.5
355.1
$ 894.4
4.3
1.5
5.6
3.6
—
(2.6)
(0.3)
(6.8)
274.9
N.M.
214.7
879.2
143.3
(442.5)
365.7
196.0
808.0
785.5
9,944.7
333.3
49.1
$ 284.2
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 relative to the
preceding period, as occurred during 2013 and 2012, 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 relative to the prior period.
Our weighted average pound/dollar exchange rate was 1.566, 1.584, and 1.603 for years ended 2013, 2012, and 2011, respectively. If the
2012 and 2011 results for our U.K. operations had been translated at the exchange rate of 2013, our operating revenue by segment in 2012
and 2011 would have been lower by approximately $10.8 million and $20.9 million, respectively, and our operating income in 2012 and
2011 would have been lower by approximately $1.4 million and $4.4 million, respectively. However, it is important to distinguish between
translating and converting 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 2013 declined slightly relative to 2012. Although we experienced premium growth in our Unum US
and Colonial Life segments, the level of growth remains below our long-term expectations. We believe premium growth in many of our
product lines has been unfavorably impacted by the weak pace of economic growth, low levels of employment growth, the competitive
environment, and the distraction caused by political instability and the implementation of healthcare reform. Offsetting the growth in
premium income in Unum US and Colonial Life was a decline in premium income due to the reinsurance agreements we entered into
Management’s Discussion and Analysis of Financial Condition and Results of Operations
UNUM 2013 ANNUAL REPORT / 39
during 2013 to cede a portion of certain product lines in Unum US individual disability — recently issued and in Unum UK. Consolidated
premium income for 2012 increased relative to 2011 and included premium growth for each of our three principal operating business
segments, although the growth was unfavorably impacted by the same factors pressuring 2013 growth. Premium income year over year
continued to decline, as expected, in our Closed Block segment in both 2013 and 2012. Further discussion of premium income for each of
our segments, as well as our outlook for future premium growth, is included in “Segment Results” as follows.
Net investment income was slightly lower in 2013 relative to 2012 due primarily to a decline in the yield on invested assets, partially
offset by a higher level of invested assets. Miscellaneous net investment income, which includes income from bond calls and private equity
partnership investments, was relatively consistent on a consolidated basis but exhibited more year-over-year volatility on an operating
segment level. Net investment income was slightly lower in 2012 relative to 2011 due primarily to a decline in yield on invested assets, an
increase in the amortization of the principal amount invested in our tax credit partnerships, and lower income on our Unum UK inflation
index-linked bonds. These declines were mostly offset by a higher level of invested assets, higher bond call premiums, an increase in
income from private equity partnership investments, and higher prepayment income on mortgage-backed securities.
We recognized a net realized investment gain of $6.8 million in 2013, compared to a gain of $56.2 million in 2012 and a loss of
$4.9 million in 2011. Included in the 2013 net realized gain was a realized investment loss of $30.0 million recognized on the sale of certain
securities during the early part of the third quarter of 2013. When interest rates increased during that time period, we sold certain of our
lower yielding fixed maturity securities to take advantage of the higher interest rate environment by reinvesting the proceeds into higher
yielding securities, thereby increasing our investment yield and also improving the credit quality of our fixed maturity securities portfolio.
Included in the 2011 net realized loss was an other-than-temporary impairment loss on fixed maturity securities of $19.9 million. Also
included in our realized investment gains and losses is the change in the fair value of an embedded derivative in a modified coinsurance
arrangement, which resulted in a realized gain of $30.7 million and $51.8 million in 2013 and 2012, respectively, and a loss of $39.4 million
in 2011.
The consolidated benefit ratios were 86.5 percent in 2013 compared to 87.1 percent in 2012 and 95.9 percent in 2011. Excluding the
2013 reserve adjustments in our life insurance product lines within the Unum US and Colonial Life segments, the benefit ratio for 2013 was
86.4 percent, and excluding the 2011 reserve adjustments in our Closed Block segment, the benefit ratio for 2011 was 85.9 percent. The
underlying risk results in 2013 for each of our principal operating business segments, as well as for the majority of our product lines within
those segments, were favorable or consistent with 2012. The year-over-year increase in the benefit ratio for 2012 relative to the level of
2011 was primarily attributable to adverse risk results in our Unum UK group life line of business and in our Closed Block long-term care line
of business. Risk results in our Unum US segment for 2012 were generally consistent with the level reported in 2011, and the benefit ratio
for Colonial Life was only slightly elevated in 2012 compared to 2011. Further discussion of our line of business risk results for each of our
segments is included in “Segment Results” as follows.
Interest and debt expense for 2013 was higher than 2012 due primarily to the issuance of $250.0 million of debt in August 2012, offset
partially by lower interest expense on our floating rate debt and the purchase and retirement of the debt held by Tailwind Holdings, LLC
(Tailwind Holdings) in January 2013. Interest and debt expense for 2012 was slightly higher than 2011 due primarily to the issuance of
$250.0 million of debt in August 2012, partially offset by the maturity of $225.1 million of debt in March 2011.
The deferral of acquisition costs in 2013 was generally consistent with 2012. The deferral increased in 2012 compared to 2011, 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.
The amortization of acquisition costs was higher year-over-year in both 2013 and 2012 due to continued growth in the level of the
deferred asset for certain of our product lines and the prospective unlocking for expected future experience relative to assumptions for our
interest-sensitive life products. We also experienced a higher level of policy terminations relative to assumptions for certain issue years
within some of our Unum US supplemental and voluntary product lines during 2013. At December 31, 2011, we determined that our
long-term care deferred acquisition costs were not recoverable, and we recognized an impairment charge at that time. Further discussion
of deferred acquisition costs and amortization by product line for each of our segments is included in “Segment Results” as follows.
40 / UNUM 2013 ANNUAL REPORT
Other expenses, including compensation expense, were in aggregate lower in 2013 and 2012 relative to the prior year periods due in
part to our continued focus on operating effectiveness and expense management. Also contributing to the decline in 2013 relative to 2012
was a reduction in the amortization of our net actuarial loss due to pension plan amendments adopted in 2013 as well as expense reductions
associated with reinsurance agreements entered into during 2013. Partially offsetting the lower expenses resulting from active expense
management were increased costs for our pension and other postretirement benefit plans in 2012 as compared to 2011. For further
discussion of the 2013 pension plan amendments, see Note 9 in the “Notes to Consolidated Financial Statements” contained herein.
Our income tax for 2013, 2012, and 2011 includes reductions of $6.3 million, $9.3 million, and $6.8 million, respectively, to reflect the
impact of the decrease in the U.K. corporation tax rate changes on our net deferred tax liability related to our U.K. operations. Also lowering
our income tax rate in 2013 and 2012 relative to the preceding year is an increase in the level of our investments in low-income housing
tax credit partnerships. Our 2012 income tax includes a release of an $11.0 million tax liability related to unrecognized tax benefits. Our
2011 income tax includes a reduction in federal income taxes of $41.3 million due to a final settlement with the IRS and an $18.6 million
tax related to the repatriation of £150.0 million of dividends from our U.K. subsidiaries. See Note 7 in the “Notes to Consolidated Financial
Statements” contained herein for further information on our income tax.
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. The non-GAAP financial measures of “operating revenue,”
“before-tax operating income” or “before-tax operating loss,” and “after-tax operating income” differ from total revenue, income 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 net realized investment gains and losses, non-operating retirement-related gains or losses, and certain other
items as specified in the reconciliations below. We believe operating revenue and operating income or loss are better performance
measures and better indicators of the revenue and profitability and underlying trends in our business. Realized investment gains or losses
depend on market conditions and do not necessarily relate to decisions regarding the underlying business of our segments. Our investment
focus is on investment income to support our insurance liabilities as opposed to the generation of realized investment gains or losses.
Although we may experience realized investment gains or losses which will affect future earnings levels, a long-term focus is necessary to
maintain profitability over the life of the business since our underlying business is long-term in nature, and we need to earn the interest
rates assumed in calculating our liabilities. The amortization of prior period actuarial gains or losses, a component of the net periodic
benefit cost for our pensions and other postretirement benefit plans, is driven by market performance as well as plan amendments and is
not indicative of the operational results of our businesses. We believe that excluding the amortization of prior period gains or losses from
operating income or loss provides investors with additional information for comparison and analysis of our operating results. Although
we manage our non-operating retirement-related gains or losses separately from the operational performance of our business, these gains
or losses impact the overall profitability of our company and have historically increased or decreased over time, depending on plan
amendments and market conditions and the resulting impact on the actuarial gains or losses in our pensions and other postretirement
benefit plans.
We may at other times exclude certain other items 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 and does not replace net income or net loss as a measure of our overall profitability.
Management’s Discussion and Analysis of Financial Condition and Results of Operations UNUM 2013 ANNUAL REPORT / 41
A reconciliation of “operating revenue” to total revenue and “before-tax operating income” to income before income tax is as follows:
(in millions of dollars)
Operating Revenue
Net Realized Investment Gain (Loss)
Total Revenue
Before-tax Operating Income
Net Realized Investment Gain (Loss)
Non-operating Retirement-related Loss
Unclaimed Death Benefits Reserve Increase
Group Life Waiver of Premium Benefit Reserve Reduction
Deferred Acquisition Costs Impairment and Reserve Charges
for Long-term Care Closed Block
Reserve Charge for Individual Disability Closed Block
Year Ended December 31
2013
2012
2011
$10,347.0
$10,459.2
$10,282.9
6.8
56.2
(4.9)
$10,353.8
$10,515.4
$10,278.0
$ 1,241.8
$ 1,239.7
$ 1,323.2
6.8
(32.9)
(95.5)
85.0
—
—
56.2
(46.4)
—
—
—
—
(4.9)
(31.9)
—
—
(769.6)
(183.5)
Income Before Income Tax
$ 1,205.2
$ 1,249.5
$ 333.3
The after-tax impacts of these items are reflected in the following reconciliation of after-tax operating income to net income.
Year Ended December 31
2013
2012
2011
(in millions)
per share*
(in millions)
per share*
(in millions)
per share*
After-tax Operating Income
$882.5
$ 3.32
$887.5
$ 3.15
$ 905.4
$ 2.98
Net Realized Investment Gain (Loss),
Net of Tax
3.9
0.02
37.1
0.13
(3.6)
(0.01)
Non-operating Retirement-related Loss,
Net of Tax
(21.4)
(0.08)
(30.2)
(0.11)
(20.7)
(0.07)
Unclaimed Death Benefits Reserve Increase,
Net of Tax
(62.1)
(0.24)
Group Life Waiver of Premium Benefit
Reserve Reduction, Net of Tax
55.2
0.21
Deferred Acquisition Costs Impairment
and Reserve Charges for Long-term Care
Closed Block, Net of Tax
Reserve Charge for Individual Disability
Closed Block, Net of Tax
Tax Reduction from IRS Settlement
Tax Related to U.K. Repatriation
Net Income
* Assuming Dilution
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(500.3)
(1.65)
(119.3)
41.3
(18.6)
(0.39)
0.14
(0.06)
$858.1
$ 3.23
$894.4
$ 3.17
$ 284.2
$ 0.94
42 / UNUM 2013 ANNUAL REPORT
Consolidated Sales Results
Shown below are sales results for our three principal operating business segments.
(in millions)
Unum US
Unum UK
Colonial Life
Year Ended December 31
2013
% Change
2012
% Change
$745.6
£ 48.4
$367.6
(2.0)%
(18.7)%
1.6%
$760.5
£ 59.5
$361.9
7.5%
(5.1)%
(1.1)%
2011
$707.3
£ 62.7
$365.9
Sales shown in the preceding chart generally represent the annualized premium income on new sales which we expect to receive and
report as premium 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 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 income over a
12 month period, while premium income reported in our financial statements is reported on an “as earned” basis rather than an annualized
basis and also includes renewals and persistency of in-force policies written in prior years as well as current new sales.
Sales, persistency of the existing block of business, employment and salary growth, and the effectiveness of a renewal program are
indicators of growth in premium 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.
See “Segment Results” as follows for a discussion of sales by segment.
Segment Results
Our reporting segments are comprised of the following: Unum US, Unum UK, Colonial Life, Closed Block, and Corporate. Financial
information for each of our reporting segments is as follows.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
UNUM 2013 ANNUAL REPORT / 43
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.
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)
2013
% Change
2012
% Change
2011
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
Commissions
Interest and Debt Expense
Deferral of Acquisition Costs
Amortization of Deferred Acquisition Costs
Other Expenses
Total
Income Before Income Tax and Net Realized
Investment Gains and Losses
Unclaimed Death Benefits (UDB) Reserve Increase
Group Life Waiver of Premium Benefit (Waiver)
Reserve Reduction
Operating Income
Operating Ratios (% of Premium Income):
Benefit Ratio
Benefit Ratio Excluding the UDB and
Waiver Reserve Adjustments
Other Expense Ratio
Income Ratio
Operating Income Ratio
$4,517.1
1.4%
$4,456.5
3.7%
$4,296.0
929.6
128.3
5,575.0
3,222.4
505.2
0.1
(252.0)
230.0
1,000.7
4,706.4
868.6
75.4
(85.0)
$ 859.0
71.3%
71.6%
22.2%
19.2%
19.0%
(2.4)
3.0
0.8
(0.5)
(0.5)
(90.9)
1.1
17.0
0.9
0.4
2.5
—
—
1.4
952.3
124.6
5,533.4
3,238.6
507.5
1.1
(249.2)
196.5
991.8
4,686.3
847.1
—
—
$ 847.1
0.1
2.5
3.1
4.0
7.1
10.0
13.1
4.5
(0.4)
2.9
3.7
—
—
3.7
951.4
121.6
5,369.0
3,113.5
474.0
1.0
(220.3)
188.1
995.8
4,552.1
816.9
—
—
$ 816.9
72.7%
72.5%
22.3%
19.0%
19.0%
23.2%
19.0%
19.0%
44 / UNUM 2013 ANNUAL REPORT
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)
2013
% Change
2012
% Change
2011
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
$1,553.9
(1.6)%
$1,578.8
(0.1)%
$1,580.2
519.6
2,073.5
550.1
95.6
2,719.2
9.0
0.9
(4.6)
2.0
(0.3)
(0.5)
3.0
(90.9)
12.5
15.3
(1.2)
(0.5)
1.8
4.7
1.0
(4.6)
4.8
(0.1)
1.1
(0.1)
10.0
20.1
(7.6)
(1.5)
0.2
(3.0)
476.7
2,055.5
576.9
93.7
2,726.1
1,741.6
159.3
1.1
(26.3)
18.3
539.0
2,433.0
$ 293.1
84.7%
26.2%
14.3%
90.7%
88.0%
455.2
2,035.4
605.0
89.4
2,729.8
1,722.1
159.5
1.0
(21.9)
19.8
547.0
2,427.5
$ 302.3
84.6%
26.9%
14.9%
90.2%
89.9%
Benefits and Change in Reserves for Future Benefits
1,732.9
Commissions
Interest and Debt Expense
Deferral of Acquisition Costs
Amortization of Deferred Acquisition Costs
Other Expenses
Total
Operating Income
Operating Ratios (% of Premium Income):
Benefit Ratio
Other Expense Ratio
Operating Income Ratio
Persistency:
Group Long-term Disability
Group Short-term Disability
164.0
0.1
(29.6)
21.1
532.3
2,420.8
$ 298.4
83.6%
25.7%
14.4%
87.2%
88.0%
Management’s Discussion and Analysis of Financial Condition and Results of Operations
UNUM 2013 ANNUAL REPORT / 45
Year Ended December 31, 2013 Compared with Year Ended December 31, 2012
Premium income increased slightly in 2013 compared to 2012 primarily due to growth from rate increases, partially offset by a
decline in persistency in the group long-term disability product line. The weak pace of economic growth, low levels of employment growth,
and competitive environment continue to pressure our premium income growth, including growth from existing customers. Net investment
income declined in 2013 relative to 2012 due to decreases in the level of invested assets, lower income from bond call premiums, and a
decrease in the yield on invested assets. Other income for 2013 included fees from administrative services products of $78.5 million
compared to $81.7 million in 2012. Also included in other income for 2013 is a gain of $4.0 million on the purchase and retirement of the
debt issued by Tailwind Holdings.
Risk results were favorable in 2013 compared to 2012 due to favorable claim incidence rates and continued strong claim recovery
experience. These results were partially offset by the decrease in the discount rate which we implemented during the third quarter of 2012
for new group long-term disability claim incurrals.
The deferral and amortization of acquisition costs were both higher in 2013 relative to the prior year due to an increase in deferrable
expenses and the resulting continued growth in the level of the deferred asset. The other expense ratio for 2013 was lower compared to
2012 as we continue to focus on operating effectiveness and expense management relative to our premium income levels.
Year Ended December 31, 2012 Compared with Year Ended December 31, 2011
Premium income increased slightly in 2012 compared to 2011 due to sales growth and generally stable persistency levels. High
unemployment levels and the competitive environment continued to pressure our premium income growth, including growth from existing
customers. Net investment income declined in 2012 relative to 2011 due to a decrease in income from bond call premiums, a decrease in
the level of invested assets, and a decline in yield on invested assets, partially offset by an increase in the level of prepayment income
on mortgage-backed securities. Other income for 2012 included fees from administrative services products of $81.7 million compared to
$77.9 million in 2011.
Risk results were slightly unfavorable in 2012 compared to 2011 due primarily to a 50 basis point decrease in the discount rate during
the third quarter of 2012 for group long-term disability new claim incurrals compared to a 25 basis point decrease during the third quarter
of 2011. Long-term disability claim recoveries were favorable in 2012 relative to 2011.
The deferral of acquisition costs in 2012 was higher than 2011 due primarily to a higher level of sales. The amortization of deferred
acquisition costs was lower in 2012 compared to the prior year due to a decrease in amortization related to internal replacement
transactions. The other expense ratio was lower in 2012 relative to 2011 due primarily to higher premium income and our focus on
operating effectiveness and expense management.
46 / UNUM 2013 ANNUAL REPORT
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)
2013
% Change
2012
% Change
2011
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
Income Before Income Tax and Net Realized
Investment Gains and Losses
Unclaimed Death Benefits (UDB) Reserve Increase
Group Life Waiver of Premium Benefit (Waiver)
Reserve Reduction
Operating Income
Operating Ratios (% of Premium Income):
Benefit Ratio
Benefit Ratio Excluding the UDB and
Waiver Reserve Adjustments
Other Expense Ratio
Income Ratio
Operating Income Ratio
Persistency:
Group Life
Accidental Death & Dismemberment
2.7%
$1,182.1
6.8%
$1,106.7
$1,213.9
121.6
1,335.5
142.6
1.8
1,479.9
909.9
108.9
(24.7)
15.6
198.2
5.5
2.9
(2.9)
(5.3)
2.3
(2.8)
4.1
10.3
14.7
2.6
1,207.9
(1.4)
1,225.3
272.0
49.1
(85.0)
$ 236.1
23.1
—
—
6.9
220.9
—
—
$ 220.9
115.3
1,297.4
146.9
5.6
6.7
8.4
1.9
(13.6)
1,446.2
6.8
936.4
104.6
(22.4)
13.6
193.1
9.6
9.5
21.1
(4.2)
(3.1)
7.0
5.9
—
—
5.9
109.2
1,215.9
135.5
2.2
1,353.6
854.6
95.5
(18.5)
14.2
199.3
1,145.1
208.5
—
—
$ 208.5
68.1%
70.8%
14.8%
20.4%
17.7%
88.1%
88.8%
72.2%
70.3%
14.9%
17.0%
17.0%
90.6%
90.0%
16.4%
17.1%
17.1%
88.0%
88.2%
Management’s Discussion and Analysis of Financial Condition and Results of Operations
UNUM 2013 ANNUAL REPORT / 47
Year Ended December 31, 2013 Compared with Year Ended December 31, 2012
Premium income increased in 2013 compared to 2012 primarily due to growth in the inforce block of business as a result of sales and
rate increases, partially offset by a decline in persistency. Net investment income was lower in 2013 compared to 2012 primarily due to a
decrease in the yield on invested assets and lower income from bond call premiums, partially offset by an increase in investment income
attributable to tax credit partnerships and the level of invested assets.
Risk results were favorable compared to 2012 primarily as a result of the previously discussed reserve reduction for group life waiver of
premium benefits, partially offset by the reserve increase for unclaimed death benefits charge. Excluding these reserve adjustments, risk results
were favorable in 2013 compared to 2012 due primarily to more favorable experience related to the group life waiver of premium benefits.
The deferral and amortization of acquisition costs were both higher in 2013 relative to the prior year due to an increase in deferrable
expenses and the resulting continued growth in the level of the deferred asset. The other expense ratio in 2013 was consistent with the
prior year.
Year Ended December 31, 2012 Compared with Year Ended December 31, 2011
Premium income was higher in 2012 compared to 2011 due primarily to higher sales and favorable persistency. Net investment
income was higher in 2012 compared to 2011 due primarily to an increase in income from bond call premiums, an increase in the level of
invested assets, and an increase in the level of prepayment income on mortgage-backed securities, partially offset by a decline in yield
on invested assets.
Risk results were unfavorable in 2012 compared to 2011 due primarily to a higher average claim size and a higher claim incidence rate.
Commissions and the deferral of acquisition costs were higher in 2012 compared to 2011 due primarily to higher sales. The amortization
of deferred acquisition costs was lower in 2012 compared to 2011 due primarily to a decrease in amortization related to internal replacement
transactions. The other expense ratio was lower in 2012 compared to 2011 due to our focus on operating effectiveness and expense
management relative to our premium income levels.
48 / UNUM 2013 ANNUAL REPORT
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)
2013
% Change
2012
% Change
2011
Year Ended December 31
Operating Revenue
Premium Income
Individual Disability — Recently Issued
$ 465.3
(2.6)%
$ 477.6
2.8%
$ 464.7
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
Income Before Income Tax and Net Realized
Investment Gains and Losses
Unclaimed Death Benefits (UDB) Reserve Increase
Operating Income
Interest Adjusted Loss Ratio:
Individual Disability — Recently Issued
Operating Ratios (% of Premium Income):
Benefit Ratios:
Individual Disability — Recently Issued
Voluntary Benefits
Benefit Ratio Excluding the
UDB Reserve Increase
Voluntary Benefits
Other Expense Ratio
Income Ratio
Operating Income Ratio
Persistency:
Individual Disability — Recently Issued
Voluntary Benefits
642.8
1,108.1
236.9
30.9
1,375.9
579.6
232.3
(197.7)
193.3
270.2
1,077.7
2.7
0.4
3.7
6.6
1.1
3.4
(4.6)
(1.4)
17.4
4.0
4.8
626.0
1,103.6
228.5
29.0
1,361.1
560.6
243.6
(200.5)
164.6
259.7
1,028.0
298.2
26.3
(10.5)
—
333.1
—
$ 324.5
(2.6)
$ 333.1
7.9
5.6
8.3
(3.3)
5.9
4.4
11.2
11.5
6.8
4.1
5.0
8.8
—
8.8
580.0
1,044.7
210.9
30.0
1,285.6
536.8
219.0
(179.9)
154.1
249.5
979.5
306.1
—
$ 306.1
29.6%
31.2%
30.8%
51.3%
53.0%
48.9%
24.4%
26.9%
29.3%
90.5%
77.0%
52.4%
49.5%
23.5%
30.2%
30.2%
91.4%
78.9%
52.2%
50.7%
23.9%
29.3%
29.3%
89.3%
80.5%
Management’s Discussion and Analysis of Financial Condition and Results of Operations
UNUM 2013 ANNUAL REPORT / 49
Year Ended December 31, 2013 Compared with Year Ended December 31, 2012
Premium income was generally consistent in 2013 compared to 2012, with growth in voluntary benefits offset by a decrease in the
individual disability — recently issued product line due to a reinsurance contract entered into during the second quarter of 2013 to cede a
small block of individual disability business. Persistency for both individual disability — recently issued and voluntary benefits declined
relative to the prior year due to a higher level of policy terminations in the early part of 2013. Net investment income was higher in 2013
compared to the prior year due to an increase in the level of invested assets, an increase in investment income attributable to tax credit
partnerships, and higher income from bond call premiums, partially offset by a decline in the yield on invested assets.
Risk results for the individual disability — recently issued product line were favorable during 2013 compared to 2012 due to higher
claim recoveries and the impact of a release of active life reserves related to the termination of a large inforce policy in 2013. Risk results
for voluntary benefits were unfavorable compared to 2012 as a result of the previously discussed reserve increase for unclaimed death
benefits. Excluding this reserve increase, risk results for voluntary benefits were slightly favorable in 2013 compared to the prior year due
to favorable experience in the life and critical illness product lines.
Commissions were lower in 2013 relative to 2012 due primarily to amounts ceded under the individual disability reinsurance contract
previously discussed. The deferral of acquisition costs was generally consistent in 2013 compared to 2012. The amortization of deferred
acquisition costs was higher in 2013 compared to the prior year due to a less favorable year-over-year impact from the prospective
unlocking for expected future experience relative to assumptions for our interest-sensitive voluntary life products as well as a higher level
of policy terminations relative to assumptions for certain issue years within certain of our product lines. The other expense ratio in 2013
was higher than 2012 due primarily to lower premium income resulting from the reinsurance contract entered into during 2013 in our
individual disability — recently issued product line as well as higher expenses associated with our voluntary benefits products.
The individual disability — recently issued product line had goodwill of approximately $187.5 million at December 31, 2013, none of
which is currently believed to be at risk for future impairment.
Year Ended December 31, 2012 Compared with Year Ended December 31, 2011
Premium income was higher in 2012 compared to 2011 due primarily to continued sales growth and stable persistency. Net investment
income was higher in 2012 compared to 2011 due primarily to an increase in the level of invested assets, an increase in bond call premiums
and other fees, and an increase in the level of prepayment income on mortgage-backed securities, partially offset by a decline in yield on
invested assets.
Risk results for the individual disability — recently issued line of business were unfavorable in 2012 compared to 2011 due primarily
to higher submitted incidence rates, partially offset by higher claim recoveries. Risk results for voluntary benefits were favorable in 2012
compared to 2011 driven primarily by the release of active life reserves associated with individual contracts that terminated and bought
voluntary group coverage during 2012.
Commissions and the deferral of acquisition costs were higher in 2012 compared to 2011 due to higher sales. The amortization
of deferred acquisition costs was higher in 2012 compared to 2011 due to unfavorable persistency relative to assumptions for certain
issue years within certain of our product lines, including the impact on persistency from individual contracts that terminated and
bought voluntary group coverage during 2012. Partially offsetting this increase in amortization was a reduction in amortization due to a
more favorable year-over-year impact from the prospective unlocking for expected future experience relative to assumptions for our
interest-sensitive voluntary life products. The other expense ratio decreased slightly due to a continued focus on operating effectiveness
and expense management.
50 / UNUM 2013 ANNUAL REPORT
Sales
(in millions of dollars)
Sales by Product
Group Disability and Group Life and AD&D
Group Long-term Disability
Group Short-term Disability
Group Life and AD&D
Subtotal
Supplemental and Voluntary
Individual Disability — Recently Issued
Voluntary Benefits
Subtotal
Total Sales
Sales by Market Sector
Group Disability and Group Life and AD&D
Core Market (< 2,000 lives)
Large Case Market
Subtotal
Supplemental and Voluntary
Total Sales
Year Ended December 31
2013
% Change
2012
% Change
2011
$173.3
(4.9)%
$182.2
101.9
199.4
474.6
52.2
218.8
271.0
$745.6
4.6
(3.9)
(2.6)
(8.4)
1.1
(0.9)
(2.0)
97.4
207.5
487.1
57.0
216.4
273.4
$760.5
$324.4
(3.1)%
$334.9
150.2
474.6
271.0
$745.6
(1.3)
(2.6)
(0.9)
(2.0)
152.2
487.1
273.4
$760.5
10.4%
14.7
2.3
7.6
2.5
8.8
7.4
7.5
4.0%
16.4
7.6
7.4
7.5
$165.0
84.9
202.9
452.8
55.6
198.9
254.5
$707.3
$322.1
130.7
452.8
254.5
$707.3
Year Ended December 31, 2013 Compared with Year Ended December 31, 2012
Sales in our Unum US group core and large case market segments declined in 2013 relative to 2012. In both markets, sales to existing
accounts increased in 2013 but this increase was more than offset by a decrease in new account sales. The decline in new sales in our
group core market was driven by fewer sales opportunities in the small-size employer market segment during 2013, which we believe may
be temporarily attributable to healthcare reform as well as the uncertain economic and political environment. We believe the decline in
new sales in our large case market was partially due to our disciplined and opportunistic approach to sales growth. The sales mix in our
group market sector in 2013 was approximately 68 percent core market and 32 percent large case market, generally consistent with 2012.
Sales of voluntary benefits were higher in 2013 compared to 2012, with an increase in core market sales partially offset by a decrease
in large case market sales. New account sales increased during 2013 but were partially offset by a decrease in sales to existing customers,
primarily in the large case market. Sales in our individual disability — recently issued line of business, which are primarily concentrated in
the multi-life market, were lower in 2013 compared to 2012 due to lower sales growth from existing customers.
We continue to believe that the group core market and voluntary benefits market, which combined together were approximately
73 percent of our Unum US sales for 2013, represent significant growth opportunities. We will continue to seek disciplined and opportunistic
growth in the group large case and individual disability markets. While in the short term we expect economic trends, premium rate
increases for certain of our group products, and the market distraction which we believe has resulted from the implementation of
healthcare reform will continue to pressure our sales growth, we believe we are well positioned to expand existing relationships and
leverage our brand and market leadership.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
UNUM 2013 ANNUAL REPORT / 51
Year Ended December 31, 2012 Compared with Year Ended December 31, 2011
Unum US sales were higher in 2012 compared to 2011, with growth in each of our product lines and in each of our major market
segments. Sales in our group core market segment were higher in 2012 relative to 2011, 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 2012 was 1.9 percent higher than the
number of new accounts added during 2011.
Sales in our group large case market segment were higher in 2012 compared to 2011, with increases in each of the product lines
within this market segment. We continued our disciplined and opportunistic approach to sales growth in the large case market during 2012,
and although the level of sales in this market segment was higher than in 2011, our new business pricing was within our guidelines. Our
sales mix in 2012 was approximately 69 percent core market and 31 percent large case market, generally consistent with 2011.
Sales of voluntary benefits were higher in 2012 compared to 2011 due primarily to strong large case sales and increases in sales to
both new and existing customers. The number of new accounts added in the voluntary benefits product line was 6.9 percent lower in 2012
than the number of new accounts added during 2011. Sales in our individual disability — recently issued line of business were 2.5 percent
higher in 2012 compared to 2011 due primarily to higher sales to existing customers.
Segment Outlook
We believe that premium growth, particularly growth within existing customer accounts, will continue to be pressured during
2014 by the weak pace of economic growth, low levels of employment growth, the competitive environment, and the distraction caused
by political instability and the implementation of healthcare reform. Although we expect to achieve marginal year-over-year growth in
premium income during 2014, opportunities for further premium growth are not expected to re-emerge until the economy improves and
employment growth accelerates. Our net investment income may be impacted, either favorably or unfavorably, by fluctuations in bond call
premiums and other types of miscellaneous net investment income. The low interest rate environment and the tightening of credit spreads
continue to place near-term pressure on our profit margins by impacting net investment income yields and claim reserve discount rates.
As a result of the continued low interest rate environment and the aging of insureds, we began initiating price increases for our group
disability products during 2012 and will continue with these pricing levels on new and renewal business throughout 2014. We anticipate
that the 2014 benefit ratio for our group disability product line will be slightly below the level of 2013. Our amortization of deferred
acquisition costs may be unfavorably impacted, particularly in our voluntary benefits product line, by higher than expected policy
terminations. We believe future profit margin improvement is achievable, driven primarily by our continued product mix shift, expense
efficiencies, and consistent operating effectiveness.
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 or lower discount 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. Claim incidence levels may fluctuate due to the
normal volatility that occurs in group disability business or may be related to economic conditions. We continuously monitor key indicators
to assess our risks and attempt to adjust our business plans accordingly.
We remain confident that our strategy of focusing on protecting consumers, broadening client relationships, and building collaborative
partnerships will enable us to achieve our long-term financial objectives. We continue to see future growth opportunity based on employee
choice, defined employer funding, superior service, and effective communication. Our focused offerings, risk management discipline,
consistent benefits performance, and expense management have enabled us to deliver earnings growth. We believe we will reach our
52 / UNUM 2013 ANNUAL REPORT
long-term sales and premium objectives by capturing opportunities emerging in our core group and voluntary markets to grow them at
above-market rates, despite short-term sales pressure from healthcare reform’s impact and increased competition and changing distribution
dynamics in the voluntary benefits market. We intend to maintain our focus on persistency of our inforce block and on increasing participation
levels from existing customers. Our continued investments in partnerships and market expansion should enhance our ability to grow the
market over the long term. We believe our operational excellence and the benefits derived from investments in our technology
infrastructure will improve our cost position.
Unum UK Segment
The Unum UK segment includes insurance for group long-term disability, group life, and supplemental lines of business which
include individual disability and critical illness. 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.
Year Ended December 31
(in millions of dollars, except ratios)
2013
% Change
2012
% Change
2011
Operating Revenue
Premium Income
Group Long-term Disability
$389.9
(4.8)%
$409.7
(2.4)%
$419.6
Group Life
Supplemental
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
Operating Ratios (% of Premium Income):
Benefit Ratio
Other Expense Ratio
Operating Income Ratio
Persistency:
Group Long-term Disability
Group Life
Supplemental
106.4
60.3
556.6
148.5
0.1
705.2
413.3
38.0
(9.8)
14.7
117.0
573.2
(51.9)
(5.2)
(19.9)
(13.1)
—
(18.5)
(23.7)
(10.8)
(16.9)
(6.4)
(20.0)
(21.9)
221.3
63.6
694.6
170.8
0.1
865.5
541.4
42.6
8.7
(1.2)
1.0
(10.1)
(66.7)
(1.4)
9.6
(6.8)
(11.8)
(23.4)
15.7
146.3
734.2
2.6
(0.9)
6.9
203.6
64.4
687.6
189.9
0.3
877.8
493.8
45.7
(15.4)
15.3
147.7
687.1
$132.0
0.5
$131.3
(31.1)
$190.7
74.3%
21.0%
23.7%
82.2%
66.7%
78.8%
77.9%
21.1%
18.9%
84.0%
82.5%
84.6%
71.8%
21.5%
27.7%
86.6%
89.3%
87.3%
Management’s Discussion and Analysis of Financial Condition and Results of Operations
UNUM 2013 ANNUAL REPORT / 53
Foreign Currency Translation
The functional currency of Unum UK is the British pound sterling. Unum UK’s premium income, 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 weakens relative to the preceding period, as occurred during 2013 and 2012, translating pounds into
dollars decreases current period results relative to the prior period. In periods when the pound strengthens relative to the preceding period,
translating pounds into dollars increases current period results relative to the prior period.
(in millions of pounds, except ratios)
2013
% Change
2012
% Change
2011
Year Ended December 31
Operating Revenue
Premium Income
Group Long-term Disability
£249.2
(3.6)%
£258.4
(1.2)%
£261.6
Group Life
Supplemental
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
Weighted Average Pound/Dollar Exchange Rate
68.2
38.5
355.9
94.9
0.1
450.9
264.5
24.3
(6.2)
9.3
74.7
366.6
£ 84.3
1.566
(51.1)
(4.0)
(18.8)
(11.9)
—
(17.4)
(22.5)
(9.7)
(17.3)
(6.1)
(19.0)
(20.8)
1.7
139.6
40.1
438.1
107.7
—
545.8
341.4
26.9
(7.5)
9.9
92.2
462.9
9.9
—
2.2
(9.0)
—
(0.3)
11.0
(5.6)
(21.1)
5.3
0.1
8.1
£ 82.9
(30.3)
1.584
127.0
40.1
428.7
118.4
0.1
547.2
307.7
28.5
(9.5)
9.4
92.1
428.2
£119.0
1.603
54 / UNUM 2013 ANNUAL REPORT
Year Ended December 31, 2013 Compared with Year Ended December 31, 2012
Premium income was lower in 2013 compared to 2012 due primarily to reinsurance agreements we entered into effective January 1,
2013 to cede an additional portion of our group life business. The reinsurance agreements significantly decreased premium income and benefit
payments for group life during 2013 and also reduced volatility in this line of business. Premium income in 2013 was also unfavorably
impacted by continued pressure on persistency resulting from the initiation of premium rate increases, partially offset by an increase in
premium income as a result of rate increases in existing customer accounts.
Net investment income declined in 2013 compared to 2012 due primarily to decreases in the yield on invested assets and in the
level of invested assets. We also reported lower income from inflation index-linked bonds which we invest in to support the claim reserves
associated with certain of our group policies that provide for inflation-linked increases in benefits.
Group long-term disability risk results were unfavorable in 2013 compared to 2012 due primarily to lower claim recoveries. Group life
risk results were favorable in 2013 compared to 2012 due primarily to lower mortality rates on the retained business. Supplemental risk
results were favorable in 2013 compared to 2012 due to lower claim incidence rates for the group critical illness product line.
Commissions and deferral of acquisition costs were lower in 2013 compared to 2012 due to expenses ceded under the group life
reinsurance agreements and a lower level of sales in 2013. The amortization of deferred acquisition costs and the other expense ratio
were generally consistent in 2013 compared to the prior year.
Year Ended December 31, 2012 Compared with Year Ended December 31, 2011
Premium income was higher in 2012 compared to 2011, although premium growth and persistency were unfavorably impacted by
the initiation of premium rate increases in our group long-term disability and group life product lines. Group long-term disability premium
income was lower in 2012 compared to 2011 due to a decline in persistency resulting primarily from premium rate increases, partially
offset by an increase in premium income due to growth in existing customer accounts. Group life premium income increased in 2012
relative to 2011 as a result of premium rate increases and higher new business sales, partially offset by lower persistency resulting primarily
from premium rate increases.
Net investment income declined in 2012 compared to 2011 due primarily to lower income on inflation index-linked bonds, a decrease
in invested asset yields, and lower income from bond call premiums, partially offset by an increase in the level of invested assets.
Group long-term disability risk results were unfavorable in 2012 compared to 2011 due primarily to less favorable claim recoveries
and higher incidence rates. Group life risk results were unfavorable in 2012 compared to 2011 due to a higher average claim size and higher
claim volumes. Supplemental risk results were favorable in 2012 compared to 2011 due to lower claim incidence rates in the group critical
illness and individual disability products.
Commissions and the deferral of acquisition costs were both lower in 2012 compared to 2011 due primarily to a lower level of
individual disability product sales. The amortization of deferred acquisition costs was higher in 2012 compared to 2011 due primarily to
an increase in internal replacement transactions. The other expense ratio was lower in 2012 compared to 2011 due primarily to higher
premium income and continued expense management initiatives.
Management’s Discussion and Analysis of Financial Condition and Results of Operations UNUM 2013 ANNUAL REPORT / 55
Sales
Shown below are sales results in dollars and in pounds for the Unum UK segment.
(in millions)
Sales by Product
Group Long-term Disability
Group Life
Supplemental
Total Sales
Sales by Market Sector
Group Long-term Disability and Group Life
Core Market (< 500 lives)
Large Case Market
Subtotal
Supplemental
Total Sales
Sales by Product
Group Long-term Disability
Group Life
Supplemental
Total Sales
Sales by Market Sector
Group Long-term Disability and Group Life
Core Market (< 500 lives)
Large Case Market
Subtotal
Supplemental
Total Sales
Year Ended December 31
2013
% Change
2012
% Change
2011
$50.5
21.4
3.9
$75.8
$38.9
33.0
71.9
3.9
$75.8
£32.2
13.7
2.5
£48.4
£24.9
21.0
45.9
2.5
£48.4
(1.4)%
(43.7)
(20.4)
(19.4)
0.5%
(34.7)
(19.4)
(20.4)
(19.4)
(0.3)%
(43.2)
(19.4)
(18.7)
2.0%
(34.4)
(18.6)
(19.4)
(18.7)
$51.2
38.0
4.9
$94.1
7.1%
$ 47.8
(13.2)
(43.0)
(6.1)
43.8
8.6
$100.2
$38.7
3.2%
$ 37.5
50.5
89.2
4.9
$94.1
£32.3
24.1
3.1
£59.5
(6.7)
(2.6)
(43.0)
(6.1)
54.1
91.6
8.6
$100.2
8.4%
£ 29.8
(12.4)
(42.6)
(5.1)
27.5
5.4
£ 62.7
£24.4
4.3%
£ 23.4
32.0
56.4
3.1
£59.5
(5.6)
(1.6)
(42.6)
(5.1)
33.9
57.3
5.4
£ 62.7
Sales in Unum UK’s group long-term disability product line during 2013 were consistent with 2012, with higher new account sales and
an increase in core market sales offset by a decrease in sales to existing customers and a decline in sales in the large case market. Group
life sales were lower in 2013 compared to 2012 as a result of declines in new account sales in both the core and large case markets, which
more than offset higher sales to existing customers. The decrease in group life sales was due in part to pricing discipline and the initiation
of rate increases on new business. Also impacting the comparability of group life sales relative to 2012 was the discontinuance of new
sales of certain of our group life product lines beginning in the third quarter of 2012. Supplemental sales were lower in 2013 compared to
2012 due primarily to lower sales in our individual disability product line.
Sales in Unum UK’s group long-term disability product line were higher in 2012 compared to 2011 due to higher new account sales in
both the core and large case markets, partially offset by lower sales to existing customers. Group life sales were lower in 2012 compared
to 2011 due to our discontinuance of new sales of certain of our group life product lines, lower large case sales, and lower sales to existing
customers, partially offset by higher core market sales. Supplemental sales were lower in 2012 compared to 2011 due primarily to lower
sales in our group critical illness and individual disability product lines.
56 / UNUM 2013 ANNUAL REPORT
Segment Outlook
Our primary focus during 2014 is to build key capabilities to enable us to deliver future growth. Our shift in business mix and focus
on premium rate increases for both group long-term disability and group life is expected to continue to improve our profitability. However,
pressure on new sales and persistency is likely to continue, and the low interest rate environment is expected to dampen overall earnings
growth. We intend to continue with our group life reinsurance program during 2014, although we have increased our retention level for our
group life products that provide lump sum benefits. We expect that the challenging economic and competitive pricing environment in the
U.K. which has continued to negatively impact Unum UK’s premium growth may continue in the near term. The current economic conditions
may lead to a higher rate of claim incidence, lower levels of claim recoveries, or lower claim discount rates. We continuously monitor key
indicators to assess our risks and attempt to adjust our business plans accordingly.
In our group life business, our near-term actions regarding rate increases, reinsurance, and the discontinuance of certain product
lines have reduced volatility. We will continue to implement rate increases in 2014, and we believe profit margins will continue to improve.
Although group life premium income may decline as a result of these actions and a shift in business mix, during 2013 the increase to
premium income from rate increases largely offset the impact of policy terminations.
In our group long-term disability business, we remain committed to driving growth in the U.K. market, although we continue to have
a cautious outlook for growth given the current environment. We anticipate returning to more normal levels of premium growth as our rate
increases continue to be placed in the market and as we continue to increase sales to new and existing customers. We have seen some
positive results in terms of new to market sales and increased coverage in existing cases. In addition, we continue to focus on new market
opportunities by raising awareness of the need for income protection. Expanding group long-term disability market penetration remains
a significant opportunity and priority in the U.K.
Management’s Discussion and Analysis of Financial Condition and Results of Operations UNUM 2013 ANNUAL REPORT / 57
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)
2013
% Change
2012
% Change
2011
Year Ended December 31
Operating Revenue
Premium Income
Accident, Sickness, and Disability
$ 738.7
2.0%
$ 724.5
4.2%
$ 695.3
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
Income Before Income Tax and Net Realized
Investment Gains and Losses
Unclaimed Death Benefits (UDB) Reserve Increase
Operating Income
Operating Ratios (% of Premium Income):
Benefit Ratio
Benefit Ratio Excluding the UDB Reserve Increase
Other Expense Ratio
Income Ratio
Operating Income Ratio
Persistency:
Accident, Sickness, and Disability
Life
Cancer and Critical Illness
221.1
272.4
1,232.2
145.4
0.2
1,377.8
667.0
252.5
(205.0)
174.2
224.3
1,113.0
264.8
20.1
$ 284.9
54.1%
52.5%
18.2%
21.5%
23.1%
75.2%
85.2%
83.1%
5.4
4.6
3.2
4.9
209.7
260.3
1,194.5
138.6
10.0
4.4
5.2
4.7
(33.3)
3.3
0.3
(40.0)
1,333.4
5.1
6.3
(0.8)
(0.6)
4.6
3.3
5.1
(3.5)
—
3.9
627.3
254.5
(206.3)
166.5
217.1
1,059.1
274.3
—
$ 274.3
6.4
3.5
1.6
10.1
1.1
6.1
1.6
—
1.6
52.5%
18.2%
23.0%
23.0%
75.7%
85.7%
84.5%
190.7
249.3
1,135.3
132.4
0.5
1,268.2
589.4
245.9
(203.1)
151.2
214.7
998.1
270.1
—
$ 270.1
51.9%
18.9%
23.8%
23.8%
73.8%
85.0%
84.0%
58 / UNUM 2013 ANNUAL REPORT
Year Ended December 31, 2013 Compared with Year Ended December 31, 2012
Premium income increased in 2013 relative to 2012 due to continued growth in the inforce block of business as a result of sales
and stable persistency. Net investment income increased in 2013 due to an increase in the level of invested assets and higher income
from bond call premiums and private equity partnership investments, partially offset by a decrease in the yield on invested assets.
Our reported risk results were unfavorable compared to 2012 as a result of the previously discussed reserve increase for unclaimed
death benefits. Excluding this reserve increase, the benefit ratio of 52.5% was consistent with the level of 2012, with favorable risk results
in the life product line, due to improved mortality experience, offsetting less favorable risk results in the accident, sickness, and disability
and cancer and critical illness product lines that resulted from an increased level of incurred claims.
Commissions and the deferral of acquisition costs were generally consistent in 2013 compared to the prior year. The amortization
of deferred acquisition costs was higher in 2013 compared to 2012 due to continued growth in the level of the deferred asset as well as an
unfavorable impact from the prospective unlocking for expected future experience relative to assumptions for our interest-sensitive life
products. The increase in other expenses in 2013 compared to 2012 was commensurate with the growth in premium income.
Year Ended December 31, 2012 Compared with Year Ended December 31, 2011
Premium income increased in 2012 relative to 2011 due primarily to prior period sales growth and improved persistency. Net investment
income was higher in 2012 compared to 2011 as a result of growth in the level of invested assets, an increase in income from private equity
partnership investments, and a higher level of fees from mortgage loan prepayments, partially offset by a decline in income from bond call
premiums and a decrease in yield.
Risk results were unfavorable in 2012 compared to 2011 for the life and cancer and critical illness product lines, partially offset by
favorable risk results for the accident, sickness, and disability product line. The unfavorable risk results for the life product line in 2012 were
driven by higher mortality rates, which can exhibit volatility from period to period. Risk results for the cancer and critical illness product line
were slightly unfavorable in 2012 due primarily to a higher level of paid claims in the cancer product line and a higher active life reserve
change due to favorable persistency for certain issue years. The slightly favorable risk results in the accident, sickness, and disability
product line in 2012 were due to favorable claim experience in the disability product.
Commissions and the deferral of acquisition costs were both higher in 2012 compared to 2011 due primarily to an increase in costs
related to growth in new business premium. The amortization of deferred acquisition costs was higher in 2012 compared to 2011 due to an
increase in the level of the deferred asset as well as a less favorable year-over-year impact from the prospective unlocking for expected
future experience relative to assumptions for our interest-sensitive life product. The other expense ratio was lower in 2012 compared to
2011 due primarily to higher premium income and a continued focus on expense management.
Sales
(in millions of dollars)
Sales by Product
Accident, Sickness, and Disability
Life
Cancer and Critical Illness
Total Sales
Sales by Market Sector
Commercial
Core Market (< 1,000 lives)
Large Case Market
Subtotal
Public Sector
Total Sales
Year Ended December 31
2013
% Change
2012
% Change
2011
$238.2
68.1
61.3
$367.6
$246.0
49.0
295.0
72.6
$367.6
2.2%
1.2
(0.5)
1.6
(0.9)%
19.8
2.0
(0.1)
1.6
$233.0
67.3
61.6
$361.9
$248.3
40.9
289.2
72.7
$361.9
(4.1)%
2.7
7.1
(1.1)
0.1%
(6.8)
(0.9)
(1.8)
(1.1)
$242.9
65.5
57.5
$365.9
$248.0
43.9
291.9
74.0
$365.9
Management’s Discussion and Analysis of Financial Condition and Results of Operations
UNUM 2013 ANNUAL REPORT / 59
Colonial Life’s sales for 2013 were slightly higher than 2012, with growth in existing account sales in all market segments. This growth
was partially offset by a slight decrease in new account sales, with the decline primarily occurring in the core market segment. Although
large case commercial market sales were significantly higher than 2012, our new business pricing was within our guidelines as we
continued our disciplined yet opportunistic approach to sales growth in this market. We believe the 2013 decrease in core commercial
market sales, particularly in the small employer segment, may be partially attributable to healthcare reform as well as the uncertain
economic and political environment. The number of new accounts decreased 18.2 percent in 2013 compared to 2012, while the average
new case size increased 20.0 percent.
Colonial Life’s sales were lower in 2012 relative to 2011, with a decrease in new account sales partially offset by an increase in existing
account sales. Commercial market sales in 2012 were lower than 2011, with a decline in large case commercial market sales which was only
partially offset by a slight increase in core commercial market sales. Sales also declined in the public sector market in 2012 compared to 2011.
The number of new accounts decreased 5.0 percent in 2012 compared to 2011, while the average new case size was 4.2 percent lower.
Segment Outlook
Current economic conditions continue to affect employment growth and buying conditions which, in turn, impact sales and premium
growth. We believe proper execution of our growth strategy and a gradual improvement in the economy will deliver sales and premium
growth that are in line with long-term expectations. We see the continuing U.S. economic conditions and the increasing competition in the
voluntary market as external risks to achievement of our business plans. We continuously monitor key indicators to assess our risks and
attempt to adjust our business plans accordingly.
We expect our sales momentum to improve during 2014 relative to the growth rate for 2013, further contributing to premium growth.
Volatility in net investment income is likely to continue during 2014 as a result of fluctuations in bond calls and other types of miscellaneous
net investment income. Regarding risk results, periods of economic downturns have historically had minimal impact on Colonial Life, due
primarily to a diversified product portfolio that is designed with short duration, indemnity benefits. We expect our overall benefit ratio for
2014 to be generally consistent with the level of 2013, excluding the reserve increase for unclaimed death benefits, and we believe our
strong profit margins will continue.
We believe our success will be driven primarily by execution in the core commercial and public sector segments and through expansion
of the overall market as well as further geographic expansion of our market within the United States. The market environment continues to
shift at a rapid pace, and we believe our products, capabilities, and service offerings will enable us to succeed in this marketplace. We intend
to continue to focus on operational excellence through a strong continuous improvement culture, risk management practices, focus on
talent development, and cross-business collaboration.
Closed Block Segment
The Closed Block segment consists of individual disability, group and individual long-term care, and other insurance products no longer
actively marketed. The individual disability line of business in this segment generally consists of policies we sold prior to the mid-1990s and
entirely discontinued selling in 2004, other than update features contractually allowable on existing policies. We discontinued offering
individual long-term care in 2009 and group long-term care in 2012. Other insurance products include group pension, individual life and
corporate-owned life insurance, reinsurance pools and management operations, and other miscellaneous product lines.
60 / UNUM 2013 ANNUAL REPORT
Operating Results
Shown below are financial results and key performance indicators for the Closed Block segment.
(in millions of dollars, except ratios)
2013
% Change
2012
% Change
2011
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
Benefits and Change in Reserves for Future Benefits
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
Income (Loss) Before Income Tax and Net Realized
Investment Gains and Losses
Individual Disability Reserve Charge
Long-term Care Reserve Charge
Impairment of Long-term Care Deferred Acquisition Costs
Operating Income
Interest Adjusted Loss Ratios:
Individual Disability
Long-term Care
Interest Adjusted Loss Ratios Excluding the Reserve Charges:
Individual Disability
Long-term Care
Operating Ratios (% of Premium Income):
Other Expense Ratio
Income (Loss) Ratio
Operating Income Ratio
Persistency:
Individual Disability
Long-term Care
N.M. = not a meaningful percentage
$ 687.5
(6.6)%
$ 736.4
(6.4)%
$ 787.0
630.6
0.7
1,318.8
1,272.3
93.9
2,685.0
2,293.0
113.8
8.4
—
—
—
160.4
2,575.6
(0.2)
(68.2)
(3.8)
3.4
(6.2)
(0.6)
(0.9)
1.1
(19.2)
—
—
—
(4.4)
(1.2)
631.9
2.2
1,370.5
1,230.5
100.1
2,701.1
3.9
N.M.
(1.8)
3.4
(5.7)
0.4
2,314.9
(23.2)
112.6
10.4
—
—
—
(0.9)
(1.0)
—
—
—
167.7
(6.8)
608.1
0.2
1,395.3
1,189.7
106.1
2,691.1
3,012.8
113.6
10.5
(3.7)
11.1
196.0
180.0
2,605.6
(26.0)
3,520.3
109.4
14.6
95.5
111.5
(829.2)
—
—
—
—
—
—
—
—
—
—
—
—
183.5
573.6
196.0
$ 109.4
14.6
$ 95.5
(22.9)
$ 123.9
82.6%
89.6%
12.2%
8.3%
8.3%
91.8%
95.5%
83.0%
90.1%
12.2%
7.0%
7.0%
92.5%
95.8%
108.0%
179.3%
84.7%
84.9%
12.9%
(59.4)%
8.9%
92.9%
96.0%
Management’s Discussion and Analysis of Financial Condition and Results of Operations
UNUM 2013 ANNUAL REPORT / 61
Year Ended December 31, 2013 Compared with Year Ended December 31, 2012
Total premium income decreased in 2013 compared to 2012 due to expected policy terminations and maturities. The premium
decrease resulting from persistency trends in the long-term care line of business was partially offset by the favorable impact of premium
rate increases on certain policies as well as the issuance of group long-term care certificates on inforce cases. We continue to file requests
with various state insurance departments for premium rate increases on certain of our individual and group long-term care policies. The
rate increases reflect current interest rates and claim experience, higher expected future claims, persistency, and other factors related to
pricing 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.
Net investment income was higher in 2013 compared to 2012 due primarily to higher invested asset levels, partially offset by a
decrease in the yield on invested assets. 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, was lower in 2013
compared to 2012 due in part to lower investment income in the portfolios held by the ceding companies.
Individual disability risk results for 2013 were slightly favorable compared to 2012 due primarily to lower claim incidence rates.
Long-term care risk results were slightly favorable in 2013 compared to 2012 due to more favorable development in active life reserves.
Interest and debt expense in 2013 was lower than 2012 due to principal repayments on the outstanding debt issued by Northwind
Holdings, LLC (Northwind Holdings) and a decrease in the floating rate of interest. The other expense ratio was consistent in 2013 compared
to 2012.
Year Ended December 31, 2012 Compared with Year Ended December 31, 2011
Total premium income decreased in 2012 compared to 2011, with lower individual disability premium income partially offset by higher
long-term care premium income. The decrease in individual disability premium income was due to the run-off of this closed line of business,
driven by expected policy terminations and maturities. The increase in long-term care premium income was due to issuances of group
long-term care policies and the implementation of rate increases on certain of our individual long-term care policies. Although we
announced in the first quarter of 2012 that we would no longer sell group long-term care, we had group cases which were already in the
quoting and/or underwriting process at the time of our announcement and for which we subsequently issued the policies.
Net investment income was higher in 2012 compared to 2011 due to higher asset levels, higher bond call premiums, and higher
prepayment income on mortgage-backed securities and other fees, partially offset by a decline in yield on invested assets. 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, was lower in 2012 compared to 2011 due to lower investment income in the
portfolios held by the ceding companies.
Individual disability risk results for 2012 were favorable compared to 2011 due to the previously discussed 2011 reserve charge.
Excluding this charge, individual disability risk results were favorable compared to 2011 due to higher claim recovery rates and a decrease
in reserves for existing claims. Long-term care risk results were favorable in 2012 compared to 2011 due primarily to the 2011 reserve
charge. Excluding this charge, risk results were unfavorable compared to 2011 due to higher claim incidence rates, partially offset by higher
claim resolutions.
Interest and debt expense in 2012 was generally consistent with 2011, as principal repayments on the amount of outstanding debt
issued by Northwind Holdings were offset by an increase in the floating rate of interest on this debt. We had no amortization of deferred
acquisition costs in 2012 due to the long-term care impairment charge recognized at December 31, 2011. The other expense ratio was
lower in 2012 compared to 2011 due primarily to a decrease in selling and underwriting costs due to our discontinuance of the sale of
group long-term care in 2012 and our continued focus on operating effectiveness and expense management.
62 / UNUM 2013 ANNUAL REPORT
Segment Outlook
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 additional premium income associated with long-term care rate increases. We also expect a small amount of group
long-term care certificates to continue to be issued where we are required to do so under the terms of existing group policies. We expect
that this segment may experience volatility in net investment income due to the volatility of bond call premiums relative to historical levels.
During 2014, we intend to continue our focus on operational effectiveness, rate increases, and capital management. We continuously
monitor key indicators to assess our risks and attempt to adjust our business plans accordingly.
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, particularly in the near term for our long-term
care product lines as our claim block matures. Claim resolution rates, which measure the resolution of claims from recovery, deaths,
settlements, and benefit expirations, are very sensitive to operational and external factors 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, including adjustments
to reserves previously established under loss recognition.
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.
Operating Results
(in millions of dollars)
Operating Revenue
Net Investment Income
Other Income
Total
Interest and Other Expenses
Operating Loss
Year Ended December 31
2013
% Change
2012
% Change
2011
$ (3.7)
(116.1)%
$ 23.0
(59.1)%
$ 56.2
7.7
4.0
147.5
175.0
(84.5)
9.8
2.8
25.8
134.3
$(143.5)
(32.3)
$(108.5)
(86.4)
(66.4)
(13.5)
(38.4)
20.6
76.8
155.2
$(78.4)
Year Ended December 31, 2013 Compared with Year Ended December 31, 2012
Net investment income was lower in 2013 compared to 2012 due to a decrease in the yield on invested assets, a decrease in reported
investment income attributable to tax credit partnerships, and lower short-term interest rates. The negative impact on net investment
income and operating income attributable to 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 2013 compared to 2012 due primarily to $4.0 million of income recognized in
2013 related to a settlement of our appeal to the IRS for tax years 2005 to 2006.
Interest and other expenses were higher in 2013 compared to 2012 due primarily to the interest expense related to the issuance
of $250.0 million of 5.75% senior notes in August 2012 and a higher level of expense accruals in 2013 compared to 2012, partially offset
by a lower rate of interest on fixed rate debt that we have effectively converted to floating rate debt.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
UNUM 2013 ANNUAL REPORT / 63
Year Ended December 31, 2012 Compared with Year Ended December 31, 2011
Net investment income was lower in 2012 compared to 2011 due to lower asset levels, a lower proportion of assets invested at
long-term interest rates, a decrease in bond call premiums, and a decrease in investment income attributable to tax credit partnerships.
Other income was lower in 2012 compared to 2011 due primarily to $17.5 million of interest income recognized in 2011 related to a
settlement of our appeal to the IRS related to tax years 1996 to 2004.
Interest and other expenses were lower in 2012 compared to 2011 due primarily to the maturity of $225.1 million of 7.625%
senior notes in March 2011, a lower level of expense accruals during 2012, comparatively higher expenses in 2011 due in part to corporate
initiatives, and state income taxes recognized during 2011 as a result of the repatriation of U.K. dividends from our U.K. subsidiaries in 2011.
Partially offsetting these decreases was an impairment of a long-lived fixed asset recognized during 2012 and higher interest expense due
to the issuance of the $250.0 million senior notes in August 2012.
Segment Outlook
We expect the quality of our investment portfolio to remain strong. The impact on net investment income attributable to tax credit
partnerships is likely to continue to negatively impact net investment income for our Corporate segment throughout 2014. However, this is
offset by a lower income tax rate due to the tax benefits recognized as a result of these investments. 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 our statutory earnings. While we intend to maintain our disciplined approach to risk management, 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.
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 partnerships, 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/asset backed securities, bank
loans, 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:
64 / UNUM 2013 ANNUAL REPORT
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, credit 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 or exceptions 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 was slightly lower in 2013 relative to 2012 due primarily to a decline in the yield on invested assets, partially
offset by a higher level of invested assets. Miscellaneous net investment income, which includes income from bond calls and private equity
partnership investments, was relatively consistent on a consolidated basis but exhibited more year-over-year volatility on an operating
segment level.
Net investment income was slightly lower in 2012 relative to 2011 due primarily to a decline in yield on invested assets, an increase
in the amortization of the principal amount invested in our tax credit partnerships, and lower income on our Unum UK inflation index-linked
bonds. These declines were mostly offset by a higher level of invested assets, higher bond call premiums, an increase in income from
private equity partnership investments, and higher prepayment income on mortgage-backed securities.
The duration weighted book yield on the fixed income securities in our investment portfolio was 6.28 percent as of December 31, 2013,
compared to a yield of 6.47 percent as of December 31, 2012. 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 varying interest
rate levels to obtain a range of projected cash flows under different interest rate scenarios.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
UNUM 2013 ANNUAL REPORT / 65
To assess the impact of a duration mismatch which may occur under the different interest rate scenarios, 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
Embedded Derivative in Modified Coinsurance Arrangement
Other Derivatives
Foreign Currency Transactions
Net Realized Investment Gain (Loss)
Year Ended December 31
2013
2012
2011
$ 15.8
(45.7)
(0.8)
15.6
—
(2.0)
30.7
(1.9)
(4.9)
$ 29.3
(20.4)
—
5.0
(4.3)
(1.9)
51.8
—
(3.3)
$ 74.0
(24.0)
(19.9)
7.1
(0.5)
(0.6)
(39.4)
—
(1.6)
$ 6.8
$ 56.2
$ (4.9)
During the third quarter of 2013, when interest rates increased during the early part of the quarter, we sold certain of our lower
yielding fixed maturity securities to take advantage of the higher interest rate environment by reinvesting the proceeds into higher yielding
mortgage-backed and corporate securities, thereby increasing our investment yield and also improving the credit quality of our fixed
maturity securities portfolio. The securities sold had a book value of $408.9 million and generated a realized loss of $30.0 million.
We had no individual realized investment losses of $10.0 million or greater from other-than-temporary impairments during 2013, 2012,
or 2011.
We had no individual realized investment losses of $10.0 million or greater from the sale of fixed maturity securities during 2013 or
2011. During 2012, we recognized a loss of $11.2 million on the sale of securities issued by a large U.S. department store chain. In 2011, the
company’s management was replaced by a new team of executives that embarked on a radically different retailing strategy. While the
company had ample liquidity and sizable value in real estate assets, initial operating results under this new strategy had been significantly
below market expectations, and there was uncertainty as to whether this new strategy would be successful. Because of this, we had
concerns that liquidity could be compromised over an extended period of time. At the time of disposition, these securities had been in an
unrealized loss position for a period of greater than three years.
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 fair value of the option of our reinsurance counterparty to cancel the reinsurance contract with
us. The change in fair value of this embedded derivative during 2013, 2012, and 2011 resulted primarily from a change in credit spreads in
the overall investment market.
66 / UNUM 2013 ANNUAL REPORT
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, 2013
(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
$ 2,446.5
$ 153.9
$ 543.4
$ 38.1
$ 1,903.1
$ 192.0
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
3,677.9
2,829.7
1,190.8
5,617.7
3,706.9
3,435.0
2,039.3
1,373.2
1,138.1
1,469.3
2,979.3
333.7
318.9
110.6
539.7
452.0
269.8
180.6
146.8
73.2
152.1
244.7
Public Utilities
Redeemable Preferred Stocks
10,403.0
1,074.1
37.7
4.7
517.0
323.1
153.3
836.1
371.3
267.9
343.5
87.2
389.1
218.5
496.0
929.3
—
18.2
21.4
8.0
52.5
21.5
8.6
4.0
2.8
21.4
9.0
45.6
52.8
—
3,160.9
2,506.6
1,037.5
4,781.6
3,335.6
3,167.1
1,695.8
1,286.0
749.0
1,250.8
2,483.3
9,473.7
37.7
351.9
340.3
118.6
592.2
473.5
278.4
184.6
149.6
94.6
161.1
290.3
1,126.9
4.7
Total
$42,344.4
$4,054.8
$5,475.7
$303.9
$36,868.7
$4,358.7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
UNUM 2013 ANNUAL REPORT / 67
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, 2013 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, 2013. The increase in the unrealized loss on both investment-grade and below-investment-grade fixed maturity securities
during 2013 was due primarily to an increase in U.S. Treasury rates which occurred during the period. We held no fixed maturity securities
at December 31, 2013 with a gross unrealized loss of $10.0 million or greater.
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
2013
2012
Fair Value < 100% >= 70% of Amortized Cost
$176.6
$ 9.7
$ 3.9
<= 90 days
> 90 <= 180 days
> 180 <= 270 days
> 270 days <= 1 year
> 1 year <= 2 years
> 2 years <= 3 years
> 3 years
Sub-total
$ 20.0
11.5
183.3
12.6
11.0
—
6.9
245.3
$ 12.3
175.7
12.3
9.5
1.0
0.1
10.2
221.1
12.6
12.3
0.1
1.7
3.4
9.1
6.3
0.4
0.1
0.5
3.3
7.5
215.8
27.8
Fair Value < 70% >= 40% of Amortized Cost
> 3 years
Total
2.5
—
—
$247.8
$221.1
$215.8
—
$27.8
0.4
0.4
0.3
0.2
5.9
12.3
23.4
—
$23.4
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
2013
2012
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
> 3 years
Total
$ 2.6
2.5
29.9
1.7
0.9
4.1
14.1
55.8
0.3
$56.1
$ 4.3
38.1
2.0
—
6.8
—
15.0
66.2
0.3
$66.5
$33.3
$ 3.0
$ 0.3
1.6
—
0.5
3.9
1.2
12.7
53.2
0.4
0.6
0.3
4.9
1.0
8.0
18.2
0.3
$53.5
0.3
$18.5
1.4
2.6
2.5
6.8
6.2
12.5
32.3
0.3
$32.6
68 / UNUM 2013 ANNUAL REPORT
At December 31, 2013, 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,
2013, we held $201.4 million fair value ($185.7 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.
At December 31, 2013, our mortgage/asset-backed securities had an average life of 5.23 years, effective duration of 4.31 years, and
a weighted average credit rating of Aa1. 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.
We have no exposure to subprime mortgages, “Alt-A” loans, or collateralized debt obligations in our investment portfolios. 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. 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, 2013, the amortized cost and fair value of our below-investment-grade fixed maturity securities was
$3,101.7 million and $3,199.3 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.
Our investments in issuers in foreign countries 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. We do not have foreign currency risk, as the cash flows from these investments are either denominated
in currencies or hedged into currencies to match the related liabilities. We have no direct exposure to sovereign debt of these countries,
no unfunded commitments to issuers domiciled in these countries, and have not used credit derivatives to hedge our exposure or to sell
credit protection.
Our monitoring is heightened for investments in certain 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. For those
countries for which we have heightened our monitoring, the following table lists our exposure by country, together with a discussion on
each exposure. We have neither direct nor indirect exposure to sovereign debt of any other countries for which we believe there is a
heightened risk of sovereign default.
Management’s Discussion and Analysis of Financial Condition and Results of Operations UNUM 2013 ANNUAL REPORT / 69
European Fixed Maturity Securities Exposure — By Country
As of December 31, 2013
(in millions of dollars)
Italy
Portugal
Spain
Total
Italy
Fair Value
$233.4
50.9
245.4
$529.7
Amortized Cost
$228.6
47.1
224.1
$499.8
We have no direct exposure to Italian financial institutions. We believe there are risks associated with the debt sustainability of Italy
given its political and economic pressures. As of December 31, 2013, all of our Italian investments were current on their obligations to us,
and we believe they will continue to meet their debt obligations. For those securities in an unrealized loss position, 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 during the year ended December 31, 2013.
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. As of December 31, 2013, our holding domiciled in Portugal is a geographically
diversified utility company that was downgraded to below-investment-grade during the first quarter of 2012. As of December 31, 2013, this
company was current on its obligations to us, and we believe it will continue to meet its debt obligations.
Spain
We have no direct exposure to Spanish financial institutions, although we do own fixed maturity securities of a certain United Kingdom
subsidiary of a Spanish financial institution. We believe there are risks associated with Spain’s high unemployment, budget deficit, banking
sector issues, recessionary pressures, and potential regional secession issues. All but one of our Spanish domiciled securities were rated
investment-grade as of December 31, 2013, and all were current on their obligations to us. We believe they will continue to have the ability
to meet their debt obligations. For those securities in an unrealized loss position, 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 during the year ended
December 31, 2013.
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.
Potential risks for these corporate holdings include a lack of access to credit in their countries of domicile and redenomination risk as
it pertains to their outstanding liabilities. Under either of these scenarios, 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.
70 / UNUM 2013 ANNUAL REPORT
Mortgage Loans
Our mortgage loan portfolio was $1,815.1 million and $1,712.7 million on an amortized cost basis at December 31, 2013 and 2012,
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 one mortgage loan at December 31, 2013 that was considered impaired and was carried at the estimated net realizable
value of $13.1 million, net of a valuation allowance of $1.5 million. We held two mortgage loans at December 31, 2012 which were
considered impaired and were carried at the estimated net realizable value of $17.4 million, net of a valuation allowance of $1.5 million.
Derivative Financial Instruments
We use derivative financial instruments primarily to manage reinvestment, duration, foreign currency, and credit risks. Historically,
we have utilized current and forward interest rate swaps and options on forward interest rate swaps and U.S. Treasury rates, current and
forward currency swaps, forward treasury locks, currency forward contracts, forward contracts on specific fixed income securities, and
credit default swaps. Our current credit exposure on derivatives, which is limited to the value of those contracts in a net gain position less
collateral held, was $5.5 million at December 31, 2013. We held $1.1 million of cash collateral from our counterparties at December 31,
2013. The carrying value of fixed maturity securities posted as collateral to our counterparties was $95.6 million at December 31, 2013.
We had no cash collateral posted to our counterparties at December 31, 2013. We believe that our credit risk is mitigated by our use of
multiple counterparties, all of which have a median credit rating of A3 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 $39.9 million and $63.3 million on a fair value basis at December 31, 2013 and December 31, 2012,
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.
Liquidity and Capital Resources
Overview
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
Management’s Discussion and Analysis of Financial Condition and Results of Operations UNUM 2013 ANNUAL REPORT / 71
debt and other payment obligations. As requirements of Dodd-Frank continue to take effect in 2014 and in subsequent years, to the extent
that we enter into derivatives that are subject to centralized exchanges and cleared through a regulated clearinghouse, we may be subject
to stricter collateral requirements which could have an adverse effect on our overall liquidity.
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.
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 $514 million and $805 million at December 31, 2013 and 2012, respectively. The decline
during 2013 was due primarily to repurchases of our common stock and a capital contribution of approximately $300 million related to our
2013 re-domestication of UnumProvident International Ltd. (UPIL) a captive reinsurance subsidiary, from Bermuda to the United States. The
December 31, 2013 balance, of which approximately $230 million was held in certain of our foreign subsidiaries in the U.K., was comprised
primarily of commercial paper, fixed maturity securities with a current average maturity of 1.7 years, and various money-market funds. No
significant restrictions exist on our ability to use or access these funds. We currently have no intent, nor do we foresee a need, to repatriate
funds from our foreign subsidiaries in the U.K. We believe we hold domestic resources sufficient to fund our liquidity requirements for the
next 12 months. 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.
As part of our capital deployment strategy, we have in recent years repurchased shares of Unum Group’s common stock, as authorized
by our board of directors. Our current share repurchase program was approved by our board of directors in December 2013 and authorizes
the repurchase of up to $750 million of common stock through June 2015, 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. This new authorization replaced the previous authorization
of $750 million that was scheduled to expire in January 2014. The dollar value of shares remaining under the current repurchase program
was approximately $730 million at December 31, 2013.
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 U.S., 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 a life insurance subsidiary is generally further limited
to the amount of unassigned funds.
Certain of our domestic insurance subsidiaries cede blocks of business to Northwind Reinsurance Company (Northwind Re), Tailwind
Reinsurance Company (Tailwind Re), and UPIL, all of which are affiliated captive reinsurance subsidiaries (captive reinsurers) with Unum
Group as the ultimate parent. The captive reinsurers are all domiciled in the United States as of December 31, 2013. The ability of Northwind
Re, Tailwind Re, and UPIL 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, Tailwind Re, and UPIL. See “Debt” and Note 8 of the
“Notes to Consolidated Financial Statements” contained herein for further discussion of dividend restrictions for Northwind Re.
72 / UNUM 2013 ANNUAL REPORT
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Unum Group and/or certain of its intermediate holding company subsidiaries may also receive dividends from our U.K. subsidiaries,
the payment of which may be subject to applicable insurance company regulations and capital guidance in the U.K. Unum Limited will
be impacted by new capital requirements and risk management standards under Solvency II which is to be adopted January 1, 2016.
Solvency II requirements have not been fully finalized, but the current proposals contain amended requirements on capital adequacy
and risk management for insurers. Although the impact of Solvency II cannot be fully determined at this time, its implementation will
result in changes to the capital, supervisory, and disclosure requirements applicable to our U.K. subsidiaries.
The payment of dividends to the parent company from our subsidiaries also requires the approval of the individual subsidiary’s board
of directors.
The ability of Unum Group and certain of its intermediate holding company subsidiaries to continue to receive dividends from their
insurance subsidiaries also depends on additional factors such as RBC ratios and capital adequacy and/or solvency requirements, funding
growth objectives at an affiliate level, and maintaining appropriate capital adequacy ratios to support desired ratings. 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 December 31, 2013, compared to 396 percent at December 31, 2012. The capital adequacy and/or
individual RBC ratios for each of our U.S. insurance subsidiaries, including our captive reinsurers, is above the range that would require state
regulatory action. During 2014, we intend to maintain a level of capital in our U.S. and U.K. insurance subsidiaries above the applicable
capital adequacy requirements and minimum solvency margins.
The amount available during 2013 for the payment of ordinary dividends from Unum Group’s traditional U.S. insurance subsidiaries,
which excludes our captive reinsurers, was $623.7 million, of which $550.4 million was declared and paid. The amount available during
2013 from Unum Limited was £144.7 million, of which £37.5 million was declared and paid to one of our U.K. holding companies. During
2013, Tailwind Re and Northwind Re paid dividends of $12.4 million and $43.3 million to Tailwind Holdings and Northwind Holdings,
respectively. UPIL paid no dividends during 2013.
Although we may not utilize the entire amount of available dividends, based on applicable restrictions under current law, approximately
$591 million is available, without prior approval by regulatory authorities, during 2014 for the payment of dividends from our traditional
U.S. insurance subsidiaries, which excludes our captive reinsurers. Approximately £188 million is available for the payment of dividends from
Unum Limited during 2014, subject to regulatory approval.
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.
Funding for Employee Retirement Benefits
In 2013, we adopted plan amendments which freeze participation and benefit accruals in our defined benefit pension plans in the U.S.
and U.K., effective December 31, 2013 for the U.S. plans and June 30, 2014 for the U.K. plan. Because the amendments eliminate all future
service accruals subsequent to the effective dates of the amendments, we were required to remeasure the benefit obligations of our pension
plans, which decreased our net pension liability approximately $330 million with a corresponding increase in other comprehensive income,
less applicable income tax of approximately $115 million as of the respective dates of remeasurement. Concurrent with our amendments to
our defined benefit pension plans, we adopted amendments to increase the benefits under our defined contribution plans commensurate
with the effective dates of the pension plan amendments.
We have met all minimum pension funding requirements set forth by ERISA. We made a voluntary contribution of $50.0 million to
our U.S. qualified defined benefit plan during 2013, but we do not expect to make any additional contributions during 2014. We contribute
to our U.K. pension plan sufficient to meet the minimum funding requirement under U.K. legislation. We made required contributions of
£2.5 million during 2013, and we expect to make contributions of approximately £1.4 million during 2014. We made contributions during
2013 of approximately $18.8 million and £1.9 million to our U.S. and U.K. defined contribution plans, respectively, and expect to make
contributions of approximately $71.5 million and £2.5 million during 2014.
UNUM 2013 ANNUAL REPORT / 73
We have estimated our future funding requirements under the Pension Protection Act of 2006 and under applicable U.K. law,
considering the effects of the retirement benefit changes described herein, and do not believe that any future funding requirements
will cause a material adverse effect on our liquidity. See Note 9 of the “Notes to Consolidated Financial Statements” contained herein
for further discussion of our employee benefit plans.
Debt
At December 31, 2013, we had short-term debt of $76.5 million, consisting entirely of securities lending agreements, and long-term
debt of $2,612.0 million, consisting primarily of senior secured notes and junior subordinated debt securities.
There are no significant financial covenants associated with any of our outstanding debt obligations. We continually monitor our
compliance with our debt covenants and remain in compliance. We have not observed any current trends that would cause a breach
of any debt covenants.
Purchases and Retirement of Debt
In January 2013, we purchased and retired the outstanding principal of $62.5 million on the floating rate, senior secured non-recourse
notes issued by Tailwind Holdings, resulting in a before-tax gain of $4.0 million. During 2012 and 2011, Tailwind Holdings made principal
payments of $10.0 million each year.
Northwind Holdings made principal payments on its floating rate, senior secured notes of $60.0 million in both 2013 and 2012 and
$74.4 million in 2011.
In 2011, we made debt repayments of $225.1 million at the maturity date of our remaining 7.625% senior notes due March 2011.
Issuance of Debt
In August 2012, we issued $250.0 million of unsecured senior notes in a public offering. These notes, due 2042, bear interest at a
fixed rate of 5.75% 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 $250.0 million at December 31, 2013.
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, 2013.
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, 2013.
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 collateral for the notes and other
assets of Northwind Holdings, consisting primarily of the stock of its sole subsidiary Northwind Re. 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 with
respect to the notes. The balance outstanding on these notes was $440.0 million at December 31, 2013.
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 was limited to the collateral for the notes and the other assets of
Tailwind Holdings, consisting primarily of the stock of its sole subsidiary Tailwind Re. These notes were purchased and retired in January 2013.
74 / UNUM 2013 ANNUAL REPORT
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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, 2013.
In 2002, Unum Group issued $250.0 million of 7.375% senior debentures due 2032, in a public offering. The 7.375% notes have an
aggregate principal amount outstanding of $39.5 million at December 31, 2013.
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, 2013.
In 1998, Provident Financing Trust I (the trust), a 100 percent-owned finance subsidiary of Unum Group, 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, 2013.
Unum Group has medium-term notes with an aggregate principal amount outstanding of $50.8 million at December 31, 2013 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.
Credit Facility
In August 2013, we entered into a five-year, $400 million unsecured revolving credit facility. Under the terms of the agreement, we
may request that the credit facility be increased up to $600 million. Borrowings under the facility are for general corporate uses and are
subject to financial covenants, negative covenants, and events of default that are customary. The facility provides for interest rates based
on either the prime rate or LIBOR. Our credit facility’s financial covenants contain provisions regarding our leverage and net worth. We do
not anticipate any violation of those covenants. However, if economic conditions worsen and we incur unexpected losses, we could violate
certain of the financial covenants imposed by the credit facility and lose access to available funds through that facility. At December 31,
2013, no amount was outstanding on the facility. While maintenance of the unsecured revolving credit facility provides a valuable source
of contingent liquidity, we believe operating cash flows are sufficient to support our short-term liquidity needs.
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 8 of the “Notes to Consolidated Financial Statements” contained herein for additional information.
UNUM 2013 ANNUAL REPORT / 75
Commitments
The following table summarizes contractual obligations and our reinsurance recoverable by period as of December 31, 2013:
(in millions of dollars)
Payments Due
Short-term Debt
Long-term Debt
Policyholder Liabilities
Pension and Other Postretirement Benefits
Miscellaneous Liabilities
Operating Leases
Purchase Obligations
Total
Receipts Due
Total
In 1 Year
or Less
After 1 Year
up to 3 Years
After 3 Years
up to 5 Years
After 5 Years
$ 76.5
$ 76.5
$
—
$
—
$
—
4,357.3
42,573.8
647.8
567.2
213.9
331.3
143.2
4,585.6
22.1
510.2
40.7
321.3
905.5
6,822.5
400.2
5,176.2
39.7
16.3
50.3
9.8
39.2
11.7
34.3
0.2
2,908.4
25,989.5
546.8
29.0
88.6
—
$48,767.8
$5,699.6
$7,844.1
$5,661.8
$29,562.3
Reinsurance Recoverable
$ 7,692.6
$ 295.3
$ 653.8
$ 534.3
$ 6,209.2
Long-term debt includes contractual principal and interest payments and therefore exceeds the amount shown in the consolidated balance
sheets. See Note 8 of the “Notes to Consolidated Financial Statements” contained herein for additional information on our debt.
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” 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 required regulatory
contributions which at December 31, 2013 totaled $2.3 million. Non-qualified pension plan and other postretirement benefit obligations
represent the expected benefit payments related to these plans. See Note 9 of the “Notes to Consolidated Financial Statements” and
“Critical Accounting Estimates” contained herein for additional information.
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, commitments to fund tax credit partnership investments, 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.
76 / UNUM 2013 ANNUAL REPORT
Off-Balance Sheet Arrangements
Operating leases include noncancelable obligations on certain office space, equipment, and software. Purchase obligations include
non-binding commitments of $58.0 million to fund certain of our investments in private placement securities, $158.4 million to fund certain
private equity partnerships, and $83.9 million to fund certain commercial mortgage loans. 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,
issuer of the private placement securities, or borrower. The amounts may or may not be funded. Also included are obligations with outside
parties for computer data processing services, software maintenance agreements, and consulting services. The aggregate obligation
remaining under these agreements was $28.3 million at December 31, 2013.
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 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, including accrued interest
receivable less collateral held, was $5.5 million at December 31, 2013. We held $1.1 million cash collateral from our counterparties at
December 31, 2013. We posted fixed maturity securities with a carrying value of $95.6 million as collateral to our counterparties at
December 31, 2013.
See Notes 3 and 4 of the “Notes to Consolidated Financial Statements” contained herein for additional information.
Transfers of Financial Assets
Our investment policy 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 $76.5 million of securities lending agreements outstanding which were
collateralized by cash at December 31, 2013 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 the year ended December 31, 2013 was $159.0 million,
and the maximum amount outstanding at any month end was $292.3 million. In addition, at December 31, 2013, we had $132.9 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 the year ended December 31, 2013 was $67.0 million, and the
maximum amount outstanding at any month end was $137.7 million.
We had no repurchase agreements outstanding at December 31, 2013. The average balance during the year ended December 31,
2013 was $0.7 million, and the maximum amount outstanding at any month end was $12.8 million. 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.
See Note 3 of the “Notes to Consolidated Financial Statements” contained herein for additional information.
Management’s Discussion and Analysis of Financial Condition and Results of Operations UNUM 2013 ANNUAL REPORT / 77
Consolidated Cash Flows
Operating Cash Flows
Net cash provided by operating activities was $1,031.5 million for 2013, compared to $1,379.6 million and $1,193.7 million for 2012 and
2011, 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 and
growth 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 capital 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 also included contributions of $70.4 million,
$74.3 million, and $20.3 million to our defined benefit pension plans and other postretirement benefit plans for 2013, 2012, and 2011,
respectively.
The variance in the change in insurance reserves and liabilities and change in income tax adjustments to reconcile net income to net
cash provided by operating activities for 2011 compared to 2013 and 2012 was due primarily to the 2011 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 $39.9 million for 2013, compared to
$1,113.4 million and $410.3 million for 2012 and 2011, respectively. Our investment strategy is to match the cash flows and durations of
our assets with the cash flows and durations of our liabilities to meet the funding requirements of our business. Currently, when our fixed
maturity securities mature, the proceeds may be reinvested at a yield below that assumed in the pricing of our insurance products. When
market opportunities arise, as occurred during the third quarter of 2013, we may sell selected securities and reinvest the proceeds to
improve the yield and credit quality of our portfolio. We may at times also sell selected securities and reinvest the proceeds to improve the
duration matching of our assets and liabilities and/or re-balance our portfolio. As a result, sales before maturity may vary from period to
period. The sale and purchase of short-term investments is influenced by our securities lending program and by the amount of cash which
is at times held in short-term investments to facilitate the availability of cash to fund the purchase of appropriate long-term investments
and/or to fund our capital deployment program.
See Notes 3 and 4 of the “Notes to Consolidated Financial Statements” contained herein for further information on our investing
cash flows.
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 $974.8 million in 2013, compared to $305.5 million and $720.4 million in 2012
and 2011, respectively.
The balance outstanding under our securities lending program decreased by $379.3 million in 2013 and increased by $143.5 million
and $312.3 million in 2012 and 2011, respectively.
During 2013, we purchased and retired the outstanding principal of $62.5 million on our floating rate, senior secured non-recourse
notes issued by Tailwind Holdings for $56.2 million and made principal payments of $60.0 million on our senior secured non-recourse notes
issued by Northwind Holdings. Aggregate principal payments on the Tailwind Holdings and Northwind Holdings notes were $70.0 million
and $84.4 million during 2012 and 2011, respectively. During 2012, we issued $250.0 million of 5.75% senior notes and received proceeds
of $246.4 million, excluding the associated debt issuance costs and discounts. During 2011, we made short-term debt repayments of
$225.1 million at the maturity date of our senior notes due March 2011.
78 / UNUM 2013 ANNUAL REPORT
Cash used to repurchase shares of Unum Group’s common stock during 2013, 2012, and 2011 was $317.2 million, $496.7 million,
and $619.9 million, respectively. During 2013, 2012, and 2011, we paid dividends of $146.5 million, $133.8 million, and $121.0 million,
respectively, to holders of Unum Group’s common stock.
See “Debt” and Notes 8 and 10 of the “Notes to Consolidated Financial Statements” contained herein for further information on our
financing cash flows.
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. 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)
Baa2 (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
A2 (Good)
Not Rated
A2 (Good)
A2 (Good)
A2 (Good)
A2 (Good)
A2 (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.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
UNUM 2013 ANNUAL REPORT / 79
On January 30, 2013 and again on December 8, 2013, AM Best affirmed its A rating of Unum Group’s primary domestic insurance
subsidiaries and affirmed the bbb issuer credit rating for Unum Group. AM Best’s outlook for all ratings is “stable.” On February 11, 2013 and
again on September 30, 2013, Fitch affirmed its A rating of Unum Group’s domestic insurance subsidiaries and affirmed the senior debt
rating of Unum Group at BBB. Fitch’s rating outlook for all ratings is “stable.” On June 24, 2013, S&P affirmed its A rating of Unum Group’s
primary domestic insurance subsidiaries and affirmed the BBB counterparty credit rating for Unum Group. S&P’s and Moody’s outlooks
for all ratings are “stable.”
There have been no other changes in any of the rating agencies’ outlook statements or ratings during 2013 or during 2014 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, 2013, for further discussion.
80 / UNUM 2013 ANNUAL REPORT
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
performance and economic conditions are reflected assuming certain changes in market rates and prices were to occur (sensitivity analysis).
Caution should be used in evaluating our overall market risk from the information presented below, as actual results may differ.
See “Investments” 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, public utility
bonds, 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.
UNUM 2013 ANNUAL REPORT / 81
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 limit interest rate risk. Due to the long duration of our long-term care product, the timing and/or
amount of our investment cash flows may not match those of our maturing liabilities. 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 enables us to choose what we believe to be the most appropriate investment strategy, as well as to limit the risk of
disadvantageous outcomes. We use this analysis in determining hedging strategies and utilizing 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.
Long-term debt is not carried at fair value in our consolidated balance sheets. If we modify or replace existing 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, 2013 and 2012 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.
82 / UNUM 2013 ANNUAL REPORT
Quantitative and Qualitative Disclosures
About Market Risk
The hypothetical potential changes in fair value of our financial instruments at December 31, 2013 and 2012 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
Deferred Acquisition Costs (2)
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
Deferred Acquisition Costs (2)
Long-term Debt
Derivatives (1)
Swaps
Embedded Derivative in Modified
Coinsurance Arrangement
December 31, 2013
Notional
Hypothetical
Amount of Derivatives
Fair Value
FV + 100 BP
Change in FV
$42,344.4
$39,009.2
$(3,335.2)
1,980.2
295.9
1,889.9
278.0
(90.3)
(17.9)
$ (3,886.3)
$ (1,568.7)
$ 2,317.6
(2,824.4)
(2,660.5)
163.9
$1,477.4
$ (124.8)
$ (139.7)
$
(14.9)
(53.2)
(62.1)
(8.9)
December 31, 2012
Notional
Hypothetical
Amount of Derivatives
Fair Value
FV + 100 BP
Change in FV
$44,973.0
$41,290.1
$(3,682.9)
1,937.1
302.6
1,847.2
283.5
(89.9)
(19.1)
$ (5,993.0)
$ (3,267.5)
$ 2,725.5
(2,968.8)
(2,780.3)
188.5
$1,432.8
$
(88.9)
$ (146.4)
$
(57.5)
(83.9)
(92.3)
(8.4)
(1) These financial instruments 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 derivatives accounted for as fair value hedges or derivatives not designated as hedging instruments,
the offset of which is reported as a component of net realized investment gain or loss.
(2) The adjustment to reserves and deferred acquisition costs for unrealized investment gains and losses reflects the adjustments to policyholder liabilities and deferred
acquisition costs 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.
UNUM 2013 ANNUAL REPORT / 83
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.
Sustained periods of low interest rates may result in lower than expected profitability. Assuming December 31, 2013 interest rates
and credit spreads remained constant through 2015, our net investment income would decrease by approximately $0.5 million in 2014 and
$6.5 million in 2015 relative to our current expectations. This interest rate scenario does not give consideration to the effect of other factors
which could impact these results, such as changes in the bond market and changes in hedging strategies and positions, nor does it consider
the potential change to our discount rate reserve assumption and any mitigating factors such as pricing adjustments. In addition, a continued
low interest rate environment may also result in an increase in the net periodic benefit costs for our pension plans, but we do not believe it
would materially affect net income in 2014 or 2015.
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 our U.K. operations.
Assuming the pound to dollar exchange rate decreased 10 percent from the December 31, 2013 and 2012 levels, stockholders’ equity
as reported in U.S. dollars as of and for the periods then ended would have been lower by approximately $102.1 million and $109.5 million,
respectively. Assuming the pound to dollar average exchange rate decreased 10 percent from the actual average exchange rates for 2013
and 2012, before-tax operating income, as reported in U.S. dollars would have decreased approximately $14.3 million and $12.6 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 “Consolidated Operating Results” and “Unum UK Segment” contained herein for further information concerning foreign
currency translation.
84 / UNUM 2013 ANNUAL REPORT
Quantitative and Qualitative Disclosures
About Market Risk
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
Our ERM framework is the ongoing system of people, processes, and tools across our Company under which we intend to function
consistently and collectively to identify and assess risks and opportunities, to manage all material risks within our risk appetite, and to
contribute to strategic decision making. With the goal of maximizing shareholder value, the primary objectives of our ERM framework are
to support Unum Group in meeting its operational and financial objectives, maintaining liquidity, preserving capital adequacy, and
protecting franchise value.
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: Own and Manage
2nd Line: Oversee
3rd Line: Independent Assurance
Business processes and procedures
Management committees chartered
employed throughout the Company
with oversight of activities within
through which management assumes
the 1st and 2nd lines of defense,
and monitors significant risks
mitigation of substantial exposures,
and management of emerging risks
Independent review
of ERM framework
and risk mitigation
UNUM 2013 ANNUAL REPORT / 85
Business units are primarily responsible for managing their principal risks. Our risk committees and other management committees
serve risk and control functions responsible for providing risk oversight, or the second line of risk control. The internal audit team provides
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. 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 chief risk officer (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, capital and financing plans and activities, and related financial matters, including matters
pertaining to our Closed Block segment. 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.
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 primary operating segments.
Operating segment risk committees for Unum US, Unum UK, Colonial Life, and Closed Block 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 and other management
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 believe this
combination of focused expertise and experience is a competitive advantage and forms the foundation of our approach to risk management.
We believe our sound and consistent business practices, strong internal compliance program, and comprehensive risk management
strategy enable us to operate efficiently and 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.
86 / UNUM 2013 ANNUAL REPORT
Quantitative and Qualitative Disclosures
About Market Risk
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, 2013.
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.
UNUM 2013 ANNUAL REPORT / 87
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 claims operational effectiveness. Detailed underwriting guidelines and
claim policies are tools used to manage our insurance risk exposure. We also monitor exposures against internally prescribed limits,
and we diversify 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.
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. By 2015,
we must comply with the ORSA requirements, which are intended to become a regular part of reviews of insurers’ ERM programs. We
believe the ORSA will 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. We have implemented, and will
continue to implement, actions to prepare for compliance with this evolving standard. See “Regulation” contained in Item 1 of our Annual
Report on Form 10-K for the fiscal year ended December 31, 2013 for additional information regarding the ORSA.
88 / UNUM 2013 ANNUAL REPORT
Consolidated Balance Sheets
(in millions of dollars)
Assets
Investments
December 31
2013
2012
Fixed Maturity Securities — at fair value (amortized cost: $38,289.6; $37,751.5)
$42,344.4
$44,973.0
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
Income Tax Receivable
Other Assets
1,815.1
3,276.0
566.0
913.4
1,712.7
3,133.8
625.0
1,460.3
48,914.9
51,904.8
94.1
1,647.8
4,806.5
700.2
1,829.2
200.9
511.9
50.3
647.8
77.3
1,632.6
4,842.6
694.6
1,755.5
201.7
501.6
—
625.4
Total Assets
See notes to consolidated financial statements.
$59,403.6
$62,236.1
UNUM 2013 ANNUAL REPORT / 89
December 31
2013
2012
$ 1,511.0
$ 1,484.6
43,099.1
44,694.4
413.8
1,658.4
—
144.3
76.5
2,612.0
1,229.4
426.7
1,644.9
54.2
269.4
455.8
2,755.4
1,838.1
50,744.5
53,623.5
36.1
2,634.1
255.0
8,083.2
36.0
2,607.7
628.0
7,371.6
(2,349.3)
(2,030.7)
8,659.1
8,612.6
$59,403.6
$62,236.1
(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 14
Stockholders’ Equity
Common Stock, $0.10 par
Authorized: 725,000,000 shares
Issued: 360,802,426 and 359,751,943 shares
Additional Paid-in Capital
Accumulated Other Comprehensive Income
Retained Earnings
Treasury Stock — at cost: 100,785,012 and 89,546,758 shares
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See notes to consolidated financial statements.
90 / UNUM 2013 ANNUAL REPORT
Consolidated Statements of Income
(in millions of dollars, except share data)
Revenue
Premium Income
Net Investment Income
Realized Investment Gain (Loss)
Other-Than-Temporary Impairment Loss on Fixed Maturity Securities
Other Net Realized Investment Gain
Net Realized Investment Gain (Loss)
Other Income
Total Revenue
Benefits and Expenses
Year Ended December 31
2013
2012
2011
$ 7,624.7
$ 7,716.1
$ 7,514.2
2,492.1
2,515.2
2,519.6
(0.8)
7.6
6.8
230.2
—
56.2
56.2
227.9
(19.9)
15.0
(4.9)
249.1
10,353.8
10,515.4
10,278.0
Benefits and Change in Reserves for Future Benefits
6,595.7
6,722.2
7,209.5
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.
909.5
149.4
(466.8)
418.9
—
790.4
751.5
9,148.6
1,205.2
296.6
50.5
347.1
917.2
145.4
(467.3)
378.7
—
786.8
782.9
9,265.9
1,249.5
206.6
148.5
355.1
879.2
143.3
(442.5)
365.7
196.0
808.0
785.5
9,944.7
333.3
230.5
(181.4)
49.1
$ 858.1
$ 894.4
$ 284.2
$ 3.24
$ 3.18
$ 3.23
$ 3.17
$ 0.94
$ 0.94
Consolidated Statements of
Comprehensive Income
(in millions of dollars)
Net Income
Other Comprehensive Income (Loss)
Change in Net Unrealized Gain on Securities Before Adjustment
UNUM 2013 ANNUAL REPORT / 91
Year Ended December 31
2013
2012
2011
$ 858.1
$ 894.4
$ 284.2
(net of tax expense (benefit) of $(1,102.8); $467.7; $798.3)
(2,101.2)
918.8
1,519.8
Change in Adjustment to Deferred Acquisition Costs and Reserves
for Future Policy and Contract Benefits, Net of Reinsurance
(net of tax expense (benefit) of $743.3; $(325.6); $(701.5))
1,363.4
(660.1)
(1,321.1)
Change in Net Gain on Cash Flow Hedges
(net of tax expense (benefit) of $(1.3); $(4.3); $25.2)
Change in Foreign Currency Translation Adjustment
Change in Unrecognized Pension and Postretirement Benefit Costs
(net of tax expense (benefit) of $185.2; $(68.0); $(67.4))
Total Other Comprehensive Income (Loss)
Comprehensive Income
See notes to consolidated financial statements.
(5.3)
25.5
344.6
(373.0)
(7.1)
45.0
(130.4)
166.2
47.7
(10.5)
(125.5)
110.4
$ 485.1
$1,060.6
$ 394.6
92 / UNUM 2013 ANNUAL REPORT
Consolidated Statements of Stockholders’ Equity
(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
Balance at Beginning of Year
Other Comprehensive Income (Loss)
Balance at End of Year
Retained Earnings
Balance at Beginning of Year
Net Income
Dividends to Stockholders (per common share: $0.550; $0.470; $0.395)
Retirement of Repurchased Common Shares
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
2013
2012
2011
$
36.0
$
35.9
$
36.5
0.1
—
36.1
0.1
—
36.0
0.2
(0.8)
35.9
2,607.7
2,591.1
2,615.4
26.4
—
16.6
—
30.9
(55.2)
2,634.1
2,607.7
2,591.1
628.0
(373.0)
255.0
461.8
166.2
628.0
351.4
110.4
461.8
7,371.6
6,611.0
6,591.8
858.1
(146.5)
—
894.4
(133.8)
—
284.2
(121.0)
(144.0)
8,083.2
7,371.6
6,611.0
(2,030.7)
(1,530.1)
(1,110.2)
(318.6)
(500.6)
(419.9)
(2,349.3)
(2,030.7)
(1,530.1)
$ 8,659.1
$ 8,612.6
$ 8,169.7
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
Net Purchases of Property and Equipment
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
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.
UNUM 2013 ANNUAL REPORT / 93
Year Ended December 31
2013
2012
2011
$
858.1
$
894.4
$
284.2
(196.7)
(47.9)
—
572.5
(49.4)
21.2
(211.5)
(6.8)
84.8
7.2
40.4
(88.6)
—
508.4
168.0
18.6
(221.3)
(56.2)
84.3
31.6
37.0
(76.8)
196.0
1,113.9
(274.4)
68.4
(240.6)
4.9
81.1
—
1,031.5
1,379.6
1,193.7
1,040.5
2,146.4
243.4
595.9
2,160.5
182.2
1,181.9
1,692.7
131.9
(3,553.6)
(3,512.8)
(2,760.1)
(363.7)
552.4
(105.5)
0.2
(353.8)
(80.1)
(105.4)
0.1
(39.9)
(1,113.4)
(379.3)
—
(116.2)
11.4
(317.2)
(146.5)
(27.0)
(974.8)
16.8
77.3
143.5
246.4
(70.0)
4.9
(496.7)
(133.8)
0.2
(305.5)
(39.3)
116.6
(304.1)
(254.6)
(98.2)
0.2
(410.3)
87.2
—
(84.4)
14.8
(619.9)
(121.0)
2.9
(720.4)
63.0
53.6
$
94.1
$
77.3
$
116.6
94 / UNUM 2013 ANNUAL REPORT
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 15). Intercompany transactions have been eliminated.
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 principal operating business segments: Unum US, Unum UK, and Colonial Life. Our other reporting segments are Closed
Block and Corporate. See Note 13 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. In particular, we 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 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.
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
Notes To Consolidated Financial Statements UNUM 2013 ANNUAL REPORT / 95
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. See Notes 2 and 3.
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. For mortgage loans on which collection of interest income is uncertain, we
discontinue the accrual of interest and recognize it 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.
We evaluate each of our mortgage loans individually for impairment based on a comprehensive rating system used to evaluate the
credit risk of the loan. 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 impairment. If we determine that it is probable we will be unable to collect all amounts
due under the contractual terms of a 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. Additions and reductions to our allowance for credit losses on mortgage loans are reported as a
component of net realized investment gains and losses. We do not purchase mortgage loans with existing credit impairments. See 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 $3,043.7 million and $2,912.7 million
of policy loans ceded to reinsurers at December 31, 2013 and 2012, respectively.
Other Long-term Investments: Other long-term investments are comprised primarily of tax credit partnerships and private
equity partnerships.
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 net realized investment gain or loss, in accordance with the source of the funds distributed from the partnership. See Notes 2 and 3.
96 / UNUM 2013 ANNUAL REPORT
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. See Note 2.
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 other long-term investments or other liabilities in our consolidated balance sheets and are reported at
fair value. The accounting for 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.
Changes in the fair value of a derivative designated as a fair value hedge, including amounts measured as ineffectiveness, and
changes in the fair value of the hedged item attributable to the risk being hedged are recognized in 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 earnings as a component of net realized investment gain or loss during the period in which the termination occurs. 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.
To the extent it is effective, changes in the fair value of a derivative designated as a cash flow hedge 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 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 fair value or cash flow hedges are reported in 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 earnings as a component of the
same income statement line item wherein we report the gain or loss on disposition of the hedged item.
For a derivative not designated as a hedging instrument, changes in the fair value of the derivative, together with the payment of
periodic fees, if applicable, are recognized in earnings as a component of net realized investment gain or loss during the period of change
in fair value.
Cash flow activity from the settlement of derivative contracts is reported in the consolidated statements of cash flows as a component
of proceeds from sales and maturities of other investments.
Notes To Consolidated Financial Statements UNUM 2013 ANNUAL REPORT / 97
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. See Notes 2 and 4.
Fair Value Measurement: Certain assets and liabilities are reported at fair value in our consolidated balance sheets and in our notes to
our consolidated financial statements. 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.
Assets or liabilities with readily available actively 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. When actively quoted prices
are not available, fair values are based on quoted prices in markets that are not active, quoted prices for similar but not identical assets or
liabilities, or other observable inputs. If observable inputs are not available, unobservable inputs and/or adjustments to observable inputs
requiring management judgment are used to determine fair value. 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 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. See Note 3.
Deferred Acquisition Costs: Incremental direct costs associated with the successful acquisition of new or renewal insurance contracts
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.
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.
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. Deviations from projections
result in a change to the rate of amortization in the period during which such events occur. Generally, the amortization periods for these
policies approximate the estimated lives of the policies.
For certain products, policyholders can elect to modify product benefits, features, rights, or coverages by exchanging a contract for
a new contract or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. These
transactions are known as internal replacement transactions. 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 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.
98 / UNUM 2013 ANNUAL REPORT
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 on an annual basis, 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 $760.8 million and
$705.0 million as of December 31, 2013 and 2012, 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 from surrender charges, mortality margins, investment returns, and expense margins for
interest-sensitive insurance policies. The value of business acquired, which is included in other assets in our consolidated balance sheets,
was $19.0 million and $23.5 million at December 31, 2013 and 2012, respectively. The accumulated amortization for value of business
acquired was $138.2 million and $131.5 million as of December 31, 2013 and 2012, respectively.
The amortization of value of business acquired, which is included in other expenses in the consolidated statements of income, was
$4.5 million, $7.5 million, and $7.4 million for the years ended December 31, 2013, 2012, and 2011, 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.
Reserves for Policy and Contract Benefits: 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.
Notes To Consolidated Financial Statements UNUM 2013 ANNUAL REPORT / 99
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 for which assumptions
are generally established and locked in at the time of policy issuance, claim reserves are subject to revision as current claim experience
and projections of future experience change. See Note 6.
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. See Note 7.
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. See Note 8.
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.
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.
Fees from our administrative-services only and family medical leave products are reported as other income when services are rendered.
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.
100 / UNUM 2013 ANNUAL REPORT
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, 2013 and 2012 was $53.6 million and
$67.4 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. See Note 12.
Premium Tax Expense: Premium tax expense is included in other expenses in the consolidated statements of income. For the years
ended December 31, 2013, 2012, and 2011, premium tax expense was $137.0 million, $136.0 million, and $134.9 million, respectively.
Stock-Based Compensation: The cost of stock-based compensation is generally measured based on the grant-date fair value of the
award. The Black-Scholes options valuation model is used for estimating the fair value of stock options, and the Monte-Carlo valuation
model is used for estimating the fair value of performance share units. Restricted stock units 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
are expensed over the requisite service period, with an offsetting increase to additional paid-in capital in stockholders’ equity. See Note 11.
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 and nonvested stock awards on the
computation of earnings per share assuming dilution. See Note 10.
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 $339.2 million and $380.4 million at December 31, 2013 and 2012, respectively.
Notes To Consolidated Financial Statements UNUM 2013 ANNUAL REPORT / 101
Accounting Updates Adopted in 2013:
Accounting Standards Codification (ASC) 210 “Balance Sheet — Disclosures about Offsetting Assets and Liabilities.” In December 2011,
the Financial Accounting Standards Board (FASB) issued an update requiring 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 provide information about the effect or potential effect of netting arrangements on an entity’s financial position, including
the effect or potential effect of rights of set-off associated with certain financial instruments and derivative instruments. In January 2013,
the FASB issued an update to clarify the scope of transactions that are subject to the disclosures about offsetting. Specifically, the update
applies only to derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending
transactions to the extent they are subject to a master netting arrangement or similar agreement. We adopted these updates effective
January 1, 2013. The adoption of these updates expanded our disclosures but had no effect on our financial position or results of operations.
ASC 220 “Comprehensive Income.” In February 2013, the FASB issued an update to improve the transparency of reporting
reclassifications out of accumulated other comprehensive income by requiring additional information to be presented regarding certain
reclassification adjustments. We adopted this update effective January 1, 2013. The adoption of this update expanded our disclosures but
had no effect on our financial position or results of operations.
ASC 815 “Derivatives and Hedging.” In July 2013, the FASB issued an update which allows entities to use the Fed Funds Effective Swap
Rate, also referred to as the Overnight Index Swap Rate (OIS), as a benchmark interest rate for hedge accounting purposes. Previously the
only acceptable benchmark rates for hedge accounting purposes under GAAP were U.S. Treasury rates and the London Interbank Offered
Rate (LIBOR) swap rate. This update reflects the evolution of market hedging practices and is intended to provide more flexibility in hedging
interest rate risk. We adopted this update effective July 17, 2013 for qualifying new or redesignated hedging relationships entered into on or
after that date.
Accounting Updates Adopted in 2012:
ASC 220 “Comprehensive Income.” In June 2011, the FASB issued an update related to the financial statement presentation of
comprehensive income. This update requires 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. We adopted this update effective
January 1, 2012. The adoption of this update modified our financial statement presentation but had 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 is
not 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. We adopted this update effective January 1, 2012. The adoption of this
update had no effect on our financial position or results of operations.
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. We adopted this update effective
January 1, 2012. The adoption of this update expanded our disclosures but had no effect on our financial position or results of operations.
102 / UNUM 2013 ANNUAL REPORT
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. We adopted this update effective January 1, 2012. The adoption of this
update had 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 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. We adopted this update effective January 1, 2012
and applied the amendments retrospectively, adjusting all prior periods in our consolidated financial statements and accompanying notes.
Accounting Updates Adopted in 2011:
ASC 310 “Receivables.” In April 2011, the 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 Outstanding:
ASC 323 “Investments — Equity Method and Joint Ventures.” In January 2014, the FASB issued an update to provide guidance on the
accounting and reporting for investments in affordable housing projects that qualify for low-income housing tax credits. The amendments
in the update permit entities to make an accounting policy election to account for their investments in qualified affordable housing projects
using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes
the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment
performance in the income statement as a component of income tax expense (benefit). Additional disclosures concerning investments in
qualified affordable housing projects will also be required by the update. The amendments in the update are effective for interim and
annual periods beginning on or after December 15, 2014, with early adoption permitted, and are to be applied retrospectively. We have
not yet finalized the expected impact on our financial position or results of operations.
Notes To Consolidated Financial Statements UNUM 2013 ANNUAL REPORT / 103
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, accrued investment income, and short-term
debt 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
2013
Carrying
Amount
Fair
Value
2012
Carrying
Amount
Fair
Value
$42,344.4
$42,344.4
$44,973.0
$44,973.0
1,815.1
3,276.0
1,980.2
3,339.6
10.8
16.4
475.2
10.8
16.4
475.2
1,712.7
3,133.8
81.6
14.6
455.1
1,937.1
3,215.3
81.6
14.6
455.1
Deferred Annuity Products
$ 631.5
$ 631.5
$ 640.1
$ 640.1
Supplementary Contracts without Life Contingencies
Long-term Debt
Other Liabilities
Derivatives
Embedded Derivative in Modified
Coinsurance Arrangement
Unfunded Commitments to Investment Partnerships
563.1
2,612.0
563.1
2,824.4
535.5
2,755.4
535.5
2,968.8
135.6
135.6
170.5
170.5
53.2
27.2
53.2
27.2
83.9
83.7
83.9
83.7
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. These financial instruments are assigned a Level 2 within the fair value hierarchy.
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. Carrying amounts for ceded policy loans, which equal $3,043.7 million
and $2,912.7 million as of December 31, 2013 and 2012, respectively, approximate fair value and are reported on a gross basis in our
consolidated balance sheets. A change in interest rates for ceded policy loans will not impact our financial position because the benefits
and risks are fully ceded to reinsuring counterparties. These financial instruments are assigned a Level 3 within the fair value hierarchy.
104 / UNUM 2013 ANNUAL REPORT
Miscellaneous Long-term Investments: Carrying amounts for tax credit partnerships equal the unamortized balance of our contractual
commitments and approximate fair value. Fair values for private equity partnerships are primarily derived from net asset values provided
by the general partner in the partnerships’ financial statements. Our private equity partnerships represent funds that are primarily invested
in power, energy, railcar leasing, infrastructure development, and mezzanine debt. Distributions received from the funds arise from income
generated by the underlying investments as well as the liquidation of the underlying investments. As of December 31, 2013, we estimate
that the underlying assets of the funds will be liquidated over the next one to ten years. These financial instruments are assigned a Level 3
within the fair value hierarchy.
Policyholders’ Funds: Policyholders’ funds are comprised primarily of deferred annuity products and supplementary contracts
without life contingencies and represent customer deposits plus interest credited at contract rates. Carrying amounts approximate fair value.
These financial instruments are assigned a Level 3 within the fair value hierarchy.
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 seeks to minimize
exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.
Long-term Debt: Fair values for long-term debt are obtained from independent pricing services or discounted cash flow analyses
based on current incremental borrowing rates for similar types of borrowing arrangements. Debt instruments which are valued using
active trades from independent pricing services for which there was current market activity in that specific debt instrument have fair values
of $1,329.2 million and $1,212.0 million as of December 31, 2013 and 2012, respectively, and are assigned a Level 1 within the fair value
hierarchy. Debt instruments which are valued based on prices from pricing services that generally use observable inputs for securities or
comparable securities in active markets in their valuation techniques have fair values of $1,495.2 million and $1,756.8 million as of
December 31, 2013 and 2012, respectively, and are assigned a Level 2.
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. These financial instruments
are assigned a Level 2 within the fair value hierarchy.
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.
Notes To Consolidated Financial Statements UNUM 2013 ANNUAL REPORT / 105
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 using a pricing service, we obtain the vendor’s pricing documentation to ensure we
understand their methodologies. We periodically review and approve the selection of our pricing vendors to ensure we are in agreement
with their current methodologies. When markets are less active, brokers may rely more on models with inputs based on the information
available only to the broker. Our internal investment management professionals, which include portfolio managers and analysts, 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 2013, we have applied valuation techniques on a consistent basis to similar
assets and liabilities and consistent with those techniques used at year end 2012.
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
106 / UNUM 2013 ANNUAL REPORT
The management of our investment portfolio includes establishing pricing policy and reviewing the reasonableness of sources and
inputs used in developing pricing. 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 an asset is sold, 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 month end reporting
period closest to the transaction date.
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 LIBOR-setting
syndicate in determining the effect of credit risk on our derivatives’ fair values. If net 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. For purposes of valuing net counterparty risk, we measure the fair value of a group of
financial assets and financial liabilities on the basis of the price that would be received to sell a net long position or transfer a net short
position for a particular risk exposure in an orderly transaction between market participants at the measurement date under current market
conditions. 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.
Notes To Consolidated Financial Statements UNUM 2013 ANNUAL REPORT / 107
At December 31, 2013, approximately 6.0 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 94.0 percent of our fixed maturity securities were valued based on non-binding quotes or other observable and
unobservable inputs, as discussed below.
• Approximately 76.0 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.
108 / UNUM 2013 ANNUAL REPORT
Fair value measurements by input level for financial instruments carried at fair value are as follows:
December 31, 2013
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
$ 144.5
$ 1,051.6
$
—
$ 1,196.1
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
Credit Default Swaps
Embedded Derivative in Modified
Coinsurance Arrangement
Total Derivatives
—
—
396.8
—
1,982.0
—
2,523.3
—
—
—
—
—
—
—
—
—
$
1,608.1
1,294.7
9,802.7
2,038.8
21,670.8
13.9
37,480.6
9.2
1.6
10.8
11.8
$ 35.0
$
98.7
1.9
—
135.6
175.1
78.5
203.5
0.5
1,859.1
23.8
2,340.5
—
—
—
4.6
—
—
—
53.2
53.2
1,783.2
1,373.2
10,403.0
2,039.3
25,511.9
37.7
42,344.4
9.2
1.6
10.8
16.4
$ 35.0
98.7
1.9
53.2
188.8
Notes To Consolidated Financial Statements
UNUM 2013 ANNUAL REPORT / 109
December 31, 2012
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
$ 104.1
$ 1,244.7
$
—
$ 1,348.8
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
53.0
—
84.2
—
1,977.1
—
2,218.4
—
—
—
—
—
—
—
—
$
1,625.1
1,424.9
10,485.6
2,216.0
23,755.5
14.5
40,766.3
76.5
5.1
81.6
10.3
128.7
82.1
574.4
0.5
1,177.8
24.8
1,988.3
—
—
—
4.3
1,806.8
1,507.0
11,144.2
2,216.5
26,910.4
39.3
44,973.0
76.5
5.1
81.6
14.6
$ 31.7
138.8
$
—
—
$ 31.7
138.8
—
170.5
83.9
83.9
83.9
254.4
110 / UNUM 2013 ANNUAL REPORT
Transfers of assets between Level 1 and Level 2 are as follows:
Year Ended December 31
2013
2012
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
States, Municipalities, and Political Subdivisions
Public Utilities
All Other Corporate Bonds
Total Fixed Maturity Securities
$1,607.1
$1,191.7
$ 62.2
—
345.9
1,199.0
$
—
53.0
53.4
1,085.3
$
—
—
47.1
1,068.6
$1,115.7
$ 224.7
43.8
653.1
2,808.9
$3,730.5
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.
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, 2013
Total Realized and
Unrealized Investment
Gains (Losses) Included in
Beginning
of Year
Earnings
Other
Comprehensive
Income or Loss Purchases
Sales
Level 3 Transfers
Out of
Into
End
of Year
(in millions of dollars)
Fixed Maturity Securities
States, Municipalities, and
Political Subdivisions
$ 128.7
$ —
$ (13.1)
$
— $ (1.0) $ 60.5 $
— $ 175.1
Foreign Governments
Public Utilities
Mortgage/Asset-Backed Securities
All Other Corporate Bonds
Redeemable Preferred Stocks
82.1
574.4
0.5
1,177.8
24.8
Total Fixed Maturity Securities
1,988.3
Equity Securities
4.3
Embedded Derivative in Modified
—
—
—
1.1
—
1.1
—
Coinsurance Arrangement
(83.9)
30.7
(3.6)
(10.8)
0.1
—
—
—
—
(3.1)
(0.1)
—
—
151.8
(508.8)
—
—
78.5
203.5
0.5
(147.1)
186.7
(122.0)
1,462.0
(699.4)
1,859.1
(1.0)
—
—
—
—
23.8
(175.5)
186.7
(126.2)
1,674.3
(1,208.2)
2,340.5
0.3
—
—
—
—
—
—
—
—
—
4.6
(53.2)
Notes To Consolidated Financial Statements
UNUM 2013 ANNUAL REPORT / 111
Year Ended December 31, 2012
Total Realized and
Unrealized Investment
Gains (Losses) Included in
Beginning
of Year
Earnings
Other
Comprehensive
Income or Loss Purchases
Sales
Level 3 Transfers
Out of
Into
End
of Year
(in millions of dollars)
Fixed Maturity Securities
States, Municipalities,
and Political Subdivisions
$ 68.1
$ —
$ (0.3)
$ 18.4 $ (0.7) $ 43.2 $
—
$ 128.7
Foreign Governments
Public Utilities
Mortgage/Asset-Backed Securities
All Other Corporate Bonds
Redeemable Preferred Stocks
—
338.9
31.7
665.5
37.2
Total Fixed Maturity Securities
1,141.4
Equity Securities
11.2
Embedded Derivative in Modified
—
—
—
1.2
(1.0)
0.2
(0.1)
5.0
22.3
—
40.8
2.9
70.7
—
Coinsurance Arrangement
(135.7)
51.8
—
15.4
47.9
—
151.6
—
—
(4.2)
(0.1)
(67.5)
(14.3)
61.7
481.4
—
—
(311.9)
(31.1)
82.1
574.4
0.5
599.8
(213.6)
1,177.8
—
—
24.8
233.3
(86.8)
1,186.1
(556.6)
1,988.3
—
—
(0.1)
—
—
—
(6.7)
4.3
—
(83.9)
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. 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. Gains for the years ended December 31, 2013 and 2012 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 $30.7 million and $51.8 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.
112 / UNUM 2013 ANNUAL REPORT
Quantitative information regarding the significant unobservable inputs used in Level 3 fair value measurements, all of which are
internally derived, is as follows:
(in millions of dollars)
Fair Value
Unobservable Input
Range/Weighted Average
December 31, 2013
Fixed Maturity Securities
States, Municipalities, and
$142.7
Comparability Adjustment
(b) 0.25%-1.25%/0.65%
Political Subdivisions — Private
Public Utilities
Mortgage/Asset-Backed
Securities — Private
All Other Corporate
Bonds — Private
All Other Corporate
Bonds — Public
64.3
0.5
307.0
514.4
Volatility of Credit
Discount for Size
(e) 0.75%-1.25%/0.92%
(c) 4.93%-5.03%/5.01%
Change in Benchmark Reference
Comparability Adjustment
Discount for Size
Lack of Marketability
Volatility of Credit
Market Convention
Change in Benchmark Reference
Comparability Adjustment
Lack of Marketability
Volatility of Credit
(a) 3.36%-3.36%/3.36%
(b) (0.70)%-(0.40)%/(0.60)%
(c) 0.50%-0.50%/0.50%
(d) 0.20%-1.00%/0.55%
(e) 0.07%-4.00%/0.84%
(f) Priced at Par
(a) (0.32)%-0.25%/0.04%
(b) (0.23)%-1.00%/0.41%
(d) 0.20%-0.20%/0.20%
(e) (0.88)%-0.46%/(0.26)%
Equity Securities — Private
4.2
Market Convention
(f) Priced at Cost or Owner’s Equity
Embedded Derivative in Modified
Coinsurance Arrangement
(53.2)
Projected Liability Cash Flows
(g) Actuarial Assumptions
Notes To Consolidated Financial Statements
UNUM 2013 ANNUAL REPORT / 113
(in millions of dollars)
Fair Value
Unobservable Input
Range/Weighted Average
December 31, 2012
Fixed Maturity Securities
States, Municipalities, and
$ 42.7
Political Subdivisions — Private
Public Utilities
Mortgage/Asset-Backed
Securities — Private
All Other Corporate
Bonds — Private
All Other Corporate
Bonds — Public
17.4
0.5
391.8
165.0
Comparability Adjustment
Lack of Marketability
Volatility of Credit
(b) 0.25%-0.25%/0.25%
(d) 0.25%-0.25%/0.25%
(e) 0.15%-0.15%/0.15%
Comparability Adjustment
(b) 0.20%-0.20%/0.20%
Discount for Size
(c) 5.74%-5.84%/5.81%
Change in Benchmark Reference
Comparability Adjustment
Discount for Size
Lack of Marketability
Volatility of Credit
Market Convention
Change in Benchmark Reference
Comparability Adjustment
Discount for Size
Lack of Marketability
Volatility of Credit
Market Convention
(a) 0.04%-2.89%/0.28%
(b) 1.48%-1.48%/1.48%
(c) 0.10%-0.50%/0.24%
(d) 0.10%-1.00%/0.46%
(e) (0.25)%-7.72%/1.51%
(f) Priced at Par
(a) 0.25%-0.25%/0.25%
(b) (0.59)%-1.00%/0.27%
(c) 0.25%-0.25%/0.25%
(d) 0.20%-0.30%/0.24%
(e) (0.30)%-(0.30)%/(0.30)%
(f) Priced at Par
Equity Securities — Private
4.0
Market Convention
(f) Priced at Cost or Owner’s Equity
Embedded Derivative in Modified
Coinsurance Arrangement
(83.9)
Projected Liability Cash Flows
(g) Actuarial Assumptions
(a) Represents basis point adjustments for changes in benchmark spreads associated with various ratings categories
(b) Represents basis point adjustments for changes in benchmark spreads associated with various industry sectors
(c) Represents basis point adjustments based on issue/issuer size relative to the benchmark
(d) Represents basis point adjustments to apply a discount due to the illiquidity of an investment
(e) Represents basis point adjustments for credit-specific factors
(f) Represents a decision to price based on par value, cost, or owner’s equity when limited data is available
(g) Represents various actuarial assumptions required to derive the liability cash flows including incidence, termination, and lapse rates
Isolated increases in unobservable inputs other than market convention will result in a lower fair value measurement, whereas
isolated decreases will result in a higher fair value measurement. The unobservable input for market convention is not sensitive to input
movements. The projected liability cash flows used in the fair value measurement of our Level 3 embedded derivative are based on
expected claim payments. If claim payments increase, the projected liability cash flows will increase, resulting in a decrease in the fair value
of the embedded derivative. Decreases in projected liability cash flows will result in an increase in the fair value of the embedded derivative.
114 / UNUM 2013 ANNUAL REPORT
Note 3. Investments
Fixed Maturity Securities
At December 31, 2013 and 2012, 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
(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, 2013
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gain
Loss
Fair
Value
$ 1,028.6
$ 173.1
$ 5.6
$ 1,196.1
1,706.0
1,226.4
9,328.9
1,858.7
23,108.0
33.0
117.2
149.6
1,126.9
184.6
2,602.6
4.7
40.0
2.8
52.8
4.0
1,783.2
1,373.2
10,403.0
2,039.3
198.7
25,511.9
—
37.7
$38,289.6
$4,358.7
$303.9
$42,344.4
December 31, 2012
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gain
Loss
Fair
Value
$ 1,020.9
$ 329.0
$ 1.1
$ 1,348.8
1,498.4
1,280.4
9,294.3
1,927.9
22,696.6
33.0
316.2
226.6
1,865.0
289.1
4,245.3
6.3
7.8
—
15.1
0.5
31.5
—
1,806.8
1,507.0
11,144.2
2,216.5
26,910.4
39.3
$37,751.5
$7,277.5
$56.0
$44,973.0
Notes To Consolidated Financial Statements
UNUM 2013 ANNUAL REPORT / 115
The following charts indicate the length of time our fixed maturity securities have been in a gross unrealized loss position.
(in millions of dollars)
United States Government and
December 31, 2013
Less Than 12 Months
12 Months or Greater
Gross
Unrealized
Gross
Unrealized
Fair Value
Loss
Fair Value
Loss
Government Agencies and Authorities
$ 41.1
$ 3.1
$ 5.2
$ 2.5
States, Municipalities, and Political Subdivisions
Foreign Governments
Public Utilities
Mortgage/Asset-Backed Securities
All Other Corporate Bonds
Total Fixed Maturity Securities
(in millions of dollars)
United States Government and
Government Agencies and Authorities
States, Municipalities, and Political Subdivisions
Public Utilities
Mortgage/Asset-Backed Securities
All Other Corporate Bonds
Total Fixed Maturity Securities
412.5
87.2
870.6
341.0
3,412.3
$5,164.7
33.5
2.8
47.1
3.6
174.0
$264.1
37.2
—
58.7
2.5
207.4
$311.0
6.5
—
5.7
0.4
24.7
$39.8
December 31, 2012
Less Than 12 Months
12 Months or Greater
Gross
Unrealized
Gross
Unrealized
Fair Value
Loss
Fair Value
Loss
$
—
$ —
$ 6.5
$ 1.1
30.8
110.3
4.4
441.3
0.9
3.9
—
7.0
42.1
147.6
3.8
396.8
6.9
11.2
0.5
24.5
$586.8
$11.8
$596.8
$44.2
116 / UNUM 2013 ANNUAL REPORT
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
$ 903.9
7,098.2
9,492.6
18,936.2
36,430.9
1,858.7
December 31, 2013
Unrealized Gain Position
Unrealized Loss Position
Gross Gain
$ 20.6
727.1
940.2
2,486.2
4,174.1
184.6
Fair Value
$ 915.5
7,678.5
8,137.4
18,441.5
35,172.9
1,695.8
Gross Loss
$
—
0.6
95.8
203.5
299.9
4.0
Fair Value
$ 9.0
146.2
2,199.6
2,777.4
5,132.2
343.5
Total Fixed Maturity Securities
$38,289.6
$4,358.7
$36,868.7
$303.9
$5,475.7
(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
$ 956.4
5,922.8
9,752.3
19,192.1
35,823.6
1,927.9
December 31, 2012
Unrealized Gain Position
Unrealized Loss Position
Gross Gain
$ 21.2
628.1
1,606.4
4,732.7
6,988.4
289.1
Fair Value
$ 934.1
6,449.8
10,997.0
23,200.2
41,581.1
2,208.3
Gross Loss
$ 0.5
5.0
7.6
42.4
55.5
0.5
Fair Value
$ 43.0
96.1
354.1
682.2
1,175.4
8.2
$1,183.6
Total Fixed Maturity Securities
$37,751.5
$7,277.5
$43,789.4
$56.0
At December 31, 2013, the fair value of investment-grade fixed maturity securities was $39,145.1 million, with a gross unrealized gain
of $4,205.0 million and a gross unrealized loss of $247.8 million. The gross unrealized loss on investment-grade fixed maturity securities
was 81.5 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, 2013, the fair value of below-investment-grade fixed maturity securities was $3,199.3 million, with a gross unrealized
gain of $153.7 million and a gross unrealized loss of $56.1 million. The gross unrealized loss on below-investment-grade fixed maturity
securities was 18.5 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, 2013, 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, 2013, we held 245 individual investment-grade fixed maturity securities and 53 individual below-investment-
grade fixed maturity securities that were in an unrealized loss position, of which 16 investment-grade fixed maturity securities and
8 below-investment-grade fixed maturity securities had been in an unrealized loss position continuously for over one year.
Notes To Consolidated Financial Statements
UNUM 2013 ANNUAL REPORT / 117
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
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.
We held no fixed maturity securities during 2013 or 2012 for which a portion of an other-than-temporary impairment was recognized
in other comprehensive income. During 2011, we held and sold one fixed maturity security for which an $8.5 million other-than-temporary
impairment had been recognized in other comprehensive income.
At December 31, 2013, we had non-binding commitments of $58.0 million to fund private placement fixed maturity securities.
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, 2013, the carrying amount of our variable interest entity investments that are not consolidated under the provisions
of GAAP was $470.8 million, comprised of $309.5 million of tax credit partnerships and $161.3 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 $27.2 million at
December 31, 2013. 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 $158.4 million to fund certain private equity partnerships
at December 31, 2013, the amount of which may or may not be funded.
118 / UNUM 2013 ANNUAL REPORT
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 and a private equity partnership investment. We contributed the bond
and several 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 remaining partnership 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. The fair values of the bond and
partnership were $136.2 million and $4.4 million, respectively, as of December 31, 2013. The bond is reported as a component of fixed
maturity securities, and the partnership is reported as a component of other long-term investments in our consolidated balance sheets.
At December 31, 2013, we had no commitments to fund the underlying partnership, nor did we fund any amounts to the partnerships
during the years ended December 31, 2013, 2012, and 2011.
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.
Mortgage loans by property type and geographic region are presented below. Prior year amounts by property type have been
reclassified to conform to the current year presentation.
(in millions of dollars)
Carrying Amount
Percent of Total
Carrying Amount
Percent of Total
December 31
2013
2012
Property Type
Apartment
Industrial
Office
Retail
Total
Region
New England
Mid-Atlantic
East North Central
West North Central
South Atlantic
East South Central
West South Central
Mountain
Pacific
Total
$ 61.1
3.3%
$ 47.2
567.8
776.5
409.7
31.3
42.8
22.6
545.7
721.2
398.6
2.7%
31.9
42.1
23.3
$1,815.1
100.0%
$1,712.7
100.0%
$ 100.9
5.6%
$ 114.3
6.7%
191.5
244.3
162.3
447.7
67.7
190.9
101.9
307.9
10.5
13.5
8.9
24.7
3.7
10.5
5.6
17.0
160.0
224.7
160.8
440.9
79.6
159.5
90.5
282.4
9.3
13.1
9.4
25.7
4.7
9.3
5.3
16.5
$1,815.1
100.0%
$1,712.7
100.0%
Notes To Consolidated Financial Statements
UNUM 2013 ANNUAL REPORT / 119
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
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 the 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%
Total
December 31
2013
2012
$ 10.8
683.1
1,094.6
13.5
13.1
$ 11.5
659.4
994.5
34.2
13.1
$1,815.1
$1,712.7
$ 777.4
$ 624.7
867.5
107.6
62.6
858.8
142.5
86.7
$1,815.1
$1,712.7
120 / UNUM 2013 ANNUAL REPORT
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
Impaired mortgage loans are as follows:
(in millions of dollars)
With an Allowance Recorded
(in millions of dollars)
With No Related Allowance Recorded
With an Allowance Recorded
Total
Year Ended December 31
2013
$1.5
—
—
$1.5
2012
$ 1.5
1.8
(1.8)
$ 1.5
Recorded
Investment
$13.1
Recorded
Investment
$ 4.3
13.1
$17.4
December 31, 2013
Unpaid
Principal Balance
$14.6
December 31, 2012
Unpaid
Principal Balance
$ 4.3
14.6
$18.9
2011
$1.5
—
—
$1.5
Related
Allowance
$1.5
Related
Allowance
$ —
1.5
$1.5
Our average investment in impaired mortgage loans was $14.9 million, $19.1 million, and $21.3 million for the years ended
December 31, 2013, 2012, and 2011, respectively. For each of the years ended December 31, 2013, 2012, and 2011, we recognized
$0.8 million of interest income on impaired mortgage loans.
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
2013
2012
2011
$4.3
1
$ —
$ —
—
$17.3
3
$ —
$ —
—
$19.9
2
$ 3.2
$ 0.2
1
We had no realized losses on loan foreclosures for the years ended December 31, 2013, 2012, and 2011 other than the initial
impairment losses recognized prior to foreclosure.
Notes To Consolidated Financial Statements
UNUM 2013 ANNUAL REPORT / 121
At December 31, 2013, we held no mortgage loans that were greater than 90 days past due regarding principal and/or interest
payments. At December 31, 2012, we held one mortgage loan that was greater than 90 days past due and for which we had discontinued
the accrual of investment income. The mortgage loan had a carrying value of $4.3 million and was foreclosed during 2013.
At December 31, 2013, we had non-binding commitments of $83.9 million to fund certain commercial mortgage loans, the amount
of which may or may not be funded.
Transfers of Financial Assets
To manage our cash position more efficiently, we may 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,
2013, the carrying amount of fixed maturity securities loaned to third parties under our securities lending program was $201.6 million, for
which we received collateral in the form of cash and securities of $76.5 million and $132.9 million, respectively. As of December 31, 2012,
the carrying amount of fixed maturity securities loaned to third parties under our securities lending program was $452.8 million, for which
we received collateral in the form of cash and securities of $455.8 million and $14.5 million, respectively. We had no outstanding
repurchase agreements at December 31, 2013 or 2012.
Offsetting of Financial Instruments
We enter into master netting agreements with each of our derivatives counterparties. These agreements provide for conditional
rights of set-off upon the occurrence of an early termination event. An early termination event is considered a default, and it allows the
non-defaulting party to offset its contracts in a loss position against any gain positions or payments due to the defaulting party. Under
our agreements, default type events are defined as failure to pay or deliver as contractually agreed, misrepresentation, bankruptcy, or
merger without assumption. See Note 4 for further discussion of collateral related to our derivative contracts.
We have securities lending agreements with unaffiliated financial institutions that post collateral to us in return for the use of our fixed
maturity securities. A right of set-off exists that allows us to keep and apply collateral received in the event of default by the counterparty.
Default within a securities lending agreement would typically occur if the counterparty failed to return the securities borrowed from us as
contractually agreed. In addition, if we default by not returning collateral received, the counterparty has a right of set-off against our
securities or any other amounts due to us.
122 / UNUM 2013 ANNUAL REPORT
Shown below are our financial instruments that either meet the accounting requirements that allow them to be offset in our balance
sheets or that are subject to an enforceable master netting arrangement or similar agreement. Our accounting policy is to not offset these
financial instruments in our balance sheets. Net amounts disclosed below have been reduced by the amount of collateral pledged to or
received from our counterparties.
December 31, 2013
Gross Amount
Gross Amount Not
of Recognized
Gross Amount
Net Amount
Offset in Balance Sheet
Financial
Offset in
Presented in
Financial
Cash
(in millions of dollars)
Instruments
Balance Sheet
Balance Sheet
Instruments
Collateral
Financial Assets:
Derivatives
Securities Lending
Total
Financial Liabilities:
Derivatives
Securities Lending
Total
$ 10.8
201.6
$212.4
$135.6
76.5
$212.1
$—
—
$—
$—
—
$—
$ 10.8
201.6
$212.4
$135.6
76.5
$212.1
$ (9.5)
(125.1)
$(134.6)
$ (98.6)
(76.5)
$(175.1)
$ (1.1)
(76.5)
$(77.6)
$
—
—
$
—
December 31, 2012
Gross Amount
Gross Amount Not
of Recognized
Gross Amount
Net Amount
Offset in Balance Sheet
Financial
Offset in
Presented in
Financial
Cash
(in millions of dollars)
Instruments
Balance Sheet
Balance Sheet
Instruments
Collateral
Financial Assets:
Derivatives
Securities Lending
Total
Financial Liabilities:
Derivatives
Securities Lending
Total
$ 81.6
452.8
$534.4
$170.5
455.8
$626.3
$—
—
$—
$—
—
$—
$ 81.6
452.8
$534.4
$170.5
455.8
$626.3
$ (72.9)
—
$
—
(452.8)
$ (72.9)
$(452.8)
$(129.8)
(452.8)
$
(1.8)
—
$(582.6)
$
(1.8)
Net
Amount
$ 0.2
—
$ 0.2
$37.0
—
$37.0
Net
Amount
$ 8.7
—
$ 8.7
$38.9
3.0
$41.9
Notes To Consolidated Financial Statements
UNUM 2013 ANNUAL REPORT / 123
Net Investment Income
Net investment income reported in our consolidated statements of income is as follows:
(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 Participation Fund Account Assets
Less Amortization of Tax Credit Partnerships
Year Ended December 31
2013
2012
2011
$2,371.6
$2,404.0
$2,425.2
35.2
109.2
15.7
18.0
2.4
28.9
107.1
14.8
15.2
4.3
22.9
100.1
14.1
13.1
2.9
2,552.1
2,574.3
2,578.3
29.5
15.7
14.8
26.9
16.1
16.1
26.9
17.4
14.4
Net Investment Income
$2,492.1
$2,515.2
$2,519.6
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
Credit Default Swaps
Foreign Currency Transactions
Year Ended December 31
2013
2012
2011
$ 15.8
(45.7)
(0.8)
15.6
—
(2.0)
30.7
(1.9)
(4.9)
$ 29.3
(20.4)
—
5.0
(4.3)
(1.9)
51.8
—
(3.3)
$ 74.0
(24.0)
(19.9)
7.1
(0.5)
(0.6)
(39.4)
—
(1.6)
Net Realized Investment Gain (Loss)
$ 6.8
$ 56.2
$ (4.9)
124 / UNUM 2013 ANNUAL REPORT
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, foreign currency risk, and credit risk.
Historically, we have utilized current and forward interest rate swaps and options on forward interest rate swaps and U.S. Treasury rates,
current and forward currency swaps, forward treasury locks, currency forward contracts, forward contracts on specific fixed income
securities, and credit default swaps. Transactions hedging interest rate risk 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. We do not use derivative financial instruments for speculative purposes.
Derivatives designated as cash flow hedges and used to reduce our exposure to interest rate and duration risk 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. We use interest rate swaps 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.
• 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.
• Options on U.S. Treasury rates are used to hedge the interest rate risk associated with the anticipated purchase of fixed maturity
securities. These options give us the right, but not the obligation, to receive a specific interest rate for a specified period of time.
These options enable us to lock in a minimum investment yield to hedge the potential adverse impact of declining interest rates.
Derivatives designated as fair value hedges and used to reduce our exposure to interest rate and duration risk 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.
Derivatives designated as cash flow hedges and used to reduce our exposure to foreign currency risk are as follows:
• 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 principal and
interest payments 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 principal and interest payments.
• 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 have used these forward contracts to hedge the foreign currency risk associated with certain of the principal
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.
Notes To Consolidated Financial Statements UNUM 2013 ANNUAL REPORT / 125
Derivatives not designated as hedging instruments and used to reduce our exposure to credit losses on securities owned are as follows:
• Credit default swaps are used as economic hedges against credit risk but do not qualify for hedge accounting. A credit default swap
is an agreement in which we agree with another party to pay, at specified intervals, a fixed-rate fee in exchange for insurance against
a credit event on a specific investment. If a defined credit event occurs, our counterparty may either pay us a net cash settlement or
we may surrender the specific investment to them in exchange for cash equal to the full notional amount of the swap. Credit events
typically include events such as bankruptcy, failure to pay, or certain types of debt restructuring.
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, including accrued interest receivable less collateral held, was $5.5 million at December 31, 2013. We held $1.1 million
cash collateral from our counterparties at December 31, 2013. We held no cash collateral at December 31, 2012. 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 $95.6 million and $108.6 million at December 31, 2013 and 2012, respectively. We had no cash posted as collateral
to our counterparties at December 31, 2013. We had $1.8 million cash posted as collateral to our counterparties at December 31, 2012.
See Note 3 for further discussion of our master netting agreements.
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 $135.6 million and $170.5 million at December 31, 2013 and 2012, respectively.
Derivative Transactions
The table below summarizes, by notional amounts, the activity for each category of derivatives. The notional amounts represent the
basis upon which our counterparty pay and receive amounts are calculated.
(in millions of dollars)
Balance at December 31, 2010
Additions
Terminations
Balance at December 31, 2011
Additions
Terminations
Balance at December 31, 2012
Additions
Terminations
Swaps
Receive
Receive
Receive
Variable/Pay
Fixed/Pay
Fixed/Pay
Fixed
Fixed
$174.0
$617.9
Variable
$890.0
—
—
174.0
—
—
174.0
—
24.0
—
63.9
554.0
—
45.2
508.8
160.0
38.4
—
205.0
685.0
250.0
185.0
750.0
—
150.0
Credit
Default
$ —
—
—
—
—
—
—
97.0
—
Forwards
Options
Total
$ —
$ —
$1,681.9
46.9
46.9
—
86.0
86.0
—
24.0
24.0
—
—
—
—
—
—
10.0
10.0
46.9
315.8
1,413.0
336.0
316.2
1,432.8
291.0
246.4
Balance at December 31, 2013
$150.0
$630.4
$600.0
$97.0
$ —
$ —
$1,477.4
126 / UNUM 2013 ANNUAL REPORT
Cash Flow Hedges
As of December 31, 2013 and 2012, we had $630.4 million and $508.8 million, respectively, notional amount of receive fixed, pay
fixed, open current and forward foreign currency swaps to hedge fixed income foreign currency-denominated securities and long-term
debt. During 2013, we entered into $150.0 million notional amount of receive fixed, pay fixed foreign currency swaps to hedge the currency
risk on a portion of the U.S. dollar-denominated debt issued by one of our U.K. subsidiaries. As of December 31, 2012, we had $150.0 million
notional amount of receive fixed, pay variable forward starting interest rate swaps to hedge the anticipated purchase of fixed maturity
securities. These interest rate swaps were terminated as scheduled in 2013.
For the years ended December 31, 2013, 2012, and 2011 there was no material ineffectiveness related to our cash flow hedges,
and no component of the derivative instruments’ gain or loss was excluded from the assessment of hedge effectiveness.
As of December 31, 2013, we expect to amortize approximately $46.7 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. 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, 2013, we are hedging the variability of future cash flows associated with forecasted transactions through
the year 2038.
Fair Value Hedges
As of December 31, 2013 and 2012, we had $150.0 million and $174.0 million, respectively, 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. The change in fair value
of the hedged fixed maturity securities attributable to the hedged benchmark interest rate resulted in a gain (loss) of $(11.5) million,
$(1.2) million and $8.1 million for the years ended December 31, 2013, 2012, and 2011, respectively, with an offsetting gain or loss on the
related interest rate swaps.
As of December 31, 2013 and 2012, we had $600.0 million notional amount of receive fixed, pay variable interest rate swaps to hedge
the changes in the fair value of certain fixed rate long-term debt. These swaps effectively convert the associated fixed rate long-term debt
into floating rate debt and provide for a better matching of interest rates with our short-term investments, which have frequent interest rate
resets similar to a floating rate security. The change in fair value of the hedged debt attributable to the hedged benchmark interest rate
resulted in a gain (loss) of $21.1 million, $(6.6) million, and $(23.2) million for the years ended December 31, 2013, 2012, and 2011,
respectively, with an offsetting gain or loss on the related interest rate swaps.
For the years ended December 31, 2013, 2012, and 2011, 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.
Notes To Consolidated Financial Statements UNUM 2013 ANNUAL REPORT / 127
Derivatives not Designated as Hedging Instruments
As of December 31, 2013, we held $97.0 million notional amount of single name credit default swaps. We entered into these swaps
in order to mitigate the credit risk associated with specific securities owned. We had no open credit default swaps as of December 31, 2012.
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
Credit Default Swaps
Embedded Derivative in Modified Coinsurance Arrangement
Total
(in millions of dollars)
Designated as Hedging Instruments
Interest Rate Swaps
Foreign Exchange Contracts
Total
Not Designated as Hedging Instruments
December 31, 2013
Asset Derivatives
Liability Derivatives
Balance Sheet
Balance Sheet
Location
Fair Value
Location
Fair Value
Other L-T Investments
$ 9.2
Other Liabilities
$ 35.0
Other L-T Investments
1.6
Other Liabilities
98.7
$10.8
$133.7
Other Liabilities
$ 1.9
Other Liabilities
53.2
$ 55.1
December 31, 2012
Asset Derivatives
Liability Derivatives
Balance Sheet
Balance Sheet
Location
Fair Value
Location
Fair Value
Other L-T Investments
Other L-T Investments
$76.5
5.1
$81.6
Other Liabilities
$ 31.7
Other Liabilities
138.8
$170.5
Embedded Derivative in Modified Coinsurance Arrangement
Other Liabilities
$ 83.9
128 / UNUM 2013 ANNUAL REPORT
The following table summarizes the location of gains and losses on the effective portion of derivative financial instruments
designated as cash flow hedging instruments, as reported in our consolidated statements of income and consolidated statements
of comprehensive income.
(in millions of dollars)
Gain (Loss) Recognized in Other Comprehensive
Income (Loss) on Derivatives
Interest Rate Swaps and Forwards
Options
Foreign Exchange Contracts
Total
Gain (Loss) Reclassified from Accumulated Other
Comprehensive Income into Income
Net Investment Income
Interest Rate Swaps and Forwards
Foreign Exchange Contracts
Net Realized Investment Gain (Loss)
Interest Rate Swaps
Foreign Exchange Contracts
Interest and Debt Expense
Interest Rate Swaps
Total
Year Ended December 31
2013
2012
2011
$ (7.2)
(0.1)
22.6
$ 15.3
$ 43.1
(5.9)
1.3
(13.8)
(1.7)
$ 23.0
$ 77.9
—
3.5
$ 81.4
$ 40.0
(5.3)
4.1
(17.0)
(1.7)
$ 20.1
$50.3
—
22.4
$72.7
$34.8
(1.1)
3.5
10.1
(1.6)
$45.7
The following table summarizes the location of gains and losses on our derivatives not designated as hedging instruments, as reported
in our consolidated statements of income.
(in millions of dollars)
Net Realized Investment Gain (Loss)
Credit Default Swaps
Embedded Derivative in Modified Coinsurance Arrangement
Total
Year Ended December 31
2013
2012
2011
$ (1.9)
30.7
$28.8
$ —
51.8
$51.8
$
—
(39.4)
$(39.4)
Notes To Consolidated Financial Statements
UNUM 2013 ANNUAL REPORT / 129
Note 5. Accumulated Other Comprehensive Income
Components of our accumulated other comprehensive income, after tax, and related changes are as follows:
(in millions of dollars)
Balance at December 31, 2012
Other Comprehensive Income
Net
Unrealized
Gain on
Securities
$ 873.5
Net Gain on
Cash Flow
Hedges
$401.6
Foreign
Currency
Unrecognized
Pension and
Translation
Postretirement
Adjustment
Benefit Costs
Total
$(72.6)
$(574.5)
$ 628.0
(Loss) Before Reclassifications
(746.4)
9.7
25.5
328.6
(382.6)
Amounts Reclassified from Accumulated
Other Comprehensive Income or Loss
8.6
Net Other Comprehensive Income (Loss)
(737.8)
(15.0)
(5.3)
—
25.5
16.0
344.6
9.6
(373.0)
Balance at December 31, 2013
$ 135.7
$396.3
$(47.1)
$(229.9)
$ 255.0
The net unrealized gain on securities consists of the following components:
(in millions of dollars)
Fixed Maturity Securities
Other Investments
Deferred Acquisition Costs
Reserves for Future Policy and Contract Benefits
Reinsurance Recoverable
Deferred Income Tax
Total
December 31
2013
2012
Change
$ 4,054.8
$ 7,221.5
$(3,166.7)
55.5
(41.6)
92.8
(67.0)
(4,108.5)
(6,277.5)
263.8
(88.3)
351.5
(447.8)
(37.3)
25.4
2,169.0
(87.7)
359.5
$
135.7
$
873.5
$ (737.8)
130 / UNUM 2013 ANNUAL REPORT
Amounts reclassified from accumulated other comprehensive income were recognized in our consolidated statements of income
as follows:
(in millions of dollars)
Net Unrealized Gain on Securities
Net Realized Investment Gain (Loss)
Loss on Sales of Securities and Other Invested Assets
Other-Than-Temporary Impairment Loss
Income Tax Benefit
Total
Net Gain on Cash Flow Hedges
Net Investment Income
Gain on Interest Rate Swaps and Forwards
Loss on Foreign Exchange Contracts
Net Realized Investment Gain (Loss)
Gain on Interest Rate Swaps
Loss on Foreign Exchange Contracts
Interest and Debt Expense
Loss on Interest Rate Swaps
Income Tax Expense
Total
Unrecognized Pension and Postretirement Benefit Costs
Other Expenses
Amortization of Net Actuarial Loss
Amortization of Prior Service Credit
Curtailment Gain
Income Tax Benefit
Total
Year Ended
December 31, 2013
$(12.6)
(0.8)
(13.4)
(4.8)
$ (8.6)
$ 43.1
(5.9)
1.3
(13.8)
(1.7)
23.0
8.0
$ 15.0
$(32.9)
5.0
3.0
(24.9)
(8.9)
$(16.0)
Notes To Consolidated Financial Statements
UNUM 2013 ANNUAL REPORT / 131
Note 6. 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
2013
2012
$24,567.1
2,006.0
$24,586.5
2,042.6
22,561.1
22,543.9
2011
$24,339.4
2,028.2
22,311.2
4,751.9
4,946.2
4,684.4
1,230.0
(44.7)
41.2
5,978.4
(1,657.3)
(4,419.4)
(6,076.7)
22,462.8
2,072.8
1,247.6
(175.7)
101.1
6,119.2
(1,715.4)
(4,386.6)
(6,102.0)
22,561.1
2,006.0
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
$24,535.6
$24,567.1
$24,586.5
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 2013, 2012, and 2011.
“Incurred Related to Prior Years — All Other Incurred” for the years shown in the preceding chart includes the reserve adjustments as
discussed in the following paragraphs, which create variances year over year. Excluding those adjustments, the variability exhibited year over
year is caused primarily by the level of claim resolutions in the period relative to the long-term expectations reflected in the reserves. 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. Claim resolution rates for 2013 in the Unum US
group long-term disability product line were less favorable than the level of 2012, though still above the level of our long-term assumptions.
2013 Unclaimed Death Benefits Reserve Increase
Beginning in 2011, a number of state regulators began requiring insurers to cross-check specified insurance policies with the Social
Security Administration’s Death Master File to identify potential matches. If a potential match was identified, insurers were requested to
determine if benefits were due, locate beneficiaries, and make payments where appropriate. We initiated this process where requested,
and in 2012 we began implementing this process in all states on a forward-looking basis. In addition to implementing this on a forward-
looking basis, in 2013 we began an initiative to search for potential claims from previous years. During the fourth quarter of 2013, we
completed our assessment of benefits which we estimate will be paid under this initiative, and as such, established $95.5 million of
additional claim reserves for payment of these benefits. Claim reserves were increased $49.1 million for Unum US group life, $26.3 million
for Unum US voluntary life, and $20.1 million for Colonial Life voluntary life. The reserves established were attributed to prior year incurred
claims, thereby impacting the results shown in the preceding chart.
132 / UNUM 2013 ANNUAL REPORT
2013 Group Life Waiver of Premium Benefit Reserve Reduction
Within our Unum US segment, we offer group life insurance coverage which consists primarily of renewable term life insurance and
includes a provision for waiver of premium, if disabled. The group life waiver of premium benefit (group life waiver) provides for continuation
of life insurance coverage when an insured, or the employer on behalf of the insured, is no longer paying premium because the employee
is not actively at work due to a disability. The group life waiver claim reserve is the present value of future anticipated death benefits
reflecting the probability of death while remaining disabled. Claim reserves are calculated using assumptions based on past experience
adjusted for current trends and any other factors that would modify past experience and are subject to revision as current claim experience
emerges and alters our view of future expectations. The two fundamental assumptions in the development of the group life waiver reserve
are mortality and recovery. Our emerging experience and that which continues to emerge within the industry indicate an increase in life
expectancies, which decreases the ultimate anticipated death benefits to be paid under the group life waiver benefit. Emerging experience
also reflects an improvement in claim recovery rates, which also lessens the likelihood of payment of a death benefit while the insured
is disabled. During the fourth quarter of 2013, we completed a review of our assumptions and modified our mortality and claim recovery
assumptions for our Unum US group life waiver reserves and, as a result, reduced claim reserves by $85.0 million. Of this amount,
approximately $78.0 million was attributed to prior year incurred claims, thereby impacting the results shown in the preceding chart.
2011 Long-term Care Loss Recognition
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 without a provision for adverse deviation.
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 2011. 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 $196.0 million were not recoverable and that our
policy and claim reserves should be increased by $573.6 million to reflect our then current estimate of future benefit obligations. Of this
amount, $248.1 million was related to claim reserves, and approximately $215.0 million was attributed to prior year incurred claims,
thereby impacting the results shown in the preceding chart.
Notes To Consolidated Financial Statements UNUM 2013 ANNUAL REPORT / 133
2011 Claim Reserve Increase for Individual Disability Closed Block Business
In December 2011, we analyzed our reserve assumptions for individual disability closed block claim reserves. 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. At that time, we were 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 had 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
indicated 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 was attributed to prior year incurred claims, thereby impacting the results shown in the preceding chart.
Reconciliation
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
2013
$ 1,511.0
43,099.1
44,610.1
7,740.5
8,225.5
4,108.5
December 31
2012
$ 1,484.6
44,694.4
46,179.0
7,571.1
7,763.3
6,277.5
2011
$ 1,494.0
43,051.9
44,545.9
7,454.2
7,259.6
5,245.6
Liability for Unpaid Claims and Claim Adjustment Expenses
$24,535.6
$24,567.1
$24,586.5
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 this adjustment are reported as a component of other comprehensive income or loss.
134 / UNUM 2013 ANNUAL REPORT
Note 7. 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
Year Ended December 31
2013
$ 347.1
2012
$ 355.1
2011
$ 49.1
(0.8)
3.5
(3.3)
Stockholders’ Equity — Accumulated Other Comprehensive Income (Loss)
Change in Net Unrealized Gain on Securities Before Adjustment
(1,102.8)
467.7
798.3
Change in Adjustment to Deferred Acquisition Costs and Reserves
for Future Policy and Contract Benefits, Net of Reinsurance
Change in Net Gain on Cash Flow Hedges
Change in Unrecognized Pension and Postretirement Benefit Costs
Total
743.3
(1.3)
185.2
(325.6)
(4.3)
(68.0)
(701.5)
25.2
(67.4)
$ 170.7
$ 428.4
$ 100.4
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:
Statutory Income Tax
Prior Year Taxes
Foreign Items
Tax Credits
Other Items, Net
Effective Tax
Year Ended December 31
2013
35.0%
(0.1)
(1.9)
(3.4)
(0.8)
2012
35.0%
(0.9)
(2.0)
(2.7)
(1.0)
28.8%
28.4%
2011
35.0%
(11.0)
(0.3)
(5.9)
(3.1)
14.7%
Notes To Consolidated Financial Statements
UNUM 2013 ANNUAL REPORT / 135
Our net deferred tax liability consists of the following. Certain prior year amounts have been reclassified to conform to current
year reporting.
(in millions of dollars)
Deferred Tax Liability
Deferred Acquisition Costs
Fixed Assets
Invested Assets
Other
Gross Deferred Tax Liability
Deferred Tax Asset
Reserves
Employee Benefits
Other
Gross Deferred Tax Asset
Total Net Deferred Tax Liability
December 31
2013
2012
$ 70.0
$ 39.3
80.3
1,274.3
54.4
1,479.0
1,180.1
151.2
3.4
1,334.7
$ 144.3
74.1
2,342.8
63.2
2,519.4
1,934.2
315.2
0.6
2,250.0
$ 269.4
Our consolidated statements of income include amounts subject to both domestic and foreign taxation. The income and related tax
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
2013
2012
2011
$1,072.0
133.2
$1,205.2
$1,128.4
121.1
$1,249.5
$ 277.9
$ 164.4
18.7
296.6
47.3
3.2
50.5
42.2
206.6
173.5
(25.0)
148.5
$ 160.5
172.8
$ 333.3
$ 218.4
12.1
230.5
(203.4)
22.0
(181.4)
$ 347.1
$ 355.1
$ 49.1
The U.K. government enacted income tax rate reductions during each of the years 2010 through 2013. During 2013, the rate was
reduced from 23 percent to 21 percent effective April 2014, and to 20 percent effective April 2015. Although the rate reductions in each
instance became or will become effective during a subsequent year, we are required to adjust deferred tax assets and liabilities through
income on the date of enactment of a rate change. As a result, we recorded income tax benefits of $6.3 million for the three percent tax
rate reduction enacted during 2013 and $9.3 million and $6.8 million for the two percent tax rate reductions enacted during 2012
and 2011, respectively.
136 / UNUM 2013 ANNUAL REPORT
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, 2013, we have not made a provision for U.S. taxes on approximately $1 billion 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 Taken During Prior Years
Additions
Subtractions
Settlements with Tax Authorities
Lapses of Statute of Limitations
Tax Positions Taken During Current Year
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
2013
$ 17.5
5.7
—
(4.8)
—
—
18.4
(10.2)
December 31
2012
$ 86.9
13.3
(0.6)
(23.5)
(61.1)
2.5
17.5
(15.0)
2011
$138.9
4.4
(11.8)
(44.6)
—
—
86.9
(86.9)
$ 8.2
$ 2.5
$
—
Included in the balances at December 31, 2013, 2012, and 2011 are $10.2 million, $15.0 million, and $86.9 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.
We recognize interest expense and penalties, if applicable, related to unrecognized tax benefits in tax expense net of federal income
tax. We recognized a reduction of interest expense associated with unrecognized tax benefits of $1.1 million, $10.4 million, and $13.1 million
for 2013, 2012, and 2011, respectively. The total amounts of accrued interest and penalties related to unrecognized tax benefits in our
consolidated balance sheets as of December 31, 2013 and 2012 were $0.8 million and $1.9 million, respectively. It is reasonably possible
that unrecognized tax benefits could decrease within the next 12 months by $0 to $8.0 million pending resolution of items with the Internal
Revenue Service (IRS).
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 2013, our appeal of tax years 2005 and 2006 was effectively settled with
the approval of the Congressional Joint Committee on Taxation. As a result of the settlement, we recognized in our 2013 operating results a
reduction in federal income taxes of $1.4 million as well as other income of $4.0 million before tax and $2.6 million after tax. We expect to
receive a cash refund of taxes and interest under this settlement of approximately $17.5 million in 2014.
During 2012, the IRS audit of our 2009 and 2010 years commenced, and we also finalized all issues with the IRS related to our 2007
and 2008 years resulting in a reduction of our federal income taxes of $11.0 million. During 2011, the IRS approved our final settlement 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 received
a cash refund of taxes and interest under this settlement of $60.4 million in 2012.
Notes To Consolidated Financial Statements
UNUM 2013 ANNUAL REPORT / 137
Tax years subsequent to 2008 remain subject to examination by tax authorities in the U.S., and tax years subsequent to 2010 remain
subject to examination in major foreign jurisdictions. We believe sufficient provision has been made for all 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.
In January 2013, the American Taxpayer Relief Act retroactively reinstated the active financing income exemption to the beginning
of 2012 which affects the amount of earnings from foreign subsidiaries that is taxed annually, regardless of whether foreign earnings are
repatriated. Our 2012 income tax expense reflected the taxation of all active financing income from our foreign subsidiaries as required
under the law in place prior to the reinstatement. In 2013, we reversed the amounts recorded in 2012 and recorded a reduction in income
tax expense of $0.9 million to reflect the reinstatement of the exemption of active financing income. The active financing income
exemption expired again for tax years beginning on or after January 1, 2014, the effect of which is expected to be immaterial in 2014.
As of December 31, 2013 and 2012, we had no net operating loss carryforward for U.S. 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, 2013 and 2012, we had no
valuation allowance. In 2011, as part of an IRS settlement, we released a $4.1 million valuation allowance related to basis differences in
foreign subsidiaries and net operating loss carryforwards in foreign jurisdictions.
Total income taxes paid net of refunds during 2013, 2012, and 2011 were $398.1 million, $185.0 million, and $303.5 million, respectively.
Note 8. Debt
Long-term and short-term debt consists of the following:
(in millions of dollars)
Long-term Debt
Senior Secured Notes, variable due 2037, callable at or above par
Senior Secured Notes, variable due 2036, callable at or above par
Notes @ 5.75% due 2042, 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
Fair Value Hedges Adjustment
Total
Short-term Debt
Securities Lending Agreements — See Note 3
Total
December 31
2013
2012
$ 440.0
$ 500.0
—
248.6
39.5
165.8
200.0
399.7
350.0
296.8
200.0
50.8
226.5
(5.7)
62.5
248.6
39.5
165.8
200.0
399.6
350.0
296.7
200.0
50.8
226.5
15.4
2,612.0
2,755.4
76.5
455.8
$2,688.5
$3,211.2
138 / UNUM 2013 ANNUAL REPORT
Collateralized debt is comprised of our senior secured notes and ranks highest in priority, followed by unsecured notes, which consist
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, $200.0 million in 2018, and
$1,772.6 million in 2020 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, 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.
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 (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, 2013, the amount in the DSCA was $7.4 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 DSCA minus an amount equal to the minimum
balance that is required to be maintained in the 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 DSCA as required under the Northwind indenture. Northwind Holdings made principal payments on the Northwind Notes
of $60.0 million in both 2013 and 2012 and $74.4 million in 2011.
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 in a private offering. During 2012 and 2011, Tailwind Holdings made principal payments of $10.0 million
each year on these notes. In January 2013, we purchased and retired the outstanding principal of $62.5 million on these notes, resulting
in a before-tax gain of $4.0 million.
Notes To Consolidated Financial Statements UNUM 2013 ANNUAL REPORT / 139
Unsecured Notes
In August 2012, we issued $250.0 million of unsecured senior notes in a public offering.
In 2011, the remaining $225.1 million of our 7.625% senior notes due March 2011 matured.
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 Hedges
As of December 31, 2013 and 2012, we had $600.0 million notional amount interest rate swaps which effectively convert certain
of our unsecured senior notes into floating rate debt. Under these agreements, we receive fixed rates of interest and pay variable rates
of interest, based off of three-month LIBOR. See Note 4 for further information on our interest rate swaps.
Junior Subordinated Debt Securities
In 1998, Provident Financing Trust I (the trust), a 100 percent-owned finance subsidiary of Unum Group, 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.
Interest and Debt Expense
Interest paid on long-term and short-term debt and related securities during 2013, 2012, and 2011 was $144.6 million, $139.6 million,
and $145.4 million, respectively.
Credit Facility
In August 2013, we entered into a five-year, $400.0 million unsecured revolving credit facility. Under the terms of the agreement, we
may request that the credit facility be increased up to $600.0 million. Borrowings under the credit facility are for general corporate uses and
are subject to financial covenants, negative covenants, and events of default that are customary. The credit facility provides for interest
rates based on either the prime rate or LIBOR. At December 31, 2013, no amount was outstanding on the facility.
Note 9. Employee Benefit Plans
Defined Benefit Pension and Other 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. qualified and non-qualified defined benefit pension 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.S. defined benefit pension
plans were closed to new entrants on December 31, 2013, and the U.K. plan was closed to new entrants on December 31, 2002.
140 / UNUM 2013 ANNUAL REPORT
Amendments to U.S. Pension Plans
In 2013, we adopted plan amendments which freeze participation and benefit accruals in our U.S. qualified and non-qualified
defined benefit pension plans, effective December 31, 2013. Because the amendments eliminate all future service accruals subsequent to
December 31, 2013 for active participants in these plans, we were required to remeasure the benefit obligations during 2013. The discount
rate assumption increased from 4.50 percent at December 31, 2012 to 5.00 percent at the remeasurement date, reflecting the change in
market interest rates during that period. The expected long-term rate of return on plan assets of 7.50 percent remained unchanged from
December 31, 2012. The remeasurement resulted in a decrease in our net pension liability of $327.4 million at the remeasurement date,
with a corresponding increase in other comprehensive income, less applicable income tax of $114.6 million. The decrease in the net pension
liability resulted primarily from the curtailment of benefits under the plan amendments as well as the increase in the discount rate
assumption used to remeasure the benefit obligations.
As a result of these plan amendments, we recognized a before-tax curtailment loss of $0.7 million in earnings during 2013, with a
corresponding reduction in the prior service cost included in accumulated other comprehensive income and associated with years of service
no longer expected to be rendered.
Amendments to U.K. Pension Plan
In 2013, we adopted amendments to our U.K. pension plan which freeze participation in our plan and which reduce the maximum rate
of inflation indexation from 5.0 percent to 2.5 percent for pension benefits which were earned prior to April 1997. The amendment to reduce
the maximum rate of inflation indexation was effective September 12, 2013, and the amendment to freeze participation will become
effective June 30, 2014. Although all future service accruals will be eliminated for active participants, pension payments to participants
currently employed will be based on the higher of (i) pensionable earnings at a participant’s retirement age or the date a participant’s
employment ceases, subject to the inflation indexation provisions in the plan, or (ii) pensionable earnings as of June 30, 2014, also subject
to the inflation indexation provisions. Because the amendments eliminate all future service accruals subsequent to June 30, 2014 for active
participants in the plan, we were required to remeasure the benefit obligation of the plan during 2013. The discount rate assumption
increased from 4.50 percent at December 31, 2012 to 4.60 percent at the remeasurement date, reflecting the change in market interest rates
during that period. The expected long-term rate of return on plan assets changed from 6.20 percent at December 31, 2012 to 6.35 percent
at the remeasurement date. The remeasurement resulted in a $2.3 million, or £1.5 million, increase in our net pension asset at the
remeasurement date.
As a result of these plan amendments, we recognized a before-tax curtailment gain of $3.7 million, or £2.3 million, in earnings during
2013, with a corresponding decrease in the prior service credit included in accumulated other comprehensive income and associated with
years of service no longer expected to be rendered. The majority of the prior service credit was related to the amendment to reduce the
rate of inflation indexation.
Amendments to OPEB Plan
We discontinued offering retiree life insurance to future retirees effective December 31, 2012 but continue to provide this benefit to
employees who retired prior to that date. As a result of this plan amendment, we recognized a curtailment gain of $4.2 million and a prior
service credit of $5.0 million in accumulated other comprehensive income during 2012.
Amortization Period of Actuarial Gain or Loss
Because all participants in the U.S. and U.K. pension plans are considered inactive as a result of these amendments, we are required
to amortize the net actuarial loss for these plans over the average remaining life expectancy of the plan participants. The net actuarial loss
was previously amortized over the average future working life of pension plan participants, or approximately 11 years, for both U.S. and
U.K. participants up to the dates of remeasurement. As of December 31, 2013, the estimate of the average remaining life expectancy of plan
participants is approximately 33 years for U.S. participants and 34 years for U.K. participants.
Notes To Consolidated Financial Statements UNUM 2013 ANNUAL REPORT / 141
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)
2013
2012
2013
2012
2013
2012
Change in Benefit Obligation
Benefit Obligation at Beginning of Year
$1,967.9
$1,579.8
$197.4
$170.4
$198.8
$190.9
Service Cost
Interest Cost
Plan Participant Contributions
Actuarial (Gain) Loss
Benefits and Expenses Paid
Plan Amendment
Curtailment
Change in Foreign Exchange Rates
59.4
86.3
—
(225.9)
(42.2)
—
(126.8)
—
48.8
84.4
—
291.4
(36.5)
—
—
—
4.3
8.6
—
2.6
(4.1)
—
(3.7)
3.6
4.2
8.5
—
9.4
(3.9)
—
—
8.8
0.7
8.0
3.9
(30.2)
(15.9)
—
—
—
1.6
9.6
3.5
19.1
(16.7)
(5.0)
(4.2)
—
Benefit Obligation at End of Year
$1,718.7
$1,967.9
$208.7
$197.4
$165.3
$198.8
Accumulated Benefit Obligation
at December 31
$1,718.7
$1,822.3
$197.7
$187.3
N/A
N/A
Change in Fair Value of Plan Assets
Fair Value of Plan Assets
at Beginning of Year
Actual Return on Plan Assets
Employer Contributions
Plan Participant Contributions
Benefits and Expenses Paid
Change in Foreign Exchange Rates
$1,353.6
$1,170.8
$205.6
$188.0
$ 11.5
$ 11.7
224.6
54.7
—
(42.2)
—
161.8
57.5
—
(36.5)
—
15.6
4.0
—
(4.1)
4.6
8.6
4.1
—
(3.9)
8.8
0.2
11.7
3.9
(15.9)
—
$ 11.4
$153.9
0.3
12.7
3.5
(16.7)
—
$ 11.5
$187.3
Fair Value of Plan Assets at End of Year
$1,590.7
$1,353.6
$225.7
$205.6
Underfunded (Overfunded) Status
$ 128.0
$ 614.3
$ (17.0)
$ (8.2)
142 / UNUM 2013 ANNUAL REPORT
The amounts recognized in our consolidated balance sheets for our pension and OPEB plans at December 31, 2013 and 2012 are as
follows. Certain prior year amounts have been reclassified to conform to current year reporting.
(in millions of dollars)
Current Liability
Noncurrent Liability
Noncurrent Asset
Pension Benefits
U.S. Plans
Non U.S. Plans
OPEB
2013
2012
$ 5.2
136.2
(13.4)
$ 4.6
609.7
—
2013
$
—
—
(17.0)
2012
$
—
—
(8.2)
2013
$ 14.6
139.3
—
2012
$ 15.6
171.7
—
Underfunded (Overfunded) Status
$ 128.0
$ 614.3
$(17.0)
$ (8.2)
$153.9
$187.3
Unrecognized Pension and
Postretirement Benefit Costs
Net Actuarial Gain (Loss)
Prior Service Credit (Cost)
Deferred Income Tax Asset
Total Included in Accumulated Other
$(342.1)
$(845.4)
$(36.9)
—
(342.1)
119.7
(0.6)
(846.0)
296.1
—
(36.9)
10.9
$(37.9)
(0.2)
(38.1)
11.1
$ 10.3
$ (19.3)
2.4
12.7
5.8
7.3
(12.0)
14.4
Comprehensive Income (Loss)
$(222.4)
$(549.9)
$(26.0)
$(27.0)
$ 18.5
$ 2.4
The following table provides the changes recognized in other comprehensive income for the years ended December 31, 2013 and 2012.
(in millions of dollars)
2013
2012
2013
2012
2013
2012
Accumulated Other Comprehensive
Income (Loss) at Beginning of Year
$(549.9)
$(437.6)
$(27.0)
$(17.2)
$ 2.4
$ 10.7
Pension Benefits
U.S. Plans
Non U.S. Plans
OPEB
Net Actuarial Gain (Loss)
Amortization
Curtailment
All Other Changes
Prior Service Credit (Cost)
Amortization
Curtailment
Plan Amendment
Change in Deferred
Income Tax Asset
31.7
126.8
344.8
(0.1)
0.7
—
45.9
—
(218.2)
(0.4)
—
—
1.2
—
(0.2)
—
(3.7)
3.9
0.5
—
(13.4)
—
—
—
—
—
29.6
—
4.2
(19.4)
(4.9)
(2.6)
—
—
—
5.0
4.5
Accumulated Other Comprehensive
Income (Loss) at End of Year
$(222.4)
$(549.9)
$(26.0)
$(27.0)
$ 18.5
$ 2.4
(176.4)
60.4
(0.2)
3.1
(8.6)
Notes To Consolidated Financial Statements
UNUM 2013 ANNUAL REPORT / 143
Plan Assets
The objective of our U.S. 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 direct investments,
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 that track the Russell 2000 index. International equity investments consist of equity 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. Emerging market equity investments consist of 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 direct investments, 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.
144 / UNUM 2013 ANNUAL REPORT
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
State and Municipal Securities
Alternative Investments:
Private Equity Direct 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
State and Municipal Securities
Alternative Investments:
Private Equity Funds of Funds
Hedge Funds of Funds
Cash Equivalents
Total
December 31, 2013
Quoted Prices
in Active Markets
for Identical Assets
or Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
—
—
231.9
134.5
—
105.7
97.8
—
—
—
—
28.4
$343.9
139.6
—
131.7
76.3
7.4
172.6
12.9
—
—
—
—
$
—
—
—
—
—
—
—
—
7.2
29.6
66.9
—
Total
$ 343.9
139.6
231.9
266.2
76.3
113.1
270.4
12.9
7.2
29.6
66.9
28.4
$598.3
$884.4
$103.7
$1,586.4
December 31, 2012
Quoted Prices
in Active Markets
for Identical Assets
or Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
—
—
83.9
106.4
—
138.0
84.1
—
—
—
13.1
$269.2
111.6
120.1
102.9
73.9
8.6
141.7
12.7
—
—
—
$
—
—
—
—
—
—
—
—
28.7
56.1
—
Total
$ 269.2
111.6
204.0
209.3
73.9
146.6
225.8
12.7
28.7
56.1
13.1
$425.5
$840.7
$ 84.8
$1,351.0
Notes To Consolidated Financial Statements
UNUM 2013 ANNUAL REPORT / 145
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, which include private equity direct investments, hedge funds of funds, and private equity funds of funds, 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 2013 or 2012. Redemptions on the hedge funds
of funds can be made on either a quarterly or bi-annual basis, depending on the fund, with prior notice of at least 90 calendar days.
Because of these redemption restrictions, we have classified the hedge funds of funds as Level 3 because we do not have the unrestricted
ability to redeem our investment at NAV at any given time. 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. Accordingly, we have assigned a Level 3 classification to the private equity
funds of funds due to the redemption restrictions.
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, 2013 and 2012 are as follows:
Year Ended December 31, 2013
Actual Return on Plan Assets
Level 3 Transfers
Beginning
Held at
Sold During
(in millions of dollars)
Private Equity Direct Investments
Private Equity Funds of Funds
Hedge Funds of Funds
Total
of Year
$ —
28.7
56.1
$84.8
Year End
the Year
Purchases
Sales
$0.3
0.9
6.3
$7.5
$ —
1.1
—
$1.1
$ 8.4
$(1.5)
2.1
4.9
(3.2)
(0.4)
$15.4
$(5.1)
Into
$—
—
—
$—
Out of
End
of Year
$—
$ 7.2
—
—
29.6
66.9
$—
$103.7
Year Ended December 31, 2012
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
$23.7
44.3
$68.0
Year End
the Year
Purchases
Sales
$0.5
3.8
$4.3
$1.0
—
$1.0
$ 6.0
11.8
$17.8
$(2.5)
(3.8)
$(6.3)
Into
$—
—
$—
Out of
$—
—
$—
End
of Year
$ 28.7
56.1
$ 84.8
146 / UNUM 2013 ANNUAL REPORT
The categorization of fair value measurements by input level for the assets in our U.K. pension plan is as follows. Certain prior year
amounts have been reclassified to conform to current year reporting.
(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
Fixed Interest and Index-linked Securities
Cash Equivalents
Total Plan Assets
December 31, 2013
Quoted Prices
in Active Markets
for Identical Assets
or Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$ —
52.6
0.7
$53.3
$172.0
0.4
—
$172.4
$—
—
—
$—
December 31, 2012
Quoted Prices
in Active Markets
for Identical Assets
or Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$ —
42.6
7.4
$50.0
$154.7
0.9
—
$155.6
$—
—
—
$—
Total
$172.0
53.0
0.7
$225.7
Total
$154.7
43.5
7.4
$205.6
Level 1 fixed interest and index-linked securities consist of individual funds that are valued based on unadjusted quoted prices
from active markets for identical securities. 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, 2013
Quoted Prices
in Active Markets
for Identical Assets
or Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$—
$—
$11.4
December 31, 2012
Quoted Prices
in Active Markets
for Identical Assets
or Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$—
$—
$11.5
Total
$11.4
Total
$11.5
Notes To Consolidated Financial Statements
UNUM 2013 ANNUAL REPORT / 147
The fair value is represented by the actuarial present value of future cash flows of the contracts.
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, 2013 and 2012 are as follows:
(in millions of dollars)
Life Insurance Contracts
(in millions of dollars)
Life Insurance Contracts
Year Ended December 31, 2013
Beginning of
Actual Return
Net Benefits and
Year
$11.5
on Plan Assets
Contributions
Expenses Paid
$0.2
$15.6
$(15.9)
Year Ended December 31, 2012
Beginning of
Year
Actual Return
on Plan Assets
Contributions
Net Benefits and
Expenses Paid
$11.7
$0.3
$16.2
$(16.7)
End of
Year
$11.4
End of
Year
$11.5
For the years ended December 31, 2013 and 2012, 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 2013 or 2012.
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:
Pension Benefits
U.S. Plans
Non U.S. Plans
OPEB
2013
2012
2013
2012
2013
2012
Benefit Obligations
Discount Rate
Rate of Compensation Increase
Net Periodic Benefit Cost
Discount Rate
Expected Return on Plan Assets
5.30%
4.00%
4.50%/
5.00%*
7.50%
4.50%
4.00%
5.40%
7.50%
Rate of Compensation Increase
4.00%
4.00%
4.40%
3.90%
4.50%
3.75%
5.00%
—%
4.20%
—%
4.50%/
4.60%**
6.20%/
6.35%**
3.75%
4.90%
4.20%
5.20%
5.80%
5.75%
5.75%
3.85%
—%
—%
*In conjunction with the remeasurement due to the amendment of the plans, a discount rate of 4.50% was used for the period January 1, 2013 through the date of
remeasurement, and a discount rate of 5.00% was used for the period subsequent to the date of remeasurement through December 31, 2013.
**In conjunction with the remeasurement due to the amendment of the plan, a discount rate of 4.50% and expected return on plan assets of 6.20% were used for the period
January 1, 2013 through the date of remeasurement, and a discount rate of 4.60% and expected return on plan assets of 6.35% were used for the period subsequent to the
date of remeasurement through December 31, 2013.
We set the discount rate assumption annually for each of our retirement-related benefit plans at the measurement date to reflect the
yield on a portfolio of high quality fixed income corporate 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.
148 / UNUM 2013 ANNUAL REPORT
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, 2013 and 2012 was 5.75 percent,
which was based on full investment in fixed income securities with an average book yield of 5.58 percent and 5.77 percent in 2013 and
2012, respectively.
Our rate of compensation increase assumption is generally based on periodic studies of compensation trends.
For measurement purposes at December 31, 2013 and 2012, the annual rate of increase in the per capita cost of covered
postretirement health care benefits assumed for the next calendar year was 7.50 percent and 8.00 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 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)
2013
2012
2011
2013
2012
2011
2013
Pension Benefits
U.S. Plans
Non U.S. Plans
OPEB
2012
Service Cost
Interest Cost
$ 59.4
$ 48.8
$ 42.7
$ 4.3
$ 4.2
$ 4.8
$ 0.7
$ 1.6
86.3
84.4
77.6
8.6
8.5
8.8
8.0
9.6
2011
$ 1.9
10.0
Expected Return on Plan Assets
(105.5)
(88.8)
(87.6)
(12.5)
(11.1)
(12.2)
(0.6)
(0.7)
(0.7)
Amortization of:
Net Actuarial Loss
Prior Service Credit
Curtailment
Total
31.7
45.9
31.9
(0.1)
(0.4)
(0.5)
0.7
—
—
1.2
—
(3.7)
0.5
—
—
—
—
—
—
—
—
(4.9)
(2.6)
(2.6)
—
—
—
$ 72.5
$ 89.9
$ 64.1
$ (2.1) $ 2.1
$ 1.4
$ 3.2
$ 7.9
$ 8.6
A one percent increase or decrease in the assumed health care cost trend rate at December 31, 2013 would have increased (decreased)
the service cost and interest cost by $0.2 million and $(0.1) million, respectively, and the postretirement benefit obligation by $2.4 million
and $(1.7) million, respectively.
Notes To Consolidated Financial Statements
UNUM 2013 ANNUAL REPORT / 149
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 $1.2 million, $1.3 million, and $1.3 million in 2013, 2012, and 2011,
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 for our pension plans during 2014 is $5.6 million before tax and $3.7 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 2014 is $1.7 million
before tax and $1.1 million after tax.
Benefit Payments
The following table provides expected benefit payments, which reflect expected future service, as appropriate (in millions of dollars).
Year
2014
2015
2016
2017
2018
2019–2023
Pension Benefits
U.S. Plans
Non U.S. Plans
$ 45.1
49.3
54.6
59.4
64.7
421.9
$ 5.4
5.8
6.1
6.4
6.7
38.9
Gross
$16.4
16.4
16.2
15.9
15.6
70.3
OPEB
Subsidy Payments
$ 1.8
1.9
2.1
2.2
2.4
14.2
Net
$14.6
14.5
14.1
13.7
13.2
56.1
Pension Plans’ Funding Policy
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 had no regulatory contribution requirements for our U.S. qualified defined benefit plan in 2013. We elected
to make a voluntary contribution of $50.0 million to this plan during 2013 but do not expect to make any contributions during 2014. 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 made required contributions to our U.K. plan of $4.0 million, or approximately £2.5 million, during December 31, 2013. Effective
October 1, 2013, we increased contributions to the U.K. plan from 24.8 percent to 30.0 percent of pensionable earnings for plan participants.
We expect to make contributions of approximately $2.3 million, or £1.4 million, during 2014. Subsequent to June 30, 2014, we may make
voluntary contributions in the future as is deemed necessary. We contribute to our U.K. pension plan sufficient to meet the minimum
funding requirements under U.K. legislation.
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.
150 / UNUM 2013 ANNUAL REPORT
Defined Contribution Plans
We offer a 401(k) plan to all eligible U.S. employees under which a portion of employee contributions is matched. Concurrent with
the adoption of our U.S. pension plan amendments, we adopted an amendment to increase the benefits under our 401(k) plan, effective
January 1, 2014, to match dollar-for dollar up to 5.0 percent of base salary. We previously matched dollar-for-dollar up to 3.0 percent of
base salary and $0.50 on the dollar for each of the next 2.0 percent of base salary for employee contributions into the 401(k) plan. Also
effective January 1, 2014, we will include any performance-based incentive compensation as part of the definition of earnings for purposes
of contributions. We will also establish a new component of the 401(k) plan wherein we will make an additional non-elective contribution
of 4.5 percent of earnings for all eligible employees, and a separate transition contribution will be made for eligible employees who meet
certain age and years of service criteria. These changes are in compliance with ERISA guidelines, and the 401(k) plan will continue to
qualify for a “safe harbor” from annual discrimination testing.
We also offer a defined contribution plan to all eligible U.K. employees under which a portion of employee contributions is matched.
Concurrent with the adoption of our U.K. pension plan amendments, we adopted an amendment to increase the benefits under our
U.K. defined contribution plan. Effective July 1, 2014, we will increase benefits under the defined contribution plan wherein we will match
two pounds for every one pound on the first 1.0 percent of employee contributions into the plan and will match additional employee
contributions pound-for-pound up to 5.0 percent of base salary. We previously matched pound-for-pound up to 5.0 percent of base salary
for employee contributions into the defined contribution plan and made an additional non-elective contribution of 5.0 percent of base
salary. Also effective July 1, 2014, we will increase the non-elective contribution to 6.0 percent of base salary for all eligible employees,
and a separate transition contribution will be made for all eligible employees through March 31, 2016.
During the years ended December 31, 2013, 2012, and 2011, we contributed $18.8 million, $18.9 million, and $18.8 million,
respectively, to our U.S. defined contribution plan, and $2.9 million, $2.9 million, and $2.6 million, or £1.9 million, £1.8 million, and
£1.6 million, respectively, to our U.K. defined contribution plan.
Note 10. Stockholders’ Equity and Earnings Per Common Share
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
Year Ended December 31
2013
2012
2011
$858.1
$894.4
$284.2
264,725.8
281,355.9
302,399.8
and Nonvested Stock Awards
1,223.4
400.9
1,171.2
Weighted Average Common Shares — Assuming Dilution
265,949.2
281,756.8
303,571.0
Net Income Per Common Share
Basic
Assuming Dilution
$ 3.24
$ 3.23
$ 3.18
$ 3.17
$ 0.94
$ 0.94
Notes To Consolidated Financial Statements
UNUM 2013 ANNUAL REPORT / 151
We use the treasury stock method to account for the effect of outstanding stock options, nonvested restricted stock units, and
nonvested performance share units on the computation of diluted 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 and the grant price of the nonvested restricted stock units and the nonvested performance
share units. The outstanding stock options have exercise prices ranging from $11.37 to $26.29, the nonvested restricted stock units have
grant prices ranging from $19.38 to $32.35, and the nonvested performance share units have a grant price of $23.97. See Note 11.
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 diluted earnings per share because their impact would be
antidilutive, based on then current market prices, approximated 0.1 million, 2.5 million, and 2.1 million shares of common stock for the
years ended December 31, 2013, 2012, and 2011, respectively.
Common Stock
Our board of directors has authorized the repurchase of Unum Group’s common stock under the following repurchase programs:
(in millions of dollars)
Authorized Repurchase Amount
Remaining Repurchase Amount at Year End 2013
Share Repurchase Program Authorized During
December 2013
July 2012
February 2011
May 2010
$750.0
$730.0
$750.0
$
—
$1,000.0
$
—
$500.0
$
—
The December 2013 share repurchase program has an expiration date of June 12, 2015.
Common stock repurchases were classified as follows in our consolidated statements of stockholders’ equity:
(in millions)
Treasury Stock
Retirement of Common Shares
Total
Year Ended December 31
2013
2012
2011
Shares
Cost
Shares
Cost
Shares
Cost
11.2
$318.6
—
—
11.2
$318.6
23.6
—
23.6
$500.6
—
$500.6
17.7
7.7
25.4
$419.9
200.0
$619.9
The cost in the preceding chart includes commissions of $0.2 million, $0.6 million, and $0.3 million for the years ended December 31,
2013, 2012, and 2011, respectively.
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. We retired 7.7 million
shares during 2011. All other repurchased shares have been classified as treasury stock.
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.
152 / UNUM 2013 ANNUAL REPORT
Note 11. Stock-Based Compensation
Description of Stock Plans
Under the stock incentive plan of 2012 (the 2012 Plan), up to 20 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 share 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 1.76 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, 2013, approximately 18.31 million shares were available for future grants under the 2012 Plan.
Under the stock incentive plan of 2007 (the 2007 Plan), which was terminated in May 2012 for purposes of any further grants, up to
35 million shares of common stock were available for awards to our employees, officers, consultants, and directors. Awards could be in
the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance share 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. Awards
granted before the termination of the 2007 Plan remain outstanding in accordance with the plan’s terms. Stock options generally have a
term of eight years after the date of grant and vest after three years.
We issue new shares of common stock for all of our stock plan vestings and exercises.
Performance Share Units (PSUs)
In February 2013, we issued approximately 0.1 million PSUs with a grant date fair value of $25.26, all of which were outstanding and
nonvested at December 31, 2013. Vesting for the PSUs occurs at the end of a three-year period and is contingent upon our achievement of
prospective company performance goals and our total shareholder return relative to a particular peer group during the three-year period.
Forfeitable dividend equivalents on PSUs are accrued in the form of additional PSUs. The weighted average grant date fair value per share
for PSU grants and dividends during 2013 was $25.26.
At December 31, 2013, we had approximately $2.1 million of unrecognized compensation cost related to PSUs that will be recognized
over a weighted average period of 2.0 years. The expense and unrecognized compensation cost assume the performance goals are
attained at 100 percent. Actual performance, including modification for relative total shareholder return, may result in 0 to 180 percent of
the PSUs ultimately being earned. Compensation expense recognized for the PSUs is adjusted quarterly based on actual performance
measure results.
We estimated the fair value on the date of initial grant for the PSUs using the Monte-Carlo simulation model. The following
assumptions were used to value the grant:
• Expected volatility of 35 percent, based on our historical daily stock prices and those for components of our peer group.
• Expected life of 3.0 years, which equals the performance period.
• Expected dividend yield of 2.17 percent, assuming continuous reinvestment of the dividends, based on the plan’s provisions.
• Risk free interest rate of 0.38 percent, based on the yield of U.S. Treasury bonds at the date of grant.
Notes To Consolidated Financial Statements UNUM 2013 ANNUAL REPORT / 153
Restricted Stock Units (RSUs)
Activity for RSUs classified as equity is as follows:
Outstanding at December 31, 2012
Granted
Vested
Forfeited
Outstanding at December 31, 2013
Shares (000s)
Weighted Average Grant Date Fair Value
1,403
731
(790)
(22)
1,322
$23.57
24.68
23.12
24.22
24.35
During 2013, 2012, and 2011, we issued RSUs with a weighted average grant date fair value per share of $24.68, $22.96, and $26.13,
respectively. RSUs 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 RSUs are accrued in the form of additional RSUs. Compensation cost
for RSUs subject to accelerated vesting upon retirement is recognized over the implicit service period.
The total fair value of shares vested during 2013, 2012, and 2011 was $18.3 million, $19.5 million, and $19.2 million, respectively.
At December 31, 2013, we had $10.6 million of unrecognized compensation cost related to RSUs that will be recognized over a weighted
average period of 0.8 years.
Cash-Settled Awards
Activity for cash-settled awards classified as a liability is as follows:
Outstanding at December 31, 2012
Granted
Vested
Outstanding at December 31, 2013
Shares (000s)
Weighted Average Grant Date Fair Value
207
60
(102)
165
$23.72
24.22
23.29
24.09
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 recognized as compensation cost during the period in which the changes occur.
The weighted average grant date fair value per unit for cash-settled awards granted during 2013, 2012, and 2011 was $24.22, $23.23,
and $26.22, respectively. The total fair value of cash-settled awards vested during 2013, 2012, and 2011 was $2.4 million, $1.5 million, and
$0.7 million, respectively, and the total fair value of cash-settled awards paid during 2013, 2012, and 2011 was $2.5 million, $1.5 million,
and $0.9 million, respectively. 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.
154 / UNUM 2013 ANNUAL REPORT
Stock Options
Stock option activity is summarized as follows:
Outstanding at December 31, 2012
Granted
Exercised
Outstanding at December 31, 2013
Exercisable at December 31, 2013
Shares
(000s)
1,691
103
(399)
1,395
1,041
Weighted Average
Remaining
Contractual
Intrinsic
Value
Exercise Price
Term (in years)
(in millions)
$20.98
24.25
21.15
21.17
$20.15
4.2
3.5
$19.4
$15.5
All outstanding stock options at December 31, 2013 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 2013, 2012, and 2011 was $4.4 million, $0.6 million, and $3.9 million, respectively.
The total fair value of options that vested during 2013, 2012, and 2011 was $2.4 million, $2.3 million, and $2.7 million, respectively.
At December 31, 2013, we had $0.6 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 2013, 2012, and 2011 was $9.77, $9.78, and $11.73, 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 2013, 2012, and 2011 grants:
• Expected volatility of 52 percent, 52 percent, and 53 percent, respectively, based on our historical daily stock prices.
• Expected life of 6.0 years, 6.0 years, and 5.5 years, respectively, based on historical average years to exercise.
• Expected dividend yield of 2.14 percent, 1.80 percent, and 1.41 percent, respectively, based on the dividend rate at the date of grant.
• Risk free interest rate of 1.12 percent, 1.13 percent, and 2.37 percent, respectively, based on the yield of U.S. 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)
Performance Share Units
Restricted Stock Units and Cash-Settled Awards
Stock Options
Other
Total Compensation Expense, Before Income Tax
Total Compensation Expense, Net of Income Tax
Year Ended December 31
2012
$ —
20.9
2.7
0.6
$24.2
$15.6
2011
$ —
19.6
2.7
1.2
$23.5
$15.3
2013
$ 1.1
21.0
1.0
0.5
$23.6
$15.6
Cash received under all share-based payment arrangements for the years ended December 31, 2013, 2012, and 2011 was
$11.4 million, $4.9 million, and $14.8 million, respectively.
Notes To Consolidated Financial Statements
UNUM 2013 ANNUAL REPORT / 155
Note 12. Reinsurance
Our reinsurance recoverable at December 31, 2013 relates to 86 companies. Thirteen major companies account for approximately
91 percent of our reinsurance recoverable at December 31, 2013, 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 eight 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
Year Ended December 31
2013
2012
2011
$7,777.3
$7,736.0
$7,521.5
203.2
(355.8)
$7,624.7
$ 728.7
210.9
(230.8)
$7,716.1
$ 591.7
216.6
(223.9)
$7,514.2
$ 609.2
We entered into reinsurance agreements, effective January 1, 2013, whereby the agreements provide 50 percent coverage up to
£0.5 million per covered life and 100 percent coverage, per covered life, above that amount for the existing in-force block of Unum UK
group life business as well as new policies issued during the term of the agreements.
We entered into a reinsurance agreement effective April 1, 2013 to cede the inforce policies on a small block of individual disability
business in our Unum US segment.
Note 13. Segment Information
We have three principal operating business segments: Unum US, Unum UK, and Colonial Life. Our other segments are the Closed Block
and the Corporate 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. 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 lines of business, which include
individual disability and critical illness 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 and marketed to employees at the workplace through an independent contractor agency sales force and brokers.
The Closed Block segment consists of individual disability, group and individual long-term care, and other insurance products no longer
actively marketed. The individual disability line of business in this segment generally consists of policies we sold prior to the mid-1990s and
entirely discontinued selling in 2004, other than update features contractually allowable on existing policies. We discontinued offering group
long-term care in 2012 and individual long-term care in 2009. Other insurance products include group pension, individual life and corporate-
owned life insurance, reinsurance pools and management operations, and other miscellaneous product lines.
156 / UNUM 2013 ANNUAL REPORT
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.
We measure and analyze our segment 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. The non-GAAP financial measures
of “operating revenue” and “operating income” or “operating loss” differ from total revenue and income before income tax as presented in
our consolidated statements of income due to the exclusion of net realized investment gains and losses, non-operating retirement-related
gains or losses, and certain other items as specified in the reconciliations below. We believe operating revenue and operating income or
loss are better performance measures and better indicators of the revenue and profitability and underlying trends in our business. Realized
investment gains or losses depend on market conditions and do not necessarily relate to decisions regarding the underlying business of
our segments. Our investment focus is on investment income to support our insurance liabilities as opposed to the generation of realized
investment gains or losses. Although we may experience realized investment gains or losses which will affect future earnings levels,
a long-term focus is necessary to maintain profitability over the life of the business since our underlying business is long-term in nature,
and we need to earn the interest rates assumed in calculating our liabilities. The amortization of prior period actuarial gains or losses,
a component of the net periodic benefit cost for our pensions and other postretirement benefit plans, is driven by market performance as
well as plan amendments and is not indicative of the operational results of our businesses. We believe that excluding the amortization of
prior period gains or losses from operating income or loss provides investors with additional information for comparison and analysis of our
operating results. Although we manage our non-operating retirement-related gains or losses separately from the operational performance
of our business, these gains or losses impact the overall profitability of our company and have historically increased or decreased over time,
depending on plan amendments and market conditions and the resulting impact on the actuarial gains or losses in our pensions and other
postretirement benefit plans.
We may at other times exclude certain other items 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 and does not replace net income or net loss as a measure of our overall profitability.
A reconciliation of “operating revenue” to total revenue and “operating income” to income before income taxes is as follows:
(in millions of dollars)
Operating Revenue
Net Realized Investment Gain (Loss)
Total Revenue
Operating Income
Net Realized Investment Gain (Loss)
Non-operating Retirement-related Loss
Unclaimed Death Benefits Reserve Increase for Unum US
Unclaimed Death Benefits Reserve Increase for Colonial Life
Group Life Waiver of Premium Benefit Reserve Reduction for Unum US
Deferred Acquisition Costs Impairment and
Reserve Charges for Long-term Care Closed Block
Reserve Charge for Individual Disability Closed Block
Year Ended December 31
2013
2012
2011
$10,347.0
$10,459.2
$10,282.9
6.8
56.2
(4.9)
$10,353.8
$10,515.4
$10,278.0
$ 1,241.8
$ 1,239.7
$ 1,323.2
6.8
(32.9)
(75.4)
(20.1)
85.0
—
—
56.2
(46.4)
—
—
—
—
—
(4.9)
(31.9)
—
—
—
(769.6)
(183.5)
Income Before Income Tax
$ 1,205.2
$ 1,249.5
$ 333.3
Notes To Consolidated Financial Statements
UNUM 2013 ANNUAL REPORT / 157
Premium income by major line of business within each of our segments is presented as follows:
(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
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
2013
2012
2011
$1,553.9
519.6
$1,578.8
476.7
$1,580.2
455.2
1,213.9
121.6
465.3
642.8
4,517.1
389.9
106.4
60.3
556.6
738.7
221.1
272.4
1,182.1
115.3
477.6
626.0
4,456.5
409.7
221.3
63.6
694.6
724.5
209.7
260.3
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
1,232.2
1,194.5
1,135.3
687.5
630.6
0.7
1,318.8
$7,624.7
736.4
631.9
2.2
1,370.5
$7,716.1
787.0
608.1
0.2
1,395.3
$7,514.2
158 / UNUM 2013 ANNUAL REPORT
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, 2013
Premium Income
Net Investment Income
Other Income
$4,517.1
929.6
128.3
$556.6
148.5
0.1
$1,232.2
$1,318.8
$
—
$ 7,624.7
145.4
0.2
1,272.3
93.9
(3.7)
7.7
2,492.1
230.2
Operating Revenue
$5,575.0
$705.2
$1,377.8
$2,685.0
$
4.0
$10,347.0
Operating Income (Loss)
Interest and Debt Expense
Depreciation and Amortization
$ 859.0
$ 0.1
$ 292.5
$132.0
$
—
$ 22.5
$ 284.9
$
—
$ 188.7
$ 109.4
$ 8.4
$ 5.2
$(143.5)
$ 1,241.8
$ 140.9
$
0.9
$ 149.4
$ 509.8
Year Ended December 31, 2012
Premium Income
Net Investment Income
Other Income
Operating Revenue
Operating Income (Loss)
Interest and Debt Expense
Depreciation and Amortization
Year Ended December 31, 2011
Premium Income
Net Investment Income
Other Income
Operating Revenue
Operating Income (Loss)
Interest and Debt Expense
Depreciation and Amortization
$4,456.5
952.3
124.6
$5,533.4
$ 847.1
$ 1.1
$ 255.6
$4,296.0
951.4
121.6
$5,369.0
$ 816.9
$ 1.0
$ 245.9
$694.6
170.8
0.1
$865.5
$131.3
$
—
$ 27.2
$687.6
189.9
0.3
$877.8
$190.7
$
—
$ 26.8
$1,194.5
$1,370.5
$
—
$ 7,716.1
138.6
0.3
1,230.5
100.1
23.0
2.8
2,515.2
227.9
$1,333.4
$2,701.1
$ 25.8
$10,459.2
$ 274.3
$
—
$ 181.0
$ 95.5
$ 10.4
$ 3.9
$(108.5)
$ 1,239.7
$ 133.9
$
0.8
$ 145.4
$ 468.5
$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
$1,268.2
$2,691.1
$ 76.8
$10,282.9
$ 270.1
$
—
$ 164.6
$ 123.9
$ 10.5
$ 16.9
$ (78.4)
$ 1,323.2
$ 131.8
$
0.8
$ 143.3
$ 455.0
Notes To Consolidated Financial Statements
UNUM 2013 ANNUAL REPORT / 159
The following table provides the changes in deferred acquisition costs by segment:
(in millions of dollars)
Year Ended December 31, 2013
Beginning of Year
Capitalized
Amortization
Adjustment Related to Unrealized Investment Gains/Losses
Foreign Currency
End of Year
Year Ended December 31, 2012
Beginning of Year
Capitalized
Amortization
Adjustment Related to Unrealized Investment Gains/Losses
Foreign Currency
End of Year
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
Assets by segment are as follows:
Unum US
Unum UK
Colonial Life
Closed Block
Total
$1,024.3
$ 38.8
$ 692.4
$
—
$1,755.5
252.0
9.8
(230.0)
(14.7)
5.2
—
—
0.4
205.0
(174.2)
20.2
—
—
—
—
—
466.8
(418.9)
25.4
0.4
$1,051.5
$ 34.3
$ 743.4
$
—
$1,829.2
$ 971.8
$ 40.9
$ 664.4
$
—
$1,677.1
249.2
(196.5)
(0.2)
—
11.8
(15.7)
—
1.8
206.3
(166.5)
(11.8)
—
—
—
—
—
467.3
(378.7)
(12.0)
1.8
$1,024.3
$ 38.8
$ 692.4
$
—
$1,755.5
$ 943.7
$ 41.0
$ 628.0
$ 203.4
$1,816.1
220.3
(188.1)
—
(4.1)
—
15.4
(15.3)
—
—
(0.2)
203.1
(151.2)
—
(15.5)
—
3.7
(11.1)
(196.0)
—
—
442.5
(365.7)
(196.0)
(19.6)
(0.2)
$ 971.8
$ 40.9
$ 664.4
$
—
$1,677.1
(in millions of dollars)
Unum US
Unum UK
Colonial Life
Closed Block
Corporate
Total
December 31
2013
2012
$18,384.3
$19,391.2
3,654.1
3,482.9
31,564.2
2,318.1
3,975.8
3,434.9
33,069.2
2,365.0
$59,403.6
$62,236.1
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 December 31, 2013 and 2012, goodwill was $200.9 million and $201.7 million, respectively, with
$189.0 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.
160 / UNUM 2013 ANNUAL REPORT
Notes To Consolidated Financial Statements
Note 14. Commitments and Contingent Liabilities
Commitments
We have noncancelable lease obligations on certain office space and equipment. As of December 31, 2013, the aggregate net
minimum lease payments were $213.9 million payable as follows: $40.7 million in 2014, $27.9 million in 2015, $22.4 million in 2016,
$17.7 million in 2017, $16.6 million in 2018, and $88.6 million thereafter. Rental expense for the years ended December 31, 2013,
2012, and 2011 was $44.1 million, $41.6 million, and $36.1 million, respectively.
At December 31, 2013, we had unfunded commitments of $158.4 million for certain of our private equity partnerships, $58.0 million
for certain private placement fixed maturity securities, and $83.9 million for certain mortgage loans. The commitments are not legally
binding at December 31, 2013 and may or may not be funded during the term of the 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, in the ordinary course of our business, 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.
UNUM 2013 ANNUAL REPORT / 161
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. In July 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 was affirmed by the United States District Court for the
Southern District of New York in September 2012 and upheld by the United States Court of Appeals for the Second Circuit in June 2013.
In October 2013, the plaintiff filed a petition for writ of certiorari with the U.S. Supreme Court. On February 24, 2014, the Supreme Court
denied the plaintiff’s petition.
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 class action alleges 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 the 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
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. In February 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. A bench trial was held on the issue of damages in June and July of 2013.
In September 2013, the District Court awarded damages based on a benchmark it created by averaging the interest rates paid on money
market mutual funds and money market checking accounts. Based on these averages, the District Court found that for certain periods
of the class we should have paid additional interest and awarded damages of $12.1 million and prejudgment interest of $1.3 million.
Subsequent to this judgment, in September 2013 we filed an appeal to the First Circuit Court of Appeals, and plaintiffs filed a cross appeal.
Based on contrary law that has developed recently in similar cases, we believe that we have strong legal arguments to raise on appeal.
We have not accrued a loss for the judgment because we have determined that we do not have a probable loss under the applicable
accounting standard relating to the accrual of loss contingencies. We cannot predict the timing of a decision or assure the ultimate outcome
of our appeal.
162 / UNUM 2013 ANNUAL REPORT
Notes To Consolidated Financial Statements
Beginning in 2011, a number of state regulators began requiring insurers to cross-check specified insurance policies with the Social
Security Administration’s Death Master File to identify potential matches. If a potential match was identified, insurers were requested to
determine if benefits were due, locate beneficiaries, and make payments where appropriate. We initiated this process where requested, and
in 2012 we began implementing this process in all states on a forward-looking basis. In addition to implementing this on a forward-looking
basis, in 2013 we began an initiative to search for potential claims from previous years. During the fourth quarter of 2013, we completed
our assessment of benefits which we estimate will be paid under this initiative, and as such, established additional reserves of $95.5 million
for payment of these benefits. Similar to other insurers, we are undergoing an examination by a third party acting on behalf of a number
of state treasurers concerning our compliance with the unclaimed property laws of the participating states. We are cooperating fully with
this examination, as well as with a Delaware Market Conduct examination and a Voluntary Disclosure Agreement process with the state of
Minnesota. The legal and regulatory environment around unclaimed death benefits continues to evolve. It is possible that the current
examination and/or similar investigations by other state jurisdictions may result in additional payments to beneficiaries, the payment of
abandoned funds under state law, and/or administrative penalties, the total of which may be in excess of the reserves established. See
Note 6 for further information concerning the reserve for unclaimed death benefits.
In December 2012, State of West Virginia ex rel. John D. Perdue v. Provident Life and Accident Insurance Company and State of West
Virginia ex rel. John D. Perdue v. Colonial Life & Accident Insurance Company were filed in the Circuit Court of Putnam County, West Virginia.
These two separate complaints alleged violations of the West Virginia Uniform Unclaimed Property Act by failing to identify and report all
unclaimed insurance policy proceeds due to be escheated to West Virginia. The complaints sought to examine company records and assess
penalties and costs in an undetermined amount. In December 2013, the court dismissed both complaints, holding that the West Virginia
Uniform Unclaimed Property Act does not require insurance companies to periodically search the Social Security Administration’s Death
Master File or escheat unclaimed life insurance benefits until a claim has been submitted. In January 2014, the plaintiff appealed the
dismissal of both complaints.
In May 2013, a purported class action complaint entitled Ruben Don v. Unum Life Insurance Company of America, Wedner Insurance
Group, Inc. dba The Morton Wedner Insurance Agency, and Does 1-30 was filed in the Superior Court of California, County of Los Angeles.
The plaintiff seeks to represent a class of California insureds who were issued long-term care policies containing an inflation protection
feature. The plaintiff alleges we incorrectly administer the inflation protection feature, resulting in an underpayment of benefits. The
complaint makes allegations against us for breach of contract, bad faith, fraud, violation of Business and Professions Code 17200, and
injunctive relief. In June 2013, we removed the case to the United States District Court for the Central District of California. We are in the
process of preparing our response to this complaint.
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.
UNUM 2013 ANNUAL REPORT / 163
Note 15. Statutory Financial Information
Statutory Net Income, Capital and Surplus, and Dividends
Statutory net income for U.S. 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. Our traditional U.S. life insurance
subsidiaries have no prescribed or permitted statutory accounting practices that differ materially from statutory accounting principles
prescribed by the NAIC.
Certain of our traditional U.S. life insurance subsidiaries cede blocks of business to Northwind Re, Tailwind Re, and UnumProvident
International Ltd. (UPIL), all of which are affiliated captive reinsurance subsidiaries (captive reinsurers) with Unum Group as the ultimate
parent. These captive reinsurers were established for the limited purpose of reinsuring risks attributable to specified policies issued or
reinsured by our life insurance subsidiaries. The captive reinsurers are all domiciled in the United States as of December 31, 2013. Our
captive reinsurers have no material state prescribed accounting practices, except for UPIL. During 2013, we re-domesticated UPIL, which
was previously domiciled in Bermuda, to the state of Vermont. Vermont reporting requirements for pure captive insurance companies
follow GAAP, unless the commissioner permits the use of some other basis of accounting. UPIL has permission from Vermont to follow
accounting practices that are generally consistent with current NAIC statutory accounting principles for its insurance reserves and invested
assets supporting reserves. All other assets and liabilities are accounted for in accordance with GAAP, as prescribed by Vermont, which
allows for the full recognition of deferred tax assets which are more likely than not to be realized. Statutory accounting principles have
a stricter limitation for the recognition of deferred tax assets. The impact of following the prescribed and permitted practices of Vermont
rather than statutory accounting principles prescribed by the NAIC resulted in higher capital and surplus for UPIL of approximately
$176 million as of December 31, 2013.
The operating results and capital and surplus of our traditional U.S. life insurance subsidiaries and our captive reinsurers, prepared in
accordance with prescribed or permitted accounting practices of the NAIC or states of domicile, are presented separately below. Results for
2012 and prior include those for UPIL as filed with insurance regulators in Bermuda.
(in millions of dollars)
Combined Net Income
Traditional U.S. Life Insurance Subsidiaries
Captive Reinsurers
Combined Net Gain from Operations
Traditional U.S. Life Insurance Subsidiaries
Captive Reinsurers
(in millions of dollars)
Combined Capital and Surplus
Traditional U.S. Life Insurance Subsidiaries
Captive Reinsurers
Year Ended December 31
2013
2012
2011
$584.5
$ 13.3
$617.5
$ 13.6
$624.5
$ 40.8
$649.8
$ 37.4
$642.9
$ 64.6
$664.0
$ 55.4
December 31
2013
2012
$3,450.5
$1,679.4
$3,426.5
$1,765.3
164 / UNUM 2013 ANNUAL REPORT
Notes To Consolidated Financial Statements
As derived from the most recent annual statutory basis financial statements filed with insurance regulators, the statutory
net income and statutory capital and surplus of our United Kingdom insurance subsidiary, Unum Limited, was £94.6 million and
£438.1 million, respectively.
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 U.S., 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 a life insurance subsidiary is generally further limited
to the amount of unassigned funds.
Based on the restrictions under current law, $591.0 million is available, without prior approval by regulatory authorities, during
2014 for the payment of dividends to Unum Group from its traditional U.S. life insurance subsidiaries. The ability of our captive insurers 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.
We also have the ability to receive dividends from Unum Limited, subject to applicable insurance company regulations and capital
guidance in the United Kingdom. Approximately £187.8 million is available for the payment of dividends from Unum Limited during 2014,
subject to regulatory approval.
Deposits
At December 31, 2013 and 2012, our U.S. insurance subsidiaries had on deposit with U.S. regulatory authorities securities with a
book value of $280.5 million and $277.5 million, respectively, held for the protection of policyholders.
UNUM 2013 ANNUAL REPORT / 165
Note 16. Quarterly Results of Operations (Unaudited)
The following is a summary of our unaudited quarterly results of operations for 2013 and 2012:
(in millions of dollars, except share data)
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
(in millions of dollars, except share data)
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
4th
$1,890.7
629.4
9.3
2,586.2
305.8
221.2
0.85
0.84
4th
$1,937.2
643.0
24.6
2,658.2
322.7
233.9
0.86
0.85
2013
2012
3rd
$1,897.3
615.5
(26.1)
2,540.9
284.1
205.7
0.78
0.78
3rd
$1,929.4
619.2
21.3
2,628.0
320.4
230.2
0.83
0.83
2nd
$1,905.8
626.1
13.3
2,601.9
311.5
218.6
0.82
0.82
2nd
$1,927.6
633.5
(2.1)
2,617.9
296.4
216.4
0.76
0.76
1st
$1,930.9
621.1
10.3
2,624.8
303.8
212.6
0.79
0.79
1st
$1,921.9
619.5
12.4
2,611.3
310.0
213.9
0.74
0.73
Items affecting the comparability of our financial results during the fourth quarter of 2013 are as follows:
• A reserve increase of $95.5 million before tax and $62.1 million after tax related to unclaimed death benefits.
• A reserve reduction of $85.0 million before tax and $55.2 million after tax related to group life waiver of premium benefits.
See Notes 6 and 14 for further discussion of the above items.
166 / UNUM 2013 ANNUAL REPORT
Report of Independent
Registered Public Accounting Firm
The Board of Directors and Stockholders
Unum Group
We have audited the accompanying consolidated balance sheets of Unum Group and subsidiaries as of December 31, 2013 and 2012,
and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years
in the period ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements 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, 2013 and 2012, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
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, 2013, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework),
and our report dated February 26, 2014 expressed an unqualified opinion thereon.
Chattanooga, Tennessee
February 26, 2014
UNUM 2013 ANNUAL REPORT / 167
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 the 1992 Internal Control
— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and concluded that, as of
December 31, 2013, we maintained effective internal control over financial reporting.
168 / UNUM 2013 ANNUAL REPORT
Report of Independent
Registered Public Accounting Firm
The Board of Directors and Stockholders
Unum Group
We have audited Unum Group and subsidiaries’ internal control over financial reporting as of December 31, 2013, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(1992 framework) (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, 2013, 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, 2013 and 2012, and the related consolidated statements
of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013,
and our report dated February 26, 2014 expressed an unqualified opinion thereon.
Chattanooga, Tennessee
February 26, 2014
UNUM 2013 ANNUAL REPORT / 169
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,” “plans,” “assumes,” “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.
• Sustained periods of low interest rates.
• Fluctuation in insurance reserve liabilities and claim payments due to 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 our claims operational
processes, and changes in government programs.
• Legislative, regulatory, or tax changes, both domestic and foreign, including the effect of potential legislation and increased
regulation in the current political environment.
• Investment results, including, but not limited to, changes in interest rates, defaults, changes in credit spreads, impairments, and the
lack of appropriate investments in the market which can be acquired to match our liabilities.
• The failure of cyber or other information security systems, as well as the occurrence of events unanticipated in our disaster
recovery systems.
• Ineffectiveness of our derivatives hedging programs due to changes in the economic environment, counterparty risk, ratings
downgrades, capital market volatility, changes in interest rates, and/or regulation.
• Increased competition from other insurers and financial services companies due to industry consolidation, new entrants to our
markets, or other factors.
• Changes in our financial strength and credit ratings.
• Damage to our reputation due to, among other factors, regulatory investigations, legal proceedings, external events, and/or
inadequate or failed internal controls and procedures.
• 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.
• Changes in demand for our products due to, among other factors, changes in societal attitudes, the rate of unemployment,
consumer confidence, and/or legislative and regulatory changes, including healthcare reform.
• Effectiveness of our risk management program.
• Contingencies and the level and results of litigation.
• Changes in accounting standards, practices, or policies.
• Fluctuation in foreign currency exchange rates.
• Ability to generate sufficient internal liquidity and/or obtain external financing.
• Availability of reinsurance in the market and the ability of our reinsurers to meet their obligations to us.
• Recoverability and/or realization of the carrying value of our intangible assets, long-lived assets, and deferred tax assets.
• Terrorism, both within the U.S. and abroad, ongoing military actions, and heightened security measures in response to these types
of threats.
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.
170 / UNUM 2013 ANNUAL REPORT
Appendix
Reconciliation of Non-GAAP Financial Measures
(per diluted common share)
After-tax Operating Income
Net Realized Investment Gain (Loss), Net of Tax
Non-operating Retirement-related Loss, Net of Tax
Regulatory Reassessment Charges, Net of Tax
Special Tax Items and Debt Extinguishment Costs, Net of Tax
Other, Net of Tax
Income from Continuing Operations
Income from Discontinued Operations
Net Income
* Does not reflect the impact of ASU 2010-26.
(in millions)
Year Ended December 31, 2013
Unum US
Unum UK
Colonial Life
Principal Operating Businesses
Closed Block
Corporate
Total
(in millions)
Year Ended December 31, 2012
Year Ended December 31, 2011
Year Ended December 31, 2010
Year Ended December 31, 2009
2008
$ 2.54
(0.89)
(0.03)
—
—
—
1.62
—
Year Ended December 31
2006*
2007*
$ 2.25
(0.12)
(0.04)
(0.10)
(0.10)
—
1.89
0.02
$ 1.85
0.01
(0.05)
(0.79)
0.23
(0.04)
1.21
0.02
2005*
$ 1.69
(0.02)
(0.05)
(0.16)
0.14
0.01
1.61
0.03
$ 1.62
$ 1.91
$ 1.23
$ 1.64
After-Tax
Operating
Income (Loss)
Average
Allocated
Equity
Operating
Return
on Equity
$563.1
104.5
185.2
$852.8
71.3
(41.6)
$882.5
After-Tax
Operating
Income
$887.5
905.4
894.3
875.6
$4,141.8
744.3
1,122.6
$6,008.7
2,580.4
(856.8)
$7,732.3
Average
Allocated
Equity
$7,241.8
7,427.0
7,499.7
6,806.0
2009
$8,045.0
382.7
370.8
$7,291.5
13.6%
14.0%
16.5%
14.2%
11.4%
Operating
Return
on Equity
12.3%
12.2%
11.9%
12.9%
2008
$5,941.5
(837.5)
458.5
$6,320.5
(in millions)
Total Stockholders’ Equity, As Reported
Net Unrealized Gain (Loss) on Securities
Net Gain on Cash Flow Hedges
Total Stockholders’ Equity, As Adjusted
2013
$8,659.1
135.7
396.3
$8,127.1
2012
$8,612.6
873.5
401.6
$7,337.5
December 31,
2011
$8,169.7
614.8
408.7
$7,146.2
2010
$8,484.9
416.1
361.0
$7,707.8
Average Equity, As Adjusted
$7,732.3
$7,241.8
$7,427.0
$7,499.7
$6,806.0
(per share)
Total Stockholders’ Equity (Book Value)
Net Unrealized Loss on Securities
Net Gain on Cash Flow Hedges
Subtotal
Foreign Currency Translation Adjustment
Subtotal
Unrecognized Pension and Postretirement
Benefit Costs
Total Stockholders’ Equity, Excluding
Accumulated Other Comprehensive Income
December 31,
2008
$17.94
(2.53)
1.38
19.09
(0.52)
19.61
(1.23)
$20.84
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
1 Mercantile 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
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.
$250
$200
$150
$100
$ 50
0
Unum Group
S&P 500 Index
2008
$100
$100
S&P 500 Life & Health Insurance Index $100
S&P 500 Multi-Line Insurance Index
$100
2009
$106.89
$126.46
$115.58
$136.35
2010
$134.73
$145.51
$144.76
$168.03
2011
$119.09
$148.59
$114.78
$122.51
2012
$120.32
$172.37
$131.53
$155.23
2013
$206.69
$228.19
$215.02
$229.58
MARKET PRICES AND DIVIDENDS
Quarterly market prices and dividends declared and paid per share of common stock are as follows:
2013
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
High
Low
Dividend
2012
$35.40
$29.45
$0.1450
32.94
29.92
28.34
29.14
25.55
21.18
0.1450
0.1300
0.1300
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
High
Low
Dividend
$21.35
$19.04
$0.1300
20.92
24.77
24.81
18.28
18.37
20.84
0.1300
0.1050
0.1050
As of March 17, 2014, there were 12,103 registered holders of common stock.
Unum Group
1 Fountain Square
Chattanooga, TN 37402
www.unum.com
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© 2014 Unum Group. All rights reserved. Unum is a registered
trademark and marketing brand of Unum Group and its
insuring subsidiaries.
All the paper used in this annual report is Elemental Chlorine Free.
The papers used for the cover and pages 1-16 of this book contain
10% Post Consumer Waste.