2018 Annual Report
A Note About Non-GAAP Measures
We present certain measures of our performance that are not calculated in accordance with generally accepted
accounting principles in the United States of America (GAAP). Non-GAAP financial measures exclude or include
amounts that are not normally excluded or included in the most directly comparable measure calculated and
presented in accordance with GAAP. Non-GAAP financial measures should not be viewed as substitutes for the
most directly comparable financial measures calculated in accordance with GAAP. This annual report refers to
the following non-GAAP financial measure, which we believe is a better performance measure and better
indicator of the revenue and profitability and underlying trends in our business:
• After-tax adjusted operating income, which excludes realized investment gains or losses, and certain
other items, as applicable, which are discussed in “Executive Summary” in Part II Item 7 of our 2018
Annual Report on Form 10-K included herein
Realized investment gains or losses and unrealized gains or losses on securities depend on market conditions
and do not necessarily relate to decisions regarding the underlying business of our company. We also 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. We exclude these items
as we believe them to be infrequent or unusual in nature, but this exclusion is not an indication that similar
items may not recur and does not replace the comparable GAAP measure in the determination of overall
profitability.
A reconciliation of the most directly comparable GAAP financial measure to the non-GAAP financial measure is
as follows:
Net Income
Net Realized Investment Loss (net of tax
benefit of $11.0)
Long-term Care Reserve Increase (net of
tax benefit of $157.7)
After-tax Adjusted Operating Income
Year Ended December 31, 2018
(in millions of dollars)
$523.4
(28.5)
(593.1)
$1,145.0
A Letter from Our President and CEO, Rick McKenney
To our shareholders, customers and colleagues:
By most measures, 2018 was a very good year for Unum.
Beyond the numbers, we excelled at serving our customers who rely on us during some of life’s most
challenging times, and we continued to invest in creating a world-class customer experience. In doing so, our
core operations delivered outstanding results, driving profitable growth as we expanded both our geographic
footprint and our product portfolio. We also continued our focus on social responsibility, principled governance
and environmental stewardship. And, despite industry headwinds, we stayed the course on our capital plans.
These accomplishments, however, weren’t reflected in the performance of our company stock price, which –
after years of strong performance – was set back by market and industry concerns about legacy long-term care.
We have managed through those challenges and delivered consistently solid results over the past decade,
driven by the steady execution of our strategy combined with the power of our 10,000 dedicated employees
pursuing a shared purpose: to provide essential financial protection to millions of workers and families.
We’ve built on our strengths and delivered excellent results, and we enter 2019 well-positioned for continued
success over the long term.
2018: Strong performance in a shifting environment
Our strong financial foundation, long history of disciplined execution and commitment to our purpose have
prepared us well to thrive in shifting environments. That’s good news for the markets where we share our
knowledge and expertise, and for the millions of people we serve.
Year-end numbers from 2018 affirm the success of that strategy. The highlights include:
Adjusted operating return on equity of 17.8% in our core operating segments
Premium growth of 5.9% in our core operating segments
After-tax adjusted operating income1 of more than $1 billion
Nearly $568 million in capital returned to shareholders
Total revenues of $11.6 billion
In spite of these results, the strength of our core business was overshadowed by negative attention on long-
term care insurance across our industry. The size of our long-term care block of business is significant enough
to influence our overall results, including our stock price. We’ve been transparent and direct in sharing our
strategy for carefully and effectively managing this business over the last decade. Our announcement in
September that we would increase our long-term care reserves also brought with it increased transparency in
underlying trends.
1 This represents a non-GAAP financial measure. Information about non-GAAP financial measures and a
reconciliation of the most directly comparable GAAP financial measure to this non-GAAP financial measure is
set forth in “A Note About Non-GAAP Measures” preceding this letter.
While the industry-wide disruption around long-term care has presented challenges, it hasn’t distracted us
from a strong operational focus on our core businesses, or from delivering excellent results. We remain
confident in our plans and our ongoing focus. Our disciplined underwriting and risk management strategy have
led to stable returns, and we have benefitted from consistent execution of our capital strategy, including
buying back $351 million in shares and paying dividends of $217 million in 2018.
A business for good
Millions of people count on our benefits as part of a critical financial safety net, and we strive to deliver on
those commitments and make a difference. Unum has a long tradition of engaging employees, shareholders,
our communities, and society at large on advocacy, community outreach, environmental responsibility and
good governance.
Our work fills an essential need for financial protection that helps keep individuals and families secure and
supports the success of thousands of businesses. Last year we paid $7.2 billion in benefits to our customers
when they needed us most and helped hundreds of thousands of people return to work after injury or illness.
Our customers tell us how much it means to have Unum to lean on in tough times. Hearing from them and
reading the messages they send us inspires us every day.
Cheri, a breast cancer survivor, said this: “Once the surgery was over, the bills started piling in. It was a
whirlwind, but ‘How am I going to afford this?’ never crossed my mind.”
Jason, who suffered complications following brain surgery, told us benefits from Unum provided the money to
pay his mortgage and living expenses when he couldn’t work. “It was such a relief, because it let me focus
more on my health and recovery,” he said.
The social good we do begins with our mission of supporting our customers, but it also extends to the
communities where we live and work. We dedicate significant resources to improving public education, to
health and wellness, and to arts and culture in the places we call home. In 2018, we followed through on a
commitment to increase our annual charitable contributions and, together, our company and our employees
contributed $13.2 million to charitable causes, while our employees volunteered more than 67,000 hours to
organizations they believe in.
To better serve our customers, we invest in the teams who deliver on our promises every day. We’re in the
midst of a modernization of our main campuses that will drive productivity, not only through greater
collaboration and flexibility, but also through employee health and wellbeing. Our new workspaces feature
sit/stand desks, state-of-the-art fitness facilities, onsite health staff, and renovated cafeterias offering healthy
dining options.
Employee wellness goes beyond physical health to include overall wellbeing. To support an engaged
workforce, we enhanced our benefits program in 2018 by implementing paid parental leave for both mothers
and fathers. Beginning in 2020, we’ll offer employees a first-of-its-kind student debt repayment option that
allows them to trade unused paid time off for a payment toward student debt. Providing these kinds of
benefits to our own employees parallels our commitment to making stronger financial protection and tools
available to businesses and their workers, meeting a growing societal need.
Our purpose-driven culture also informs our approach to building an inclusive workplace. Building on our focus
over several years, we established an office of Inclusion and Diversity in 2018 and hired a vice president to
lead that organization in ensuring Unum is a company where everyone has a voice. It’s the latest step down a
path that already includes inclusion and diversity expectations for leaders across the company; strategies for
building inclusion and diversity into recruitment and hiring practices; research and education to improve our
understanding of different needs; and employee-led resource groups focused on supporting LGBTQIA+
employees, women, people of diverse racial and ethnic backgrounds, people with disabilities, veterans, and
other self-identified populations.
Ensuring an inclusive and diverse culture is a long-term commitment, but our efforts have already earned
recognition outside our walls. Unum is one of 230 companies selected for the 2019 Bloomberg Gender-Equality
Index, which distinguishes organizations committed to transparency in gender reporting and advancing
women’s equality. The index includes organizations from 10 industry sectors across 36 countries and regions.
Our company scored particularly high for gender equality among senior leadership; inclusion and diversity
leadership and strategy; and flexible work, family-friendly, and health care policies.
Unum has also been recognized by the Women’s Forum of New York and the 2020 Women on Boards
organization for female representation on the corporate board. And we are proud to be one of the Human
Rights Campaign Foundation’s Best Places to Work for LGBTQ Equality.
Growing our reach
Our companies continue to hold leadership positions in our markets, with deep expertise that spans more than
170 years. In 2018, we strategically expanded both our portfolio of products and services and the geographic
area we cover, while maintaining our single-minded focus on meeting the growing need for financial
protection.
We have seen the benefits of this disciplined growth in new dental products and dental insurance networks
that are providing lift across the portfolio. We continue to find dental insurance offers a cost-effective entry
point into our full suite of products and services for new customers while deepening current relationships.
In early 2018, we acquired LeaveLogic, which provides easy-to-use digital tools that help customers easily
access and manage their leave benefits. We also launched HR Connect to seamlessly integrate with existing
HR platforms, creating a simple experience for benefits administration. These capabilities expand our
leadership in the growing leave and absence management market, demonstrated by the more than 310,000
leaves we administered in 2018. We also grew our stop loss offering, which helps companies limit their
exposure to high medical claims.
We expanded our geographic reach with the acquisition of Pramerica Życie, a financial protection provider in
Poland. Unum Poland joins Unum UK to form our Unum International business, bringing tremendous potential
for growth. Unum UK also launched a new voluntary benefits offering called Benni to make personalized,
employee-selected coverage more widely available to workers in the U.K. Meanwhile, our Colonial Life
business continued to expand its distribution network to reach more underserved areas with more than two
dozen new territory or district offices and nearly 750 new sales representatives.
Today’s economic trends indicate the need for our products and services will continue to grow. Low
unemployment means employers must take advantage of more attractive, robust benefits packages to
compete for top talent. At the same time, too many employees lack a basic financial safety net to protect their
families, their finances and their futures. For example, although the vast majority of disability insurance is
acquired through the workplace, only a third of workers have this essential coverage. And about two in five
working-age people in the U.S. are considered financially fragile, unable to come up with $400 in an
emergency or cover the cost of a midsize budget shock such as a car repair or medical bill within a month.
For so many people, financial protection benefits are a lifeline during some of life’s worst times. This is our
purpose; this is what drives us.
Investing in customer experience
Our unwavering focus on serving customers who rely on us to be there when they need us most drives our
ongoing investment in the customer experience.
The workforce of the future includes five generations from diverse cultures and backgrounds, each with unique
interests and needs. One thing they have in common, though, is their need for financial protection — and,
increasingly, their expectation of seamless, online experiences that provide near-instant responses.
To meet and keep ahead of those expectations, we’re investing in our operations, streamlining our processes
and redesigning the customer experience with a digital mindset and an outside-in approach that puts the
customer journey at the center. This requires us to constantly question and better understand what customers
want to do and how we can make it easier for them.
Helping guide us on this journey is our recently hired chief information and digital officer, who is leading our
efforts to transform our thinking so the digital customer experience is central and we tap into technology to
deliver agile, accurate, and empathetic solutions.
The view ahead
Our belief in our shared purpose of providing essential financial protection to millions of workers and families,
combined with our disciplined approach to executing our plans and active management of our closed block,
position us well for continued growth in 2019 and beyond.
We’ll continue to focus on expanding our business to meet increasing customer needs while preparing for
market changes and challenges. Our exceptional home office and field teams put us in an enviable position in
our industry, ready to take advantage of opportunities for greater success.
Enhancing the customer experience has been a cornerstone of our investments in 2018 and that will continue
in 2019. As part of this focus, we are investing in digital capabilities that will benefit our clients — both
employers and their employees — while also bringing more digital processes into our own operations to create
efficiencies we can reinvest in our external growth.
Over the past few years, we have added products and made acquisitions that are now allowing us to expand
into new areas. Our dental platform is expected to add 3% to our U.S. sales growth in 2019. Our medical stop
loss business is in its early stages but offers a strong growth opportunity in the coming years. And we’ve
added a vital employee benefits business in Poland that is well-run, profitable, and fast-growing.
With these opportunities in front of us, I am excited about where we are headed in 2019. Thank you for your
trust and confidence in our commitment to exceeding the expectations of you and our customers every day.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2018
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission file number 1-11294
Unum Group
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
62-1598430
(I.R.S. Employer Identification No.)
1 FOUNTAIN SQUARE
CHATTANOOGA, TENNESSEE
(Address of principal executive offices)
37402
(Zip Code)
423.294.1011
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, $0.10 par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes [X] No
[ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ]
No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the
extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the shares of the registrant's common stock held by non-affiliates (based upon the closing price
of these shares on the New York Stock Exchange) as of the last business day of the registrant's most recently completed second
fiscal quarter was $8.1 billion. As of February 15, 2019, there were 214,625,710 shares of the registrant's common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the information required by Part III of this Form 10-K are incorporated herein by reference from the registrant's
definitive proxy statement for its 2019 Annual Meeting of Stockholders which will be filed with the Securities and Exchange
Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, within 120 days after the end
of the registrant's fiscal year ended December 31, 2018.
TABLE OF CONTENTS
Cautionary Statement Regarding Forward-Looking Statements
PART I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4. Mine Safety Disclosures
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
PART II
Securities
Item 6.
Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14.
Principal Accounting Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
PART IV
Index to Exhibits
Signatures
Page
1
2
19
30
30
30
30
31
32
34
90
97
190
190
192
193
193
194
195
195
196
207
211
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 on Form 10-K (including certain statements
in the business description in Item 1, Management's Discussion and Analysis in Item 7, and the consolidated financial
statements and related notes in Item 8), 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, 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 Securities and Exchange Commission, 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:
•
•
Sustained periods of low interest rates.
Fluctuation in insurance reserve liabilities and claim payments due to changes in claim incidence, recovery rates,
mortality and morbidity rates, and policy benefit 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 governmental programs.
• Unfavorable economic or business conditions, both domestic and foreign, that may result in decreases in sales,
premiums, or persistency, as well as unfavorable claims activity.
• Changes in or interpretations of laws and regulations, including tax laws and regulations.
• A cyber attack or other security breach could result in the unauthorized acquisition of confidential data.
• The failure of our business recovery and incident management processes to resume our business operations in the
•
•
event of a natural catastrophe, cyber attack, or other event.
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.
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.
• Our ability to execute on our technology systems upgrades or replacements.
• 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 in the broad array of our products that deviates from our assumptions used in pricing, underwriting,
and reserving.
• Changes in accounting standards, practices, or policies.
• Effectiveness of our risk management program.
• Contingencies and the level and results of litigation.
• Availability of reinsurance in the market and the ability of our reinsurers to meet their obligations to us.
•
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.
Fluctuation in foreign currency exchange rates.
•
• Ability to generate sufficient internal liquidity and/or obtain external financing.
• 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.
1
ITEM 1. BUSINESS
General
PART I
Unum Group, a Delaware general business corporation, and its insurance and non-insurance subsidiaries, which collectively
with Unum Group we refer to as the Company, operate in the United States, the United Kingdom, Poland, and, to a limited
extent, in certain other countries. The principal operating subsidiaries in the United States are Unum Life Insurance Company
of America (Unum America), Provident Life and Accident Insurance Company (Provident), The Paul Revere Life Insurance
Company (Paul Revere Life), Colonial Life & Accident Insurance Company, Starmount Life Insurance Company (Starmount
Life), in the United Kingdom, Unum Limited, and in Poland, Unum Zycie TUiR S.A. (Unum Poland). We are a leading
provider of financial protection benefits in the United States and the United Kingdom. Our products include disability, life,
accident, critical illness, dental and vision, and other related services. We market our products primarily through the workplace.
We have three principal operating business segments: Unum US, Unum International, and Colonial Life. Our other segments
are the Closed Block and Corporate segments. These segments are discussed more fully under "Reporting Segments" included
herein in this Item 1.
Business Strategies
The benefits we provide help protect people from the financial hardship of illness, injury, or loss of life by providing support
when it is needed most. As one of the leading providers of employee benefits in the U.S. and the U.K., we offer a broad
portfolio of products and services through the workplace.
Specifically, we offer group, individual, and voluntary benefits, either as stand-alone products or combined with other
coverages, that help employers of all sizes attract and retain a stronger workforce while protecting the incomes and livelihood
of their employees. We believe employer-sponsored benefits represent the single most effective way to provide workers with
access to the information and options they need to protect their financial stability. Working people and their families,
particularly those at lower and middle incomes, are perhaps the most vulnerable in today's economy yet are often overlooked by
many providers of financial services and products. For many of these people, employer-sponsored benefits are the primary
defense against the potentially catastrophic fallout of death, illness, or injury.
We have established a corporate culture consistent with the social values our products provide. We are committed not only to
meeting the needs of our customers who depend on us, but also to operating with integrity and being accountable for our
actions. Our sound and consistent business practices, strong internal compliance program, and comprehensive risk
management strategy enable us to operate efficiently as well as to identify and address potential areas of risk in our business.
We have also applied these same values to our social responsibility efforts. Because we see important links between the
obligations we have to all of our stakeholders, we place a strong emphasis on contributing to positive change in our
communities.
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. We protect people when they
need it most, and we believe the need for our products and services remains strong. We intend to continue protecting our solid
margins and returns through our pricing and risk actions. We also continue to invest in our infrastructure and our employees,
with a focus on quality and simplification of processes and offerings. Our strategy is centered on market growth through the
expansion of our product portfolio, distribution system, and geographic footprint, and enhancing the customer experience
through efficiency, simplification, and investment in digital capabilities. Accordingly, we continue to identify ways to expand
our product offerings, which we believe will allow us to strengthen our brand through both new and existing customer
relationships. Although the low interest rate environment continues to place pressure on our profit margins, we continue to
analyze and employ strategies that we believe will help us navigate this environment and allow us to maintain solid operating
margins and significant financial flexibility to support the needs of our businesses, while also continuing to return capital to our
shareholders and exploring merger and acquisition opportunities to enhance our business lines. We have substantial leverage to
rising interest rates and an improving economy which generates payroll growth and wage inflation. We believe that consistent
operating results, combined with the implementation of strategic initiatives and the effective deployment of capital, will allow
us to meet our long-term financial objectives.
2
Reporting Segments
Our reporting segments are comprised of the following: Unum US, Unum International, Colonial Life, Closed Block, and
Corporate. In connection with our acquisition of Unum Poland in the fourth quarter of 2018, we changed the name of our
Unum UK segment to Unum International. The Unum International segment is comprised of our Unum UK line of business
and our Unum Poland line of business. The percentage of consolidated premium income generated by each reporting segment
for the year ended December 31, 2018 is as follows:
Unum US
Unum International
Colonial Life
Closed Block
Total
63.8%
6.3
17.9
12.0
100.0%
Financial information, including discussion of the acquisition of Unum Poland, is provided in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained herein in Item 7 and Note 13 of the "Notes to
Consolidated Financial Statements" contained herein in Item 8.
Unum US Segment
Our 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. The supplemental and voluntary lines of business
are comprised of individual disability, voluntary benefits, and dental and vision products. Unum US products are issued
primarily by Unum America, Provident, and Starmount Life. Paul Revere Life previously issued products reported in our
Unum US segment and continues to service the in-force policies, but Paul Revere Life no longer actively markets new business.
These products are marketed through our field sales personnel who work in conjunction with independent brokers and
consultants. Our market strategy for Unum US is to effectively deliver an integrated offering of employee benefit products in
the group core market segment, which we define for Unum US as employee groups with fewer than 2,000 employees, the group
large case market segment, and the supplemental and voluntary market segment.
The percentage of Unum US segment premium income generated by each product line during 2018 is as follows:
Group Disability
Group Life and Accidental Death & Dismemberment
Individual Disability
Voluntary Benefits
Dental and Vision
Total
43.1%
30.3
7.4
15.6
3.6
100.0%
Group Long-term and Short-term Disability
We sell group long-term and short-term disability products to employers for the benefit of employees. Group long-term
disability provides employees with insurance coverage for loss of income in the event of extended work absences due to
sickness or injury. We offer services to employers and insureds to encourage and facilitate rehabilitation, retraining, and re-
employment. Most policies begin providing benefits following 90 or 180 day waiting periods and continue providing benefits
until the employee reaches a certain age, generally between 65 and 70, or recovers from the disability. The benefits are limited
to specified maximums as a percentage of income. Effective January 1, 2018, coverage began for our new medical stop-loss
product, which is included in our group long-term disability product line. Medical stop-loss is designed to protect self-insured
employers if their employees' medical claims exceed certain agreed upon thresholds.
Group short-term disability insurance generally provides coverage from loss of income due to injury or sickness, effective
immediately for accidents and after one week for sickness, for up to 26 weeks, limited to specified maximums as a percentage
of income.
Premiums for group long-term and short-term disability are generally based on expected claims of a pool of similar risks plus
provisions for administrative expenses, investment income, and profit. In some cases, coverage for large employers will
3
include retrospective experience rating provisions or will be underwritten on an experience-rated basis. Premiums for
experience-rated group long-term and short-term disability business are based on the expected experience of the client given its
demographics, industry group, and location, adjusted for the credibility of the specific claim experience of the client. Both
group long-term and short-term disability are sold primarily on a basis permitting periodic repricing to address the underlying
claims experience. We also offer fee-based administrative services only (ASO) products, where the responsibility for funding
claim payments remains with the customer, and fee-based family medical leave products. Premiums for our medical stop-loss
product are generally based on the number of covered employees in self-insured employer groups and their estimated overall
health risk plus provisions for administrative expenses, and profit.
We have defined underwriting practices and procedures. If the coverage amount exceeds certain prescribed age and amount
limits, we may require a prospective insured to submit evidence of insurability. Our disability policies are typically issued, both
at inception and renewal, with rate guarantees. For new group policyholders, the usual rate guarantee is one to three years. For
group policies being renewed, the rate guarantee is generally one year, but may be longer. The profitability of the policy
depends on the adequacy of the rate during the rate guarantee period. The contracts provide for certain circumstances in which
the rate guarantees can be overridden. Our medical stop loss contracts are typically renewable on an annual basis and rates are
not guaranteed beyond one year. There is no requirement for prospective insureds to submit evidence of insurability because
coverage levels are determined for the group as a whole.
Profitability of group long-term and short-term disability insurance and our medical stop-loss product is affected by sales,
persistency, investment returns, claims experience, and the level of administrative expenses. Morbidity is an important factor in
disability claims experience, and many economic and societal factors can affect claim incidence for disability insurance. We
routinely make pricing adjustments on our group insurance products, when contractually permitted, which take into account
emerging experience and external factors.
Group Life and Accidental Death and Dismemberment
Group life and accidental death and dismemberment products are sold to employers as employee benefit products. Group life
consists primarily of renewable term life insurance with the coverages frequently linked to employees' wages and includes a
provision for waiver of premium, if disabled. Accidental death and dismemberment consists primarily of an additional benefit
amount payable if death or severe injury is attributable to an accident.
Premiums are generally based on expected claims of a pool of similar risks plus provisions for administrative expenses,
investment income, and profit. Underwriting practices and rate guarantees are similar to those used for group disability
products, and evidence of insurability is required for benefits in excess of a specified limit.
Profitability of group life and accidental death and dismemberment insurance is affected by persistency, investment returns,
claims experience, and the level of administrative expenses.
Individual Disability
Individual disability products are offered primarily to multi-life employer groups to supplement their group disability plans and
may be funded by the employer, but the policy is owned by the employee and is portable. Individual disability insurance
provides the insured with a portion of earned income lost as a result of sickness or injury. The benefits, including the
underlying group disability coverage, typically range from 30 percent to 75 percent of the insured's monthly earned income.
We provide various options with respect to length of benefit periods, product features, and waiting periods before benefit
payments begin, which permit tailoring of the multi-life plan to a specific employer's needs. We also market individual
disability policies which include payments for the transfer of business ownership between partners and payments for business
overhead expenses, also on a multi-life basis. Individual disability products do not provide for the accumulation of cash values.
Premium rates for individual disability products vary by age, product features, and occupation based on assumptions
concerning morbidity, mortality, persistency, administrative expenses, investment income, and profit. We develop our
assumptions based on our own experience. Our underwriting rules, issue limits, and plan designs reflect risk and the financial
circumstances of prospective insureds. Individuals in multi-life groups may be subject to limited medical underwriting. The
majority of our individual disability policies are written on a noncancelable basis. Under a noncancelable policy, as long as the
insured continues to pay the fixed annual premium for the policy's duration, we cannot cancel the policy or change the
premium.
4
Profitability of individual disability insurance is affected by persistency, investment returns, claims experience, and the level of
administrative expenses.
Voluntary Benefits
Voluntary benefits products are primarily sold to groups of employees through payroll deduction at the workplace and include
life, disability, accident, hospital indemnity, cancer, and critical illness offered on both a group and individual basis.
Premium rates for voluntary benefits products are based on assumptions concerning morbidity, mortality, persistency,
administrative expenses, investment income, and profit. We develop our assumptions based on our own claims and persistency
experience and published industry tables. Our underwriters evaluate the medical condition of prospective policyholders prior to
the issuance of a policy on a simplified basis. Underwriting requirements may be waived for cases that meet certain criteria,
including participation levels. Individual voluntary benefits products other than life insurance are offered on a guaranteed
renewable basis which allows us to re-price in-force policies, subject to regulatory approval. Group voluntary benefits products
are offered primarily on an optionally renewable basis which allows us to re-price or terminate in-force policies.
Profitability of voluntary benefits products is affected by the level of employee participation, persistency, investment returns,
claims experience, and the level of administrative expenses.
Dental and Vision
Group dental and vision products are sold to employers as employee benefit products. Our group dental products include a
variety of insured and self-insured dental care plans including preferred provider organizations and scheduled reimbursement
plans. Our group vision products provide coverage that includes a range of both in-network and out-of-network benefits for
routine vision services offered either in conjunction with our dental product offerings or as stand-alone coverage.
Premiums for small case group dental and vision products are generally based on expected claims of a pool of similar risks plus
a provision for administrative expenses, investment income, and profit. Premiums for large employer groups are underwritten
on an experience-rated basis.
Profitability of our dental and vision products is affected by persistency, investment returns, claims experience, and the level of
administrative expenses.
We discontinued offering our direct-to-consumer individual dental and vision products, a portion of the Starmount Life
offering, in the second half of 2018 to focus on the integration of our dental and vision products in our existing Unum US and
Colonial Life distribution channels.
Unum International Segment
The Unum International segment includes our operations in the United Kingdom and Poland. Unum UK's business includes
insurance for group long-term disability, group life, and supplemental lines of business which include dental, individual
disability, and critical illness products. Unum Poland's business primarily includes insurance for individual and group life with
accident and health riders. Both Unum UK's and Unum Poland's products are sold primarily through field sales personnel and
independent brokers and consultants. Unum Poland 's results are included within the supplemental product. The market
strategy for the segment is to offer benefits to employers and employees through the workplace, with a focus on the expansion
of the number of employers and employees covered in our Unum UK core market segment, which we define as employee
groups with fewer than 500 employees, and the growth of the existing Unum Poland business through the incorporation of our
benefits and distribution expertise.
The percentage of Unum International segment premium income generated by each product line during 2018 is as follows:
Group Long-term Disability
Group Life
Supplemental
Total
63.1%
19.5
17.4
100.0%
5
Group Long-term Disability
Group long-term disability products are sold to employers for the benefit of employees. Group long-term disability provides
employees with insurance coverage for loss of income in the event of extended work absences due to sickness or injury.
Services are offered to employers and insureds to encourage and facilitate rehabilitation, retraining, and re-employment. Most
policies begin providing benefits following 90 or 180 day waiting periods and continue providing benefits until the employee
reaches a certain age, generally between 60 and 67. The benefits are limited to specified maximums as a percentage of income.
Premiums for group long-term disability are generally based on expected claims of a pool of similar risks plus provisions for
administrative expenses, investment income, and profit. Some cases carry experience rating provisions. Premiums for
experience-rated group long-term disability business are based on the expected experience of the client given its demographics,
industry group, and location, adjusted for the credibility of the specific claim experience of the client.
We have defined underwriting practices and procedures. If the coverage amount exceeds certain prescribed age and amount
limits, we may require a prospective insured to submit evidence of insurability. Policies are typically issued, both at inception
and renewal, with rate guarantees. The usual rate guarantee is two years but may vary depending on circumstances. The
profitability of the policy is dependent upon the adequacy of the rate during the rate guarantee period. The contracts provide for
certain circumstances in which the rate guarantees can be overridden.
Profitability of group long-term disability insurance is affected by persistency, investment returns, claims experience, and the
level of administrative expenses. Morbidity is an important factor in disability claims experience. We routinely make pricing
adjustments on our group insurance products, when contractually permitted, which take into account emerging experience and
external factors.
Group Life
Group life products are sold to employers as employee benefit products. Group life consists of two types of products, a
renewable term life insurance product and a group dependent life product. The renewable term life product provides a lump
sum benefit to the beneficiary on death of an employee. The group dependent life product, which we discontinued offering to
new customers in 2012, provides an annuity to the beneficiary upon the death of an employee. Both coverages are frequently
linked to employees' wages. Premiums for group life are generally based on expected claims of a pool of similar risks plus
provisions for administrative expenses, investment income, and profit. Underwriting and rate guarantees are similar to those
utilized for group long-term disability products.
Profitability of group life is affected by persistency, investment returns, claims experience, and the level of administrative
expenses.
Supplemental
Supplemental products for our Unum UK line of business are sold to individual retail customers as well as groups of employees
and include individual disability, group and individual critical illness, and group dental. Individual disability products provide
the insured with a portion of earned income lost as a result of sickness or injury. Critical illness products provide a lump-sum
benefit on the occurrence of a covered critical illness event. Group dental products generally provide fixed benefits based on
specified treatments or a portion of the cost of the treatment. Unum Poland products, which include both individual and group
life products, provide renewable term and whole life insurance with accident and health riders.
Premiums for our individual products vary by age and are based on assumptions concerning morbidity, mortality, persistency,
administrative expenses, investment income, and profit. We develop our assumptions based on our own claims and persistency
experience and published industry tables. Approximately one half of our individual disability policies are written on a
noncancelable basis. The remainder of our individual disability policies and all of our individual critical illness products are
offered on a guaranteed renewable basis which allows us to re-price in-force policies. Our underwriters evaluate the medical
and financial condition of prospective policyholders prior to the issuance of a policy.
Premiums for group critical illness products are generally based on expected claims of a pool of similar risks plus provisions for
administrative expenses, investment income, and profit. Underwriting and rate guarantees are similar to those utilized for
group long-term disability products. Premiums for group dental products are generally based on standard industry rates that
vary by age, with minor pricing variation based on the number of covered employees in the group.
6
Premiums for Unum Poland products are based on expected claims of a pool of similar risks plus provisions for administrative
expenses, investment income, and profit.
Profitability of our supplemental products is affected by persistency, investment returns, claims experience, and the level of
administrative expenses.
Colonial Life Segment
Our Colonial Life segment includes insurance for accident, sickness, and disability products, which includes our expanded
dental and vision products, life products, and cancer and critical illness products issued primarily by Colonial Life & Accident
Insurance Company and marketed to employees, on both a group and an individual basis, at the workplace through an
independent contractor agency sales force and brokers. Our market strategy for Colonial Life is to effectively deliver a broad
set of voluntary products and services in the public sector market and in the commercial market, with a particular focus on the
core commercial market segment, which we define for Colonial Life as accounts with fewer than 1,000 employees.
We have defined underwriting practices and procedures for each of our products. Most policies are issued on a simplified issue
basis, based on answers to simple health and employment questions. If the amount applied for exceeds certain levels, the
applicant may be asked to answer additional health questions or submit to additional medical examinations.
The percentage of Colonial Life segment premium income generated by each product line during 2018 is as follows:
Accident, Sickness, and Disability
Life
Cancer and Critical Illness
Total
57.9%
20.5
21.6
100.0%
Accident, Sickness, and Disability
The accident, sickness, and disability product line consists of short-term disability plans, accident-only plans providing benefits
for injuries on a specified loss basis, and our expanded dental and vision products. It also includes accident, health, and dental
plans covering hospital admissions, confinement, surgeries, and dental services on an indemnity basis.
Premiums for accident, sickness, and disability products are generally based on assumptions for morbidity, mortality,
persistency, administrative expenses, investment income, and profit. We develop our assumptions based on our own
experience. Premiums are primarily individual guaranteed renewable for which we have the ability to change premiums on a
state by state basis. A small percentage of the policies are written on a group basis for which we retain the right to change
premiums at the individual account level. Premiums for our expanded dental and vision products are generally guaranteed issue
with standard industry rates that vary by age and region.
Profitability is affected by the level of employee participation, persistency, investment returns, claims experience, and the level
of administrative expenses.
The accident, health and dental products qualify as fringe benefits that can be purchased with pre-tax employee dollars under
flexible benefits programs. Flexible benefits programs assist employers in managing benefit and compensation packages and
provide policyholders the ability to choose benefits that best meet their needs. Laws could be changed to limit or eliminate
fringe benefits available on a pre-tax basis, eliminating our ability to continue marketing our products this way. However, we
believe our products provide value to our policyholders that will remain even if the tax advantages offered by flexible benefits
programs are modified or eliminated.
Life
Life products are primarily comprised of universal life, whole life, and term life policies.
Premium rates vary by age and are based on assumptions concerning mortality, persistency, administrative expenses,
investment income, and profit. We develop our assumptions based on our own experience and published industry tables.
Premiums for the whole life and level term products are guaranteed for the life of the contract. Premiums for the universal life
7
products are flexible and may vary at the individual policyholder level. For the group term life products, we retain the right to
change premiums at the account level based on the experience of the account.
Profitability is affected by the level of employee participation, persistency, investment returns, claims experience, and the level
of administrative expenses.
Cancer and Critical Illness
Cancer policies provide various benefits for the treatment of cancer including hospitalization, surgery, radiation, and
chemotherapy. Critical illness policies provide a lump-sum benefit and/or fixed payments on the occurrence of a covered
critical illness event.
Premiums are generally based on assumptions for morbidity, mortality, persistency, administrative expenses, investment
income, and profit. We develop our assumptions based on our own experience. Premiums are primarily individual guaranteed
renewable wherein we have the ability to change premiums on a state by state basis.
Profitability of these products is affected by the level of employee participation, persistency, investment returns, claims
experience, and the level of administrative expenses.
Closed Block Segment
Our Closed Block segment consists of individual disability, group and individual long-term care, and other insurance products
no longer actively marketed. Closed Block segment premium income for 2018 was comprised of approximately 39 percent
individual disability and 61 percent group and individual long-term care.
Individual Disability
We began limiting sales of the types of individual disability policies reported in our Closed Block segment subsequent to the
mid-1990s after substantial changes in product design were implemented to improve the overall risk profile of our offerings of
individual disability products. We entirely discontinued issuing new policies in this closed block of business in 2004, other
than through update features contractually allowable on existing policies. The majority of the policies were written on a
noncancelable basis and were marketed on a single-life customer basis. Profitability is affected by persistency, investment
returns, claims experience, and the level of administrative expenses.
Group and Individual Long-term Care
We discontinued offering individual long-term care in 2009 and group long-term care in 2012, other than features contractually
allowable on existing group policies. Group long-term care was previously offered to employers for the benefit of employees.
Individual long-term care was previously marketed on a single-life customer basis.
Long-term care insurance pays a benefit upon the loss of two or more activities of daily living and the insured's requirement of
standby assistance or cognitive impairment. Payment is generally made on an indemnity basis, regardless of expenses incurred,
up to a lifetime maximum. Benefits begin after a waiting period, usually 90 days or less, and are generally paid for a period of
three years, six years, or lifetime.
Our long-term care insurance was sold on a guaranteed renewable basis which allows us to re-price in-force policies, subject to
regulatory approval. Premium rates for long-term care vary by age and are based on assumptions concerning morbidity,
mortality, persistency, administrative expenses, investment income, and profit. Premium rate increases continue to be
implemented where needed and where approved by state regulators. We develop our assumptions based on our own claims and
persistency experience and published industry tables.
Profitability is affected by premium rate increases, persistency, investment returns, claims experience, and the level of
administrative expenses.
8
Other
Other insurance products not actively marketed include group pension, individual life and corporate-owned life insurance,
reinsurance pools and management operations, and other miscellaneous product lines. The majority of these products have
been reinsured, with approximately 80 percent of reserves at December 31, 2018 ceded to other insurance companies.
Corporate Segment
Our 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.
Reinsurance
In the normal course of business, we assume reinsurance from and cede reinsurance to other insurance companies. In a
reinsurance transaction, a reinsurer agrees to indemnify another insurer for part or all of its liability under a policy or policies it
has issued for an agreed upon premium. We undertake reinsurance transactions for both risk management and capital
management. If the assuming reinsurer in a reinsurance agreement is unable to meet its obligations, we remain contingently
liable. In the event that reinsurers do not meet their obligations under the terms of the reinsurance agreement, reinsurance
recoverable balances could become uncollectible. We evaluate the financial condition of reinsurers to whom we cede business
and monitor concentration of credit risk to minimize our exposure. We may also require assets to be held in trust, letters of
credit, or other acceptable collateral to support reinsurance recoverable balances. The collectibility of our reinsurance
recoverable is primarily a function of the solvency of the individual reinsurers. Although we have controls to minimize our
exposure, the insolvency of a reinsurer or the inability or unwillingness of a reinsurer to comply with the terms of a reinsurance
contract could have a material adverse effect on our results of operations.
In general, the maximum amount of life insurance risk retained by our U.S. insurance subsidiaries under group or individual life
or group or individual accidental death and dismemberment policies during 2018 was $1 million per covered life per policy.
The retention amount remains at $1 million for 2019. For Unum Limited life insurance risk, during 2018 we had reinsurance
agreements which provided 75 percent coverage up to £500 thousand per covered life for group dependent life benefits and 25
percent coverage for group lump sum benefits, as well as 100 percent coverage per covered life above that amount.
We have reinsurance agreements on approximately 76 percent of our Closed Block individual disability business. As of
December 31, 2018, this reinsurance covers approximately 67 percent of that portion of the consolidated risk above a $4.6
billion retention limit. The risk limit for the reinsurer grows over time to a maximum of $2.2 billion, after which any further
losses will revert to us.
We have global catastrophic reinsurance coverage which covers all Unum Group insurance companies and includes four layers
of coverage to limit our exposure under life, accidental death and dismemberment, long-term care, and disability policies in
regard to a catastrophic event. Each layer provides coverage for all catastrophic events, including acts of war and any type of
terrorism, up to $1 million of coverage per person per policy for each U.S. and non-U.K. line of covered business, and up to £2
million of coverage for each U.K. covered line of business. We have the following coverage for 2019, after a $100 million
deductible:
Layer
First
Second
Third
Fourth
Total Catastrophic Coverage
Coverage
(in millions)
50.0
$
55.0
90.0
180.0
375.0
$
Percent
Coverage
50.0%
55.0
60.0
60.0
9
In addition to the global catastrophic reinsurance coverage noted above, Unum Limited has additional catastrophic coverage via
an arms-length, inter-company reinsurance agreement with Unum America, under similar terms as the global catastrophic
treaties. Unum Limited has the following additional coverage for 2019, after a £75 million deductible:
Layer
First
Second
Total Catastrophic Coverage
Coverage
(in millions)
15.0
£
6.8
21.8
£
Percent
Coverage
20.0%
22.5
Unum Poland has additional global catastrophic reinsurance coverage of up to z 70 million with a maximum retention limit of
z 0.8 million in 2018. Insurable events include passive war, as well as nuclear, chemical, biological and other forms of
terrorism. This agreement was renewed with the same conditions for 2019.
Events may occur which limit or eliminate the availability of catastrophic reinsurance coverage in future years.
We have a quota share reinsurance agreement under which we cede certain blocks of Unum US group long-term disability
claims. The agreement is on a combination coinsurance with funds withheld and modified coinsurance basis and provides 90
percent quota share reinsurance on the ceded claims, which was increased from 80 percent during 2018 on all ceded blocks of
business. We also have four reinsurance agreements that collectively cede approximately 55 percent of Unum US group life
risk up to our per person retention limit for our U.S. insurance subsidiaries. These reinsurance agreements for Unum US group
disability and group life allow us to more effectively manage capital in conformity with statutory accounting principles but do
not meet insurance risk transfer in accordance with applicable U.S. generally accepted accounting principles (GAAP) and
therefore are not accounted for as reinsurance in our consolidated GAAP financial statements.
We also cede 30 percent of the risk for certain blocks of recently issued Unum US individual disability policies, as well as some
related claims development risk for a limited period of time. The agreement is on a non-proportional modified coinsurance
basis with a provision for experience refunds.
Certain of our domestic insurance subsidiaries cede blocks of business to Northwind Reinsurance Company (Northwind Re)
and Fairwind Insurance Company (Fairwind), both of which are affiliated captive reinsurance subsidiaries (captive reinsurers)
domiciled in the United States, 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 insurance subsidiaries in order to
effectively manage risks in connection with certain blocks of our business as well as to enhance our capital efficiency. On a
consolidated reporting basis for Unum Group, financial statement impacts of our reinsurance arrangements with affiliates are
eliminated in accordance with GAAP.
For further discussion of our reinsurance activities, refer to "Risk Factors" contained herein in Item 1A; "Consolidated
Operating Results," "Segment Results," and "Liquidity and Capital Resources - Cash Available from Subsidiaries" contained
herein in Item 7, and Notes 1, 12, and 15 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
Reserves for Policy and Contract Benefits
The applicable insurance laws under which insurance companies operate require that they report, as liabilities, policy reserves
to meet future obligations on their outstanding policies. These reserves are the amounts which, with the additional premiums to
be received and interest thereon compounded annually at certain assumed rates, are calculated to be sufficient to meet the
various policy and contract obligations as they mature. These laws specify that the reserves shall not be less than reserves
calculated using certain specified mortality and morbidity tables, interest rates, and methods of valuation required for statutory
accounting.
The reserves reported in our financial statements contained herein are calculated in conformity with GAAP and differ from
those specified by the laws of the various states and reported in the statutory financial statements of our life insurance
subsidiaries. These differences result from the use of mortality and morbidity tables and interest assumptions which we believe
are more representative of the expected experience for these policies than those required for statutory accounting purposes and
also result from differences in actuarial reserving methods.
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The assumptions we use to calculate our reserves are intended to represent an estimate of experience for the period that policy
benefits are payable. If actual experience is equal, or favorable, to our reserve assumptions, then reserves should be adequate to
provide for future benefits and expenses. If experience is less favorable than the reserve assumptions, additional reserves may
be required. The key experience assumptions include claim incidence rates, claim resolution rates, mortality and morbidity
rates, policy persistency, interest rates, premium rate increases, and any applicable policy benefit offsets, including those for
social security and other government-based welfare benefits. We periodically review our experience and update our policy
reserves for new issues and reserves for all claims incurred, as we believe appropriate.
The consolidated statements of income include the annual change in reserves for future policy and contract benefits. The
change reflects a normal accretion for premium payments and interest buildup and decreases for policy terminations such as
lapses, deaths, and benefit payments. If policy reserves using best estimate assumptions as of the date of a test for loss
recognition are higher than existing policy reserves net of any deferred acquisition costs, the increase in reserves necessary to
recognize the deficiency is also included in the change in reserves for future policy and contract benefits.
For further discussion of reserves, refer to "Risk Factors" contained herein in Item 1A, "Critical Accounting Estimates" and the
discussion of segment operating results included in "Management's Discussion and Analysis of Financial Condition and Results
of Operations" contained herein in Item 7, and Notes 1 and 6 of the "Notes to Consolidated Financial Statements" contained
herein in Item 8.
Investments
Investment activities are an integral part of our business, and profitability is significantly affected by investment results. We
segment our invested assets into portfolios that support our various product lines. Generally, our investment strategy for our
portfolios is to match the effective asset cash flows and durations with related expected liability cash flows and durations to
consistently meet the liability funding requirements of our businesses. We seek to earn investment income while assuming
credit risk in a prudent and selective manner, subject to constraints of quality, liquidity, diversification, and regulatory
considerations. Our overall investment philosophy is to invest in a portfolio of high quality assets that provide investment
returns consistent with that assumed in the pricing of our insurance products. Assets are invested predominately in fixed
maturity securities. Changes in interest rates may affect the amount and timing of cash flows.
We actively manage our asset and liability cash flow match and our asset and liability duration match to limit interest rate risk.
We may redistribute investments among our different lines of business, when necessary, to adjust the cash flow and/or duration
of the asset portfolios to better match the cash flow and duration of the liability portfolios. Asset and liability portfolio
modeling is updated on a quarterly basis and is used as part of the overall interest rate risk management strategy. Cash flows
from the in-force asset and liability portfolios are projected at current interest rate levels and also at levels reflecting an increase
and a decrease in interest rates to obtain a range of projected cash flows under the different interest rate scenarios. These results
enable us to assess the impact of projected changes in cash flows and duration resulting from potential changes in interest rates.
Testing the asset and liability portfolios under various interest rate 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. 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 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 rate assumptions embedded in the
reserves. We also use this analysis in determining hedging strategies and utilizing derivative financial instruments for
managing interest rate risk and the risk related to matching duration for our assets and liabilities. We do not use derivative
financial instruments for speculative purposes.
Refer to "Risk Factors" contained herein in Item 1A; "Critical Accounting Estimates" and the discussion of investments in
"Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7; and
Notes 1, 2, 3, and 4 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for information on our
investments and derivative financial instruments.
Ratings
AM Best, Fitch Ratings (Fitch), Moody's Investors Service (Moody's), and Standard & Poor's Ratings Services (S&P) are
among the third parties that assign issuer credit ratings to Unum Group and financial strength ratings to our insurance
subsidiaries. Issuer credit ratings reflect an agency's opinion of the overall financial capacity of a company to meet its senior
debt obligations. Financial strength ratings are specific to each individual insurance subsidiary and reflect each rating agency's
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view of the overall financial strength (capital levels, earnings, growth, investments, business mix, operating performance, and
market position) of the insuring entity and its ability to meet its obligations to policyholders. Both the issuer credit ratings and
financial strength ratings incorporate quantitative and qualitative analyses by rating agencies and are routinely reviewed and
updated on an ongoing basis.
Rating agencies assign an outlook statement of "positive," "negative," or "developing" to indicate an intermediate-term trend in
credit fundamentals which could lead to a rating change. "Positive" means that a rating may be raised, "negative" means that a
rating may be lowered, and "developing" means that a rating may be raised or lowered with equal probability. Alternatively, a
rating may have a "stable" outlook to indicate that the rating is not expected to change.
"Credit watch" or "under review" highlights the potential direction of a short-term or long-term rating. It focuses on
identifiable events and short-term trends that cause a rating to be placed under heightened surveillance by a rating agency.
Events that may trigger this action include mergers, acquisitions, recapitalizations, regulatory actions, criteria changes, or
operating developments. Ratings may be placed on credit watch or under review when an event or a change in an expected
trend occurs and additional information is needed to evaluate the current rating level. This status does not mean that a rating
change is inevitable, and ratings may change without first being placed on a watch list. A rating is not a recommendation to
buy, sell, or hold securities and may be subject to revision or withdrawal at any time by the rating agency. Each rating should
be evaluated independently of any other rating.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Ratings" contained herein in
Item 7 for our current outlook, issuer credit, and financial strength ratings. See also further discussion in "Risk Factors"
contained herein in Item 1A.
Competition
There is significant competition among insurance companies for the types of products we sell. We are operating in a dynamic
competitive environment of both traditional and non-traditional competitors, with changes in product offerings, enrollment
services, and technology solutions. We believe that the principal competitive factors affecting our business are price, quality of
the customer experience regarding service and claims management, integrated product choices, enrollment capabilities,
financial strength ratings, and claims-paying ratings. In the individual and group disability markets, we compete in the United
States with a number of major companies and regionally with other companies offering specialty products. Our principal
competitors for our other products, including group life and the product offerings sold to groups of employees through payroll
deduction, include the largest insurance companies in the United States. Some of these companies have more competitive
pricing or have higher claims-paying ratings. Some may also have greater financial resources with which to compete.
In both the United Kingdom and Poland, we compete for the individual and group products we sell with a mix of large
internationally recognized providers and strong local carriers.
We believe the need for the types of products we offer is significant. Individuals and families often live paycheck to paycheck
with a considerable chance of being out of work. Pressure is also mounting on governments as to the sustainability of public
assistance. Based on current penetration levels, we believe there is substantial upside growth potential.
All areas of the employee benefits markets are highly competitive due to the yearly renewable term nature of our products and
the large number of insurance companies offering products in this market. There is a risk that our customers may be able to
obtain more favorable terms or improved technology solutions from competitors in lieu of renewing coverage with us. The
effect of competition may, as a result, adversely affect the persistency of these and other products, as well as our ability to sell
products in the future.
We must attract and retain independent agents and brokers to actively market our products. Strong competition exists among
insurers for agents and brokers. We compete with other insurers for sales agents and brokers primarily on the basis of our
product offerings, financial strength, support services, and compensation. Sales of our products could be materially adversely
affected if we are unsuccessful in attracting and retaining agents and brokers.
For further discussion, refer to "Risk Factors" contained herein in Item 1A.
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Regulation
We and our subsidiaries are subject to extensive and comprehensive supervision and regulation in the United States, the United
Kingdom, and Poland. The laws and regulations with which we must comply are complex and subject to change. New or
existing laws and regulations may become more restrictive or otherwise adversely affect our operations. As a result of the
financial market and economic challenges in recent years, regulation and the cost of compliance with regulation has continued
to increase.
Insurance Regulation and Oversight
Our U.S. insurance subsidiaries are subject to regulation and oversight by insurance regulatory authorities in the jurisdictions in
which they do business and by the U.S. Department of Labor (DOL) on a national basis, primarily for the protection of
policyholders. State insurance regulators in the U.S. generally have broad powers with respect to all aspects of the insurance
business, including the power to: license and examine insurance companies; regulate and supervise sales practices and market
conduct; license agents and brokers; approve policy forms; approve premium rates and subsequent increases thereon for certain
insurance products; establish reserve requirements and solvency standards; place limitations on shareholder dividends;
prescribe the form and content of required financial statements and reports; regulate the types and amounts of permitted
investments; and regulate reinsurance transactions. Our U.S. insurance subsidiaries are examined periodically by their states of
domicile and by other states in which they are licensed to conduct business. The domestic examinations have traditionally
emphasized financial matters from the perspective of protection of policyholders, but they can and have covered other subjects
that an examining state may be interested in reviewing, such as market conduct issues. Examinations in other states more
typically focus on market conduct, such as a review of sales practices, including the content and use of advertising materials
and the licensing and appointing of agents and brokers, as well as underwriting, claims, and customer service practices, and
identification and handling of unclaimed property to determine compliance with state laws. Our U.S. insurance subsidiaries are
also subject to assessments by state insurance guaranty associations to cover the proportional cost of insolvent or failed
insurers. The DOL enforces a comprehensive federal statute which regulates claims paying fiduciary responsibilities and
reporting and disclosure requirements for most employee benefit plans.
Our U.K. insurance subsidiary, Unum Limited, is subject to dual regulation by the Prudential Regulation Authority (PRA) and
the Financial Conduct Authority (FCA). The PRA oversees the financial health and stability of financial services firms and is
responsible for the prudential regulation and day-to-day supervision of insurance companies. The FCA seeks to protect
consumers and oversees financial services products and practices, including those governing insurance companies in the U.K.
In June 2016, the U.K. held a referendum and voted to leave the European Union (EU). The U.K. subsequently invoked Article
50 of the Treaty and is due to leave the EU on March 29, 2019. The U.K.'s decision to leave the EU may add cost and
complexity to our compliance efforts if new laws and regulations are established that significantly diverge from those currently
in place, however, we are not aware of any indications of such changes in the short-term and do not expect significant changes
over the longer term.
Our Polish insurance subsidiary, Unum Poland, is subject to regulation by the Komisja Nadzoru Finansowego (KNF) of the
Financial Supervision Authority (FSA) in Poland. The KNF oversees the financial health and stability of financial services
firms and is responsible for the prudential regulation and day-to-day supervision of insurance companies and other financial
institutions.
Capital Requirements
Risk-based capital (RBC) standards for U.S. life insurance companies are prescribed by the National Association of Insurance
Commissioners (NAIC). The domiciliary states of our U.S. insurance subsidiaries have all adopted a version of the NAIC RBC
Model Act, which prescribes a system for assessing the adequacy of statutory capital and surplus for all life and health insurers.
The basis of the system is a risk-based formula that applies prescribed factors to the various risk elements in a life and health
insurer's business to report a minimum capital requirement proportional to the amount of risk assumed by the insurer. The life
and health RBC formula is designed to measure annually (i) the risk of loss from asset defaults and asset value fluctuations, (ii)
the risk of loss from adverse mortality and morbidity experience, (iii) the risk of loss from mismatching of asset and liability
cash flow due to changing interest rates, and (iv) business risks. The formula is used as an early warning tool to identify
companies that are potentially inadequately capitalized. The formula is intended to be used as a regulatory tool only and is not
intended as a means to rank insurers generally. The NAIC modified the RBC factors in 2018 to reflect the lower U.S. statutory
income tax rate that was enacted in 2017 which resulted in lower RBC ratios for our U.S. insurance subsidiaries, including our
captive reinsurers, as of December 31, 2018. Although the RBC ratios for our insurance subsidiaries are lower than the prior
13
year, the ratios continue to remain in line with our expectations and are significantly above the level that would require state
regulatory action. The NAIC has also issued a proposal to implement a new and more granular RBC structure for fixed income
asset capital charges. The proposed structure will expand the fixed income asset designations from six to 20 categories and will
revise factor values. We do not anticipate that the new structure related to fixed income assets will be effective before year end
2019. We will continue to monitor the NAIC's activities on this issue.
The NAIC continues to review the state-based solvency regulation framework to identify opportunities to respond to national
and international insurance regulatory and solvency developments. The topics of its review include capital requirements,
governance and risk management, statutory accounting and financial reporting, and reinsurance. This ongoing review will
likely result in significant changes to U.S. insurance regulation and solvency standards, including those for our U.S. insurance
subsidiaries. One of the outcomes of the NAIC's review was the adoption of the NAIC Risk Management and Own Risk and
Solvency Assessment (ORSA) Model Act which, following enactment at the state level, requires insurers to provide, at least
annually, a group-level perspective on the risks of the current and future business plans and the sufficiency of capital to support
those risks. All states where our traditional U.S. insurance subsidiaries are domiciled have enacted ORSA requirements, and we
file an ORSA summary report annually with the applicable insurance regulators.
The NAIC has established a working group charged with developing a group capital calculation that can be used by regulators
as a baseline quantitative measure in assessing the risks and financial position of insurance groups. The initial recommendation
for calculation is an RBC aggregation approach that would utilize existing regulatory calculations for legal entities within the
group. Items still under development include the scope of the group of legal entities that would be subject to the calculation as
well as factors to be used for non-insurance entities and non-U.S. insurance entities within the group. It is too early to predict
what, if any, impact this will have on our capital requirements.
The NAIC has adopted a valuation manual containing a principles-based approach to life insurance company reserves. The
effective date to begin a three-year implementation period was January 2017 and applies only to new business. The adoption of
this valuation manual has not had a material impact on our statutory reserves.
In 2012, the NAIC established a subgroup to study the insurance industry's use of captive reinsurers and special purpose
vehicles to transfer insurance risk and is considering ways to promote uniformity in both the approval and supervision of such
reinsurers. More recently, the NAIC adopted a proposal to subject certain captive reinsurers and special purpose vehicles to the
same capital requirements as traditional insurers. As the NAIC and state insurance regulators continue to examine the use of
captive insurance companies to finance reserves required under current regulations, we cannot predict the ultimate outcome of
their work, or how long or extensively they will continue to focus on this issue. Although we believe it to be unlikely, a
potential outcome of future NAIC decisions from its various committees, task forces, and working groups is that companies
could be prohibited from using captive reinsurers. No changes in the use or regulation of captive reinsurers have been proposed
by the NAIC, and we are unable to predict the extent of any changes that might be made. Accordingly, we expect to continue
our strategy of using captive reinsurers to manage risks and enhance capital efficiency while monitoring the NAIC's study and
proposed changes in regulations. See "Reinsurance" contained herein in this Item 1 for further discussion.
The PRA has statutory requirements, including capital adequacy and liquidity requirements and minimum solvency margins, to
which Unum Limited must adhere as part of the provisions of Solvency II, an EU directive that prescribes capital requirements
and risk management standards for the European insurance industry. Our European holding company is also subject to the
Solvency II requirements relevant to insurance holding companies, while its subsidiaries, which includes Unum Limited, are
subject to group supervision under Solvency II. The Unum European Economic Area (EEA) Group, which is comprised of the
European holding company and its subsidiaries, received approval from the PRA to use its own internal model for calculating
regulatory capital and also received approval for certain associated regulatory permissions including transitional relief as the
Solvency II capital regime is implemented. Although there are currently no indications that the regulatory capital regime for
our U.K. operations will change due to the U.K.'s decision to leave the EU, it remains too early to predict what, if any, impact
this may have on existing capital requirements for our U.K. entities, but economic conditions may cause volatility in our
solvency ratios.
The International Association of Insurance Supervisors (IAIS) is developing a Common Framework (ComFrame) for the
supervision of internationally active insurance groups (IAIGs) that contemplates group-wide supervision across national
boundaries, including uniform standards for insurer corporate governance and enterprise risk management, a framework for
group capital adequacy assessment that accounts for group-wide risks, and the establishment of ongoing supervisory colleges.
We do not qualify as an IAIG under the current criteria for designating an IAIG. However, we monitor the activities of the
IAIS for the potential that ComFrame could apply to us in the future. The IAIS expects to implement an Insurance Capital
Standard in the form of confidential reporting to supervisory colleges by the end of 2019. At this time, we cannot predict what,
14
if any, additional capital requirements, compliance costs, or other requirements this proposed standard might impose on us, if
adopted.
See further discussion in "Risk Factors" contained herein in Item 1A and "Liquidity and Capital Resources" contained herein in
Item 7 and Note 15 of the "Notes to Consolidated Financial Statements" contained herein in Item 8.
Insurance Holding Company Regulation
We and our U.S. insurance subsidiaries (excluding captive reinsurers) are subject to regulation under the insurance holding
company laws in the states in which our insurance subsidiaries are domiciled, which currently include Maine, Massachusetts,
New York, South Carolina, and Tennessee. These laws generally require each insurance company that is domiciled in the state
and a member of an insurance holding company system to register with the insurance department of that state and to furnish at
least annually financial and other information about the operations of companies within the holding company system, including
information concerning capital structure, ownership, management, financial condition, and certain intercompany transactions.
Transactions between an insurer and affiliates in the holding company system generally must be fair and reasonable and, if
material, require prior notice and approval by the domiciliary insurance regulator.
In addition, such laws and regulations restrict the amount of dividends that may be paid by our insurance subsidiaries to their
respective shareholders, including our Company and certain of our intermediate holding company subsidiaries. See further
discussion in "Risk Factors" contained herein in Item 1A and "Liquidity and Capital Resources - Cash Available from
Subsidiaries" contained herein in Item 7.
There are a number of proposals to amend state insurance laws and regulations in ways that could affect us and our insurance
subsidiaries. The NAIC has adopted or amended model laws on holding company regulation that provide for supervision of
insurers at the corporate group level. The various proposals to implement group supervision include uniform standards for
insurer corporate governance, group-wide supervision of insurance holding companies, adjustments to RBC calculations to
account for group-wide risks, and additional regulatory and disclosure requirements for insurance holding companies, including
a requirement that the ultimate controlling person of a U.S. insurer submit to the lead state insurance regulator an annual
enterprise risk report, which identifies activities, circumstances, or events involving one or more affiliates of an insurer that, if
not remedied properly, are likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its
insurance holding company system as a whole. The NAIC has adopted the Corporate Governance Annual Disclosure Model
Act and the Corporate Governance Annual Disclosure Model Regulation, which require U.S. insurers to disclose detailed
information regarding their governance practices. The model act and regulation must be adopted by individual state legislatures
and insurance regulators in order to be effective in a particular state. At this time, among the states in which our insurance
subsidiaries are domiciled, the model act and regulation are effective only in Maine, Massachusetts, and Tennessee. The NAIC
adopted the Insurance Data Security Model Law, which creates a legal framework that requires insurance companies to
establish cybersecurity programs designed to protect the private data of consumers. The law outlines planned cybersecurity
testing, and the development of incident response plans for breach notification procedures. The model law must be adopted by
individual state legislatures and insurance regulators in order to be effective in particular state. At this time, among the states in
which our insurance subsidiaries are domiciled, the model law is effective only in South Carolina. The New York State
Department of Financial Services has established similar regulations to this law which became effective in 2017 and the state of
California has enacted the California Consumer Privacy Act of 2018.
The laws of most states, including the states in which our insurance subsidiaries are domiciled (or deemed to be commercially
domiciled), require regulatory approval of a change in control of an insurance company or its holding company. Where these
laws apply to us, there can be no effective change in control of our Company or of any of our insurance subsidiaries unless the
person seeking to acquire control has filed a statement containing specified information with the appropriate insurance
regulators and has obtained their prior approval of the proposed change. The usual measure for a presumptive change of
control pursuant to these laws is the acquisition of 10 percent or more of the voting stock of an insurance company or its
holding company, although this presumption is rebuttable. Consequently, a person acquiring 10 percent or more of the voting
stock of an insurance company or its holding company without the prior approval of the insurance regulators in the state(s) of
domicile of the insurance company(ies) sought to be acquired (or whose holding company is sought to be acquired) will be in
violation of these laws. Such a person may also be subject to one or more of the following actions: (i) injunctive action
requiring the disposition or seizure of those shares by the applicable insurance regulators; (ii) prohibition of voting of such
shares; and (iii) other actions determined by the relevant insurance regulators. Further, many states' insurance laws require that
prior notification be given to state insurance regulators of a change in control of a non-domiciled insurance company doing
business in the state. These pre-notification statutes do not authorize the state insurance regulators to disapprove the change in
control; however, they do authorize regulatory action in the affected state if particular conditions exist, such as undue market
15
concentration. Any future transactions that would constitute a change in control of our Company or of any of our insurance
subsidiaries may require prior notification in those states that have adopted pre-notification laws.
These laws may discourage potential acquisition proposals and may delay, deter, or prevent a change in control of our
Company, including through transactions, and in particular unsolicited transactions, that some or all of our shareholders might
consider to be desirable.
Federal Laws and Regulations
Enacted in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) effected comprehensive
changes to the regulation of financial services in the United States. Dodd-Frank directed various government agencies and
bodies to promulgate regulations implementing the law, many of which remain to be completed. Among other provisions,
Dodd-Frank created a new framework for regulation of the over-the-counter derivatives markets, including requirements that
certain swaps be executed through a centralized exchange or regulated facility and be cleared through a regulated
clearinghouse. It also subjected us and major swap participants to capital and margin (i.e., collateral) requirements, which
generally had the effect of increasing the costs of hedging and the credit risk posed by some counterparties.
Dodd-Frank also established the Federal Insurance Office (FIO) within the Department of the Treasury, with powers over most
lines of insurance, and the Financial Stability Oversight Council (FSOC). The FIO is authorized to gather data and information
to monitor aspects of the insurance industry, identify issues in the regulation of insurers about insurance matters, and preempt
state insurance measures under certain circumstances. Although the FIO is prohibited from directly regulating the business of
insurance, the FIO may also recommend enhanced regulations to state regulatory authorities or recommend to the FSOC that it
designate an insurer as a "systemically important financial institution" (SIFI). An insurer designated as a SIFI could be subject
to Federal Reserve supervision and heightened regulatory standards. We have not been designated as a SIFI, and at this time
we believe it is unlikely that we would be designated as such. We continue to monitor the political, legislative and regulatory
environment, where possible amendments to various provisions of Dodd-Frank are under discussion.
We are subject to the laws and regulations generally applicable to public companies, including the rules and regulations of the
Securities and Exchange Commission and the New York Stock Exchange relating to public reporting and disclosure, accounting
and financial reporting, corporate governance, and securities trading. Further, the Sarbanes-Oxley Act of 2002, and rules and
regulations adopted under this regulation, have increased the requirements for us and other public companies in these and other
areas.
The USA PATRIOT Act of 2001 (Patriot Act) contains anti-money laundering and financial transparency laws and mandates the
implementation of various regulations applicable to broker-dealers and other financial services companies, including insurance
companies. The Patriot Act seeks to promote cooperation among financial institutions, regulators and law enforcement entities
in identifying parties that may be involved in terrorism or money laundering. Anti-money laundering laws outside of the
United States contain some similar provisions. Additionally, other federal laws and regulations, including the Foreign Corrupt
Practices Act and regulations issued by the Office of Foreign Asset's Controls, as well as the U.K.'s Bribery Act of 2010, have
increased requirements relating to identifying customers, prohibiting transactions with certain organizations or individuals,
watching for and reporting suspicious transactions, responding to requests for information by regulatory authorities and law
enforcement agencies, sharing information with other financial institutions, and requiring the implementation and maintenance
of internal practices, procedures, and controls.
We are subject to federal income, employment, excise and other taxes related to both our U.S. and our foreign operations. On
December 22, 2017, the U.S. Federal government enacted a tax bill, H.R.1, An Act to Provide Reconciliation Pursuant to Titles
II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, more commonly known as the Tax Cuts and Jobs Act
(TCJA). The key provisions of the TCJA relevant to us are as follows:
• Establishes a corporate income tax rate of 21 percent;
• Creates a territorial tax system rather than a worldwide system, which will generally allow companies to repatriate
future foreign source earnings without incurring additional U.S. taxes by providing a 100 percent exemption for the
foreign source portion of dividends from certain foreign subsidiaries;
Subjects undistributed and previously untaxed foreign earnings and profits to a one-time transition tax also referred to
as a deemed repatriation toll charge;
•
• Creates a U.S. shareholder tax on certain foreign subsidiary income above a routine equity return on tangible
depreciable business assets (Global Intangible Low-taxed Income);
• Decreases tax-deductible life and property and casualty insurance reserves;
16
Increases the amount and amortization period of acquisition costs capitalized for tax purposes;
•
• Reduces the maximum deduction for net operating loss (NOL) carryforwards arising in companies other than non-life
insurance companies in tax years beginning after 2017 to a percentage of the taxpayer's taxable income. It also allows
any NOLs generated in tax years beginning after December 31, 2017 to be carried forward indefinitely and repeals
carrybacks. NOL provisions for non-life insurance companies remain unchanged from current law;
• Allows businesses to immediately write off the cost of new investments in certain qualified depreciable assets made
after September 27, 2017 subject to phase downs starting in 2023;
• Eliminates or reduces certain deductions (including deductions for certain compensation arrangements, certain
payments made to governments for violations of law and certain legal settlements), exclusions and credits and adds
other provisions that broaden the tax base; and
• Creates a new base erosion anti-abuse tax (BEAT) that subjects certain payments made by a U.S. company to a related
foreign company to additional taxes.
See "Executive Summary" and "Liquidity and Capital Resources" contained herein in Item 7 and Notes 7 and 15 of the "Notes
to Consolidated Financial Statements" contained herein in Item 8 for discussion of the impact to our financial position and
results of operations as a result of these changes.
Federal tax laws and regulations are subject to change, and any such change could materially impact our federal taxes and
reduce profitability as well as capital levels in our insurance subsidiaries. We continually monitor federal tax legislative and
regulatory developments to understand their potential impact on our profitability.
For further discussion of regulation, refer to "Risk Factors" contained herein in Item 1A.
Geographic Areas
Adjusted operating revenue, which excludes net realized investment gains and losses, for our Unum International segment was
approximately 6 percent of our consolidated adjusted operating revenue in 2018, 2017, and 2016. As of December 31, 2018,
total assets equaled approximately 6 percent of consolidated assets and total liabilities equaled approximately 5 percent of
consolidated liabilities for our Unum International segment. Fluctuations in the U.S. dollar relative to the local currencies of
our Unum International segment will impact our reported operating results. See "Risk Factors" contained herein in Item 1A and
"Quantitative and Qualitative Disclosures About Market Risk" contained herein in Item 7A for further discussion of fluctuations
in foreign currency exchange rates. See "Reporting Segments" contained herein in this Item 1; "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained herein in Item 7; and Note 13 of the "Notes to
Consolidated Financial Statements" contained herein in Item 8 for further discussion of Unum International's operating results.
Employees
At December 31, 2018, we had approximately 9,600 full-time employees.
Available Information
Our internet website address is www.unum.com. We make available, free of charge, on or through our website our Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material
with the Securities and Exchange Commission.
17
Executive Officers of the Registrant
Our executive officers, who are also executive officers of certain of our principal subsidiaries, were appointed by Unum
Group's board of directors to serve until their successors are chosen and qualified or until their earlier resignation or removal.
Name
Richard P. McKenney
John F. McGarry
Lisa G. Iglesias
Michael Q. Simonds
Timothy G. Arnold
Peter G. O'Donnell
Elizabeth A. Ahmed
Puneet Bhasin
Breege A. Farrell
Age
50
61
53
45
56
52
44
56
59
Position
President and Chief Executive Officer and a Director
Executive Vice President and Chief Financial Officer
Executive Vice President, General Counsel
Executive Vice President, President and Chief Executive Officer, Unum US
Executive Vice President, President and Chief Executive Officer, Colonial Life
Executive Vice President, Chief Executive Officer, Unum International
Executive Vice President, People and Communications
Executive Vice President, Chief Information and Digital Officer
Executive Vice President, Chief Investment Officer
Mr. McKenney became President in April 2015 and Chief Executive Officer in May 2015. He served as Executive Vice
President and Chief Financial Officer from August 2009 until April 2015, having joined the Company in July 2009. Before
joining the Company, Mr. McKenney served as Executive Vice President and Chief Financial Officer of Sun Life Financial Inc.,
an international financial services company, from February 2007, having joined that company as Executive Vice President in
September 2006.
Mr. McGarry became Executive Vice President and Chief Financial Officer in April 2015. He served as Executive Vice
President, President and Chief Executive Officer, Closed Block Operations from August 2013 to April 2015, after having served
as Executive Vice President, Individual Disability and Long-term Care Closed Block Operations from September 2012. He
previously served as Executive Vice President, President and Chief Executive Officer, Unum UK from July 2010, and as Senior
Vice President, Benefits, Individual Disability, and National Client Group Business, Unum US from January 2010. Prior to
that, he served in various other capacities within Unum US, including as Senior Vice President, Benefits Operations and Risk
Management from March 2008 to January 2010, and as Senior Vice President, Benefits Operations from January 2006 to March
2008. Mr. McGarry originally joined a Unum Group predecessor company in 1986.
Ms. Iglesias was named Executive Vice President, General Counsel upon joining the Company in January 2015. She served as
Senior Vice President, General Counsel and Secretary of WellCare Health Plans, Inc., a managed care company, from February
2012 to December 2014, having first joined WellCare in February 2010 as Vice President, Securities and Assistant General
Counsel. Prior to that, she served as General Counsel and Corporate Secretary for Nordstrom, Inc., a fashion specialty retailer,
from 2007 to 2008, and as General Counsel and Secretary of Spherion Corporation, a recruiting and staffing company, from
1999 to 2007.
Mr. Simonds was named Executive Vice President, President and Chief Executive Officer, Unum US in July 2013, after having
served as Senior Vice President and Chief Operating Officer, Unum US from June 2012. He previously served as Senior Vice
President, Growth Operations, Unum US from July 2010, and as Senior Vice President and Chief Marketing Officer, Unum US
from March 2008. Mr. Simonds originally joined a Unum Group predecessor company in 1994, left the Company in 2000 to
further his education, and rejoined the Company in 2003 after serving as a consultant with McKinsey & Company, a global
management consulting firm.
Mr. Arnold was named Executive Vice President, President and Chief Executive Officer, Colonial Life in January 2015, after
having served as Executive Vice President, President, Colonial Life from July 2014. He previously served as Senior Vice
President, Sales and Marketing, Colonial Life from August 2012, as Senior Vice President, Chief Operations Officer, Colonial
Life from July 2011, and as Senior Vice President, Integrated Underwriting, Unum US from May 2010. Mr. Arnold originally
joined a Unum Group predecessor company in 1985.
Mr. O'Donnell serves as Executive Vice President, Chief Executive Officer, Unum International, having been named to this
position in October 2018 when the reporting segment was previously known as Unum UK. He previously served as President
and Chief Executive Officer, Unum UK, from September 2012, after having joined the Company as Unum Limited's Chief
Financial Officer in 2010. Prior to joining Unum Limited, Mr. O'Donnell served as Director of Group Finance at Prudential
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plc, an international financial services company, from May 2008 to May 2010. He served as Finance director at Royal &
SunAlliance plc, an international financial services company, from May 2005 to May 2008.
Ms. Ahmed was named Executive Vice President, People and Communications upon joining the Company in October 2018.
She served as Executive Vice President, Chief Human Resources Officer, AmTrust Financial Services, Inc., a multinational
insurance holding company, from May 2015 to October 2018. Prior to that, she served as Vice President of Human Resources
at Equity Trust Company, a financial services company, from May 2012 to May 2015, and as Senior Vice President of Human
Resources at PNC Bank, a diversified financial services institution, from August 2008 to May 2012.
Mr. Bhasin was named Executive Vice President, Chief Information and Digital Officer after joining the Company in March
2018. He served as Executive Vice President, Corporate Operations and Recycling at Waste Management, Inc., a waste
management environmental services provider, from November 2015 to March 2017. While at Waste Management, he also
served as Senior Vice President, Corporate Operations from November 2014, Chief Information Officer and Senior Vice
President, Technology, Logistics and Customer Service from August 2012, and Senior Vice President and Chief Information
Officer from December 2009.
Ms. Farrell was named Executive Vice President, Chief Investment Officer in August 2013, after having joined the Company as
Senior Vice President and Chief Investment Officer in April 2011. Before joining the Company, she held a number of
executive-level investment positions within The Allstate Corporation, a personal lines insurer, including as Senior Managing
Director of Allstate Investments, LLC and certain affiliated companies from January 2010 to April 2011, and as Managing
Director of these companies from August 2004 to January 2010.
ITEM 1A. RISK FACTORS
We face a wide range of risks, and our continued success depends on our ability to identify and appropriately manage our risk
exposures. Discussed below are factors that may adversely affect our business, results of operations, or financial condition.
Any one or more of the following factors may cause our actual results for various financial reporting periods to differ materially
from those expressed in any forward-looking statements made by or on behalf of the Company, including those in this
document or made by us elsewhere, such as in earnings release investor calls, investor conference presentations, or press
releases. See "Cautionary Statement Regarding Forward-Looking Statements" contained herein on page 1.
Sustained periods of low interest rates in the long-term investment market may adversely affect our reported net
investment income and the discount rates used in reserving for our insurance products and projecting our pension
obligations, which may adversely affect our results of operations or financial condition.
Declines in interest rates and/or the continuance of the current level of low interest rates and yields on fixed income
investments may cause the rates of return on our investment portfolio to decrease more than expected, leading to lower net
investment income than assumed in the pricing and reserving for our insurance products. An interest, or discount, rate is used
in calculating reserves for our insurance products. We set our reserve discount rate assumptions based on our current and
expected future investment yield for assets supporting the reserves, considering current and expected future market conditions.
If the discount rate assumed in our reserve calculations is higher than our future investment returns, our invested assets will not
earn enough investment income to support our future claim payments. In that case, the reserves may eventually be insufficient,
resulting in the need to increase our reserves and/or increase our capital contributions to our insurance subsidiaries, either of
which could have a material adverse effect on our results of operations or financial condition.
Our net periodic benefit costs and the value of our benefit obligations for our pension 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 set the discount rate assumption at the measurement date for each of our plans to reflect the yield of a portfolio of high
quality fixed income corporate debt instruments matched against the timing and amounts of projected future benefits. A lower
discount rate increases the present value of benefit obligations and increases our costs. Our expectations for the future
investment returns on plan assets are based on a combination of historical market performance, current market conditions, and
future capital market assumptions obtained from external consultants and economists. The actual rate of return on plan assets is
determined based on the fair value of the plan assets at the beginning and end of the measurement period. Increases or
decreases in long-term interest rates as well as equity market volatility will impact the fair value of our plan assets and may
result in a decrease in the funded status of our pension plans and/or increased pension costs, which may adversely affect our
results of operations, financial condition, or liquidity.
19
See "Reserves for Policy and Contract Benefits" contained herein in Item 1, "Critical Accounting Estimates" included in
"Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein in Item 7, "Interest
Rate Risk" contained herein in Item 7A, and Note 9 of the "Notes to Consolidated Financial Statements" contained herein in
Item 8 for further discussion.
Actual experience may differ from our reserve assumptions which may adversely affect our results of operations or
financial condition.
Historical results may not be indicative of future performance due to, among other things, changes in our mix of business, re-
pricing of certain lines of business, or any number of economic cyclical effects on our business. Reserves, whether calculated
under GAAP or statutory accounting principles, do not represent an exact calculation of future benefit liabilities but are instead
estimates made by us using actuarial and statistical procedures. Actual experience may differ from our reserve assumptions.
There can be no assurance that our reserves will be sufficient to fund our future liabilities in all circumstances. Future loss
development may require reserves to be increased, which would adversely affect earnings in current and future periods. Life
expectancies may continue to increase, which could lengthen the time a claimant receives disability or long-term care benefits
and could result in a change in mortality assumptions and an increase in reserves for these and other long-tailed products.
Adjustments to reserve amounts may also be required in the event of changes from the assumptions regarding future morbidity
(the incidence of claims and the rate of recovery, including the effects thereon of inflation and other societal and economic
factors); premium rate increases; persistency; policy benefit offsets, including those for social security and other government-
based welfare benefits; and interest rates used in calculating the reserve amounts, which could have a material adverse effect on
our results of operations or financial condition.
See "Reserves for Policy and Contract Benefits" contained herein in Item 1, "Executive Summary" and "Critical Accounting
Estimates" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained
herein in Item 7, and Notes 1 and 6 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further
discussion.
Unfavorable economic conditions may result in lower sales, lower premium growth and persistency, higher claims
incidence, and longer claims duration, which may adversely affect our results of operations or financial condition.
We are affected by conditions in the capital markets and the general economy, primarily in the United States, the United
Kingdom, Poland, and to a lesser extent, the broader global financial markets. Negative developments in the capital markets
and/or the general economy could adversely affect our business and results of operations.
In particular, factors such as unemployment levels, consumer confidence levels, consumer spending, business investment,
government spending, the volatility and strength of the capital markets, and inflation all affect the business and economic
environment and, ultimately, the amount and profitability of our businesses. Given the nature of our products, in an economic
environment characterized by higher unemployment, lower personal income, reduced consumer spending, and lower corporate
earnings and investment, new product sales may be adversely affected. Our premium growth may also be negatively impacted
by lower premium growth from existing customers due to lower salary growth and lower growth in the number of employees
covered under an existing policy. In addition, during such periods we may experience higher claims incidence, longer claims
duration, and/or an increase in policy lapses, any of which could have a material adverse effect on our results of operations or
financial condition.
We and our insurance subsidiaries are subject to extensive supervision and regulation. Changes in laws and regulations
that affect our industry or the customers to whom we sell our products may affect the cost or demand for our products,
increase capital requirements for our insurance subsidiaries, and adversely affect our profitability, liquidity, or growth.
Our insurance subsidiaries are subject to extensive supervision and regulation in the United States and abroad. The primary
purpose of insurance regulation is to protect policyholders, not stockholders. To that end, applicable laws establish regulatory
authorities, including state insurance departments in the United States, the PRA in the United Kingdom, and the KNF in Poland,
with broad administrative powers over many aspects of the insurance business. For example, our insurance subsidiaries may
not be able to obtain or maintain necessary licenses, permits, authorizations, or accreditations, or may be able to do so only at
great cost. In addition, we and our insurance subsidiaries may not be able to comply fully with, or obtain appropriate
exemptions from, the wide variety of laws and regulations applicable to insurance companies and insurance holding companies.
These laws and regulations can be complex and subject to differing interpretations and are regularly re-examined. Existing or
future laws and regulations, and the manner in which they are interpreted or applied, may become more restrictive or otherwise
adversely affect our operations. For example, they may restrict or prohibit the payment of dividends by our subsidiaries to us,
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restrict transactions between subsidiaries and/or between us and our subsidiaries, and may require contributions of capital by us
to our insurance subsidiaries even if we are otherwise in compliance with stated requirements. Failure to comply with or to
obtain appropriate exemptions under any applicable laws or regulations could result in restrictions on the ability of our
insurance subsidiaries to do business in one or more of the jurisdictions in which they operate and could result in fines and
other sanctions, which may have a material adverse effect on our business or results of operations.
It is possible that there will be heightened oversight of insurers by regulatory authorities in the jurisdictions in which our
insurance subsidiaries are domiciled and operate. We cannot predict specific proposals that might be adopted, or what impact,
if any, such proposals or, if enacted, such laws, could have on our business, results of operations, or financial condition. For
instance, the NAIC or state regulators may adopt revisions to the RBC formula, the PRA may revise its capital adequacy
requirements and minimum solvency margins, the IAIS may adopt capital requirements to which we could be subject, or rating
agencies may incorporate higher capital thresholds into their quantitative analyses, thus requiring additional capital
contributions by us to our insurance subsidiaries. Increased financial services regulation, which could include activities
undertaken by the NAIC and regulatory authorities in the U.K., Poland, and the EU may impose greater quantitative
requirements, supervisory review, and disclosure requirements and may impact the business strategies, capital requirements,
and profitability of our insurance subsidiaries. The United Kingdom's Financial Ombudsman Service, which was established to
help settle disputes between consumers and businesses providing financial services, and the FCA, which has rule-making,
investigative, and enforcement powers to protect consumers, may hamper our ability to do business, which could have a
material adverse effect on our U.K. operations.
We use affiliated captive reinsurers for the limited purpose of reinsuring risks attributable to specified policies issued or
reinsured by our insurance subsidiaries in order to effectively manage risks in connection with certain blocks of our business as
well as to enhance our capital efficiency. If we were required to discontinue use of the captive reinsurers or to alter the
structure of the captive reinsurance arrangements, our ability to maintain current RBC ratios and/or our capital deployment
activities could be adversely affected.
Changes in U.S. programs such as healthcare reform and financial services sector reform may compete with or diminish the
need or demand for our products, particularly as it may affect our ability to sell our products through employers or in the
workplace. The U.S. social security disability insurance program may not be sustainable, which may adversely affect the level
of our disability claim payments and reserves. Legislative changes related to pension funding requirements could negatively
impact our cash flows from operations and our profitability.
Changes in tax laws and other regulations or interpretations of such laws or regulations could unfavorably impact our corporate
taxes. In addition, changes in tax laws could make some of our products less attractive to consumers.
Negotiations regarding the U.K.'s plans to leave the EU on March 29, 2019 are ongoing and the anticipated resolutions remain
uncertain. The magnitude and longevity of potential negative economic impacts on the growth of our Unum UK business will
depend on whether an agreement is reached between the U.K. and EU as a result of exit negotiations and, if reached, the nature
of the agreement and the resulting response of the U.K. marketplace. We do not expect that the underlying operations of our
U.K. business to be significantly impacted by the U.K.'s exit from the EU. The insurance policies issued by our U.K. insurance
subsidiary are almost exclusively written in the U.K. and cover policyholders based in the U.K. These policies will not be
affected by the U.K.'s exit nor will we need to obtain additional insurance licenses to be able to continue writing these policies.
For the small amount of contracts and coverages provided to companies and individuals outside of the U.K., we have developed
contingency plans that could be invoked following the U.K.'s exit. The employees that support our U.K. business reside in the
U.K. and will not need to change residence status after the exit. We may experience volatility in the fair values of our
investments in U.K. and EU-based issuers, but we do not expect a material increase in other-than-temporary impairments or
defaults, nor do we believe this volatility will impact our ability to hold these investments. We may also experience higher
claims incidence in the near term, which is generally correlated to periods of economic uncertainty. Additionally, it is possible
that there are tax impacts associated with the exit such as revised or new tax regulations. The continued dampening of growth
due to the current disruption and uncertainty in the U.K. economy may lead to lower near-term sales and premium growth.
There are currently no indications that capital requirements for our U.K. operations will change, but economic conditions may
cause volatility in our solvency ratios. Our reported consolidated financial results may be unfavorably impacted by the
weakening of the British pound sterling relative to preceding periods.
Dodd-Frank directs various government agencies and bodies to promulgate regulations implementing the law, an ongoing
process that continues to develop. As a result of the regulations implemented thus far, regulations directed at some derivative
activities and the implementation of central clearing rules have increased the cost of some hedging activities primarily as a
result of more restrictive collateral requirements. We cannot predict the requirements of the remaining regulations that might
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ultimately be adopted, whether existing requirements will be repealed or changed, or how or whether such regulations will
affect our businesses, results of operations, cash flows, or financial condition, require us to raise additional capital, or result in a
downgrade of our credit ratings.
Most group long-term and short-term disability plans we administer are governed by the Employee Retirement Income Security
Act (ERISA). Changes to ERISA enacted by Congress or through judicial interpretations may adversely affect the risk to us of
managing employee benefit plans, increase the premiums associated with such plans, and ultimately affect their affordability
and our profitability.
The insurance departments in jurisdictions wherein our insurance subsidiaries conduct business may limit our ability to obtain
rate increases under guaranteed renewable contracts or could require changes in rates and/or benefits to meet minimum loss
ratio requirements which could negatively impact the profitability of our products. Many regulatory and governmental bodies
have the authority to review our products and business practices and those of our agents and employees. These regulatory or
governmental bodies may bring regulatory or other legal actions against us if, in their view, our practices are improper. These
actions could result in substantial fines or restrictions on our business activities and could have a material adverse effect on our
business or results of operations.
Regulatory examinations or investigations could result in, among other things, changes in our claims handling or other business
practices, changes in procedures for the identification and payment to the states of benefits and other property that is not
claimed by the owners, changes in the use and oversight of reinsurance, increases to reserving requirements, changes in
governance and other oversight procedures, assessments by tax authorities or other governing agencies, fines, and other
administrative action, which could injure our reputation, adversely affect our issuer credit ratings and financial strength ratings,
place us at a competitive disadvantage in marketing or administering our products, impair our ability to sell or retain insurance
policies, and/or have a material adverse effect on our results of operations or financial condition. Determination by regulatory
authorities that we have engaged in improper conduct may also adversely affect our defense of various lawsuits.
See "Regulation" contained herein in Item 1 and Notes 7 and 14 of the "Notes to Consolidated Financial Statements" contained
herein in Item 8 for further discussion.
A cyber attack or other security breach could disrupt our operations, result in the unauthorized disclosure or loss of
confidential data, damage our reputation or relationships, and expose us to significant financial and legal liability, which
may adversely affect our business, results of operations, or financial condition.
We store confidential information about our business and our policyholders, employees, agents and others on our information
technology systems, including proprietary and personally identifiable information. As part of our normal business operations,
we use this information and engage third-party providers, including outsourcing, cloud computing, and other business partners,
that store, access, process, and transmit such information on our behalf. We devote significant resources and employ security
measures to help protect our information technology systems and confidential information, and we have programs in place to
detect, contain, and respond to information security incidents. However, because the techniques used to obtain unauthorized
access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of
time, we and our third-party providers may be unable to anticipate these techniques or implement adequate preventative
measures. In addition, hardware, software, or applications we develop or procure from third parties or through open source
solutions may contain defects in design or manufacture or other problems that could unexpectedly compromise our information
security. Unauthorized parties, whether within or outside our company, may disrupt or gain access to our systems, or those of
third parties with whom we do business, through human error, misfeasance, fraud, trickery, or other forms of deceit, including
break-ins, use of stolen credentials, social engineering, phishing, or other cyber attacks, computer viruses, malicious codes, and
similar means of unauthorized and destructive tampering.
We and our third-party providers have experienced and likely will continue to experience information security incidents from
time to time. Although known incidents have not had a material effect on our business or financial condition, there is no
assurance that our security systems and measures will be able to prevent, mitigate, or remediate future incidents that could have
such an effect. A successful penetration or circumvention of the security of our information technology systems, or those of
third parties with whom we do business, could cause serious negative consequences for us, including significant disruption of
our operations, unauthorized disclosure or loss of confidential information, harm to our brand or reputation, loss of customers
and revenues, violations of privacy and other laws, and exposure to litigation, monetary damages, regulatory enforcement
proceedings, fines, and potentially criminal proceedings and penalties. If we are unaware of the incident for some time after it
occurs, our exposure could increase. In addition, the costs to address or remediate systems disruptions or security threats or
vulnerabilities, whether before or after an incident, could be significant. As we continue to build our digital capabilities and
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focus on enhancing the customer experience, the amount of information that we retain and share with third parties is likely to
grow, increasing the cost to prevent data security breaches and the cost and potential consequences of such breaches. An
information technology systems failure could also interfere with our ability to comply with financial reporting and other
regulatory requirements, exposing us to potential disciplinary action by regulators. Further, successful cyber-attacks at other
large financial institutions or other market participants, whether or not we are affected, could lead to a general loss of customer
and investor confidence in financial institutions that could negatively affect us.
Although we have insurance against some cyber risks and attacks, we may be subject to litigation and financial losses that
exceed our policy limits, are subject to deductibles or are not covered under any of our current insurance policies.
The failure of our business recovery and incident management processes to resume our business operations in the event
of a natural catastrophe, cyber attack, or other event could adversely affect our profitability, results of operations, or
financial condition.
In the event of a disaster such as a natural catastrophe, an epidemic, a cyber attack, cyber security breach or other information
technology systems failure, a terrorist attack, or war, unanticipated problems with our disaster recovery systems could have a
material adverse impact on our ability to conduct business and on our results of operations and financial condition, particularly
if those problems affect our information technology systems and destroy valuable data or result in a significant failure of our
internal control environment. In addition, in the event that a significant number of our employees were unavailable in the event
of a disaster, our ability to effectively conduct business could be severely compromised.
The failure of our information technology and/or disaster recovery systems for any reason could cause significant interruptions
or malfunctions in our or our customers’ operations and result in the loss, theft, or failure to maintain the security,
confidentiality or privacy of sensitive data, including personal information relating to our customers. Such a failure could harm
our reputation, subject us to regulatory sanctions, legal claims, and increased expenses, and lead to a loss of customers and
revenues.
In addition to interest rate risk as previously discussed, we are exposed to other risks related to our investment portfolio
which may adversely affect our results of operations, financial condition, or liquidity.
Default Risk
Our investment portfolio consists primarily of fixed maturity securities. These securities are issued by both domestic and
foreign entities and are backed either by collateral or the credit of the underlying issuer. Factors such as an economic downturn
or political change in the country of the issuer, a regulatory change pertaining to the issuer's industry, a significant deterioration
in the cash flows of the issuer, unforeseen accounting irregularities or fraud committed by the issuer, widening risk spreads,
ratings downgrades, a change in the issuer's marketplace or business prospects, or other events that adversely affect the issuers
of these securities may result in the issuer defaulting on its obligations.
Our mortgage loan portfolio has default risk. Events or developments, such as economic conditions that impact the ability of
tenants to pay their rents or limit the availability of refinancing, may have a negative effect on our mortgage loan portfolio.
Events or developments that have a negative effect on any particular geographic region or sector may have a greater adverse
effect on an investment portfolio to the extent that the portfolio is concentrated in that region or sector.
A default results in the recognition of an impairment loss on the investment. A default may also adversely affect our ability to
collect principal and interest due to us. The probability of credit downgrades and defaults increases when the fixed income
markets experience periods of volatility and illiquidity.
Credit Spread Risk
Our exposure to credit spreads, which is the yield above comparable U.S. Treasury securities, primarily relates to market price
and cash flow variability associated with changes in credit spreads. A widening of credit spreads may unfavorably impact the
net unrealized gain or loss position of the investment portfolio and may adversely impact liquidity. Credit spread tightening
may reduce net investment income associated with new purchases of fixed income securities.
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Valuation Risk
We report our fixed maturity securities and certain other financial instruments at fair value. Valuations may include inputs and
assumptions that are less observable or require greater estimation, particularly during periods of market disruption, resulting in
values which may be less than the value at which the investments may ultimately be sold. Further, rapidly changing and
unprecedented credit and equity market conditions could materially impact the valuation of securities as reported in our
financial statements, and the period to period changes in value could vary significantly. Decreases in value may have a material
adverse effect on our results of operations or financial condition.
We evaluate our investment portfolio for impairments. There can be no assurance that we have accurately assessed the level of
impairments taken. Additional impairments may need to be taken in the future, and historical trends may not be indicative of
future impairments. Any event reducing the value of our securities other than on a temporary basis may have a material adverse
effect on our business, results of operations, or financial condition.
Market Timing and Liquidity Risk
While 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, there may at times be a lack of appropriate investments in the market which can be
acquired. In addition, we may, in certain circumstances, 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. There may also be a
limited market for certain of our investments, such as our private placement fixed maturity securities, mortgage loans, and
policy loans, which makes them more illiquid. In periods of market volatility or disruption, other of our securities may also
experience reduced liquidity. If events occur wherein we need to sell securities in an unfavorable interest rate or credit
environment or need to quickly sell securities which are illiquid, market prices may be lower than what we might realize under
normal circumstances, with a resulting adverse effect on our results of operations, financial condition, or liquidity.
See "Critical Accounting Estimates" included in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained herein in Item 7 and Notes 1, 2, 3, and 4 of the "Notes to Consolidated Financial Statements" contained
herein in Item 8 for further discussion of our investments and derivatives.
Competition may adversely affect our market share or profitability.
All of our businesses are highly competitive. We believe that the principal competitive factors affecting our business are price,
the quality of our customer's experience regarding service and claims management, integrated product choices, enrollment
capabilities, financial strength, and claims-paying ratings. We compete for new product sales, the retention of existing business,
and the ability to attract and retain independent agents and brokers to market our products, all of which affect our profitability.
All areas of the employee benefits markets are highly competitive due to the yearly renewable term nature of the group
products and the large number of insurance companies offering products in this market. There is a risk that our customers may
be able to obtain more favorable terms or improved technology solutions from competitors in lieu of renewing coverage with
us, particularly if industry pricing levels do not align with our view of adequate premium rates. We are operating in a dynamic
competitive environment of both traditional and non-traditional competitors, with changes in product offerings, enrollment
capabilities, and technology solutions. The level and intensity of competition may also grow due to existing competitors
becoming more aggressive, and an increase in merger and acquisition activity which may result in larger competitors with
greater financial resources. There are many insurance companies which actively compete with us in our lines of business, and
there is no assurance that we will be able to compete effectively against these companies and new competitors in the future.
See "Competition" contained herein in Item 1 for further discussion.
A decrease in our financial strength or issuer credit ratings may adversely affect our competitive position, our ability to
hedge our risks, and our cost of capital or ability to raise capital, which may adversely affect our results of operations,
financial condition, or liquidity.
We compete based in part on the financial strength ratings provided by rating agencies. A downgrade of our financial strength
ratings may 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, 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 and our ability to raise additional capital. If we are downgraded significantly, ratings triggers in our
derivatives financial instrument contracts may result in our counterparties enforcing their option to terminate the derivative
contracts. Such an event may have a material adverse effect on our financial condition or our ability to hedge our risks.
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See "Ratings" contained herein in Item 1 and in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained herein in Item 7 for further discussion.
The failure to effectively execute upgrades to or replacements of information technology systems could adversely affect
our business, results of operations, or financial condition.
We rely heavily on the effective operation of our information technology systems to administer our business and support the
investments we are making to offer digital capabilities to enhance our customers' experience. Although we believe we have
information technology systems which adequately support our business needs, we continually upgrade our existing information
technology systems and acquire or develop new systems to keep pace with the rapidly changing business and technology
environment. There are risks involved with upgrading or replacing information technology systems, including, but not limited
to, data loss, data errors, and disruption to our operations. We seek to monitor and control our exposure to the risks arising out
of these activities through our risk control framework which encompasses a variety of reporting systems, internal controls,
management review processes, and other mechanisms.
Events that damage our reputation may adversely affect our business, results of operations, or financial condition.
There are many events which may harm our reputation, including, but not limited to, those discussed in this Item 1A regarding
regulatory investigations, legal proceedings, and cyber or other information security incidents.
In addition, as an insurance company, we are paid to accept certain risks. Those who conduct our business, including executive
officers and members of management, sales managers, investment professionals, and to some extent, independent agents and
brokers, do so in part by making decisions that involve exposing us to risk. These include decisions such as maintaining
effective underwriting and pricing discipline, maintaining effective claim management and customer service performance,
managing our investment portfolio and derivatives trading activities, delivering effective technology solutions, complying with
established sales practices, executing our capital management strategy, exiting a line of business and/or pursuing strategic
growth initiatives, and other decisions. Although we employ controls and procedures designed to monitor business decisions
and prevent us from taking excessive risks or unintentionally failing to comply with internal policies and practices such that
errors occur, there can be no assurance that these controls and procedures will be effective. If our employees and business
associates take excessive risks and/or fail to comply with internal policies and practices, the impact of those events may damage
our market position and reputation.
Depending on the severity of the damage to our reputation, we may be unable to effectively compete for new products or retain
our existing business, which could adversely affect our results of operations or financial condition. Damage to our reputation
may also hinder our ability to raise new capital and/or increase our cost of capital. See "Regulation" contained herein in Item 1
and Note 14 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for additional information on
regulatory matters and legal proceedings.
We provide a broad array of disability, long-term care, group life, and voluntary insurance products that are affected by
many factors, and changes in any of those factors may adversely affect our results of operations, financial condition, or
liquidity.
Disability Insurance
Disability insurance may be affected by a number of social, economic, governmental, competitive, and other factors. Changes
in societal attitudes, such as work ethic, motivation, or stability, can significantly affect the demand for and underwriting results
from disability products.
Both economic and societal factors can affect claim incidence and recoveries for disability insurance. Claim incidence and
claim recovery rates may be influenced by, among other factors, the rate of unemployment and consumer confidence. Claim
incidence and claim recovery rates may also be influenced by the emergence of new infectious diseases or illnesses. Claim
durations may be extended by medical improvements which could extend life expectancies. The relationship between these and
other factors and overall incidence is very complex and will vary due to contract design features and the degree of expertise
within the insuring organization to price, underwrite, and adjudicate the claims.
Within the group disability market, pricing and renewal actions can be taken to react to higher claim rates. However, 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
pricing actions available in the individual disability market differ among product classes. Our individual noncancelable
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disability policies, in which the policy is guaranteed to be renewable through the life of the policy at a fixed premium, do not
permit us to adjust premiums on our in-force business. Guaranteed renewable contracts that are not noncancelable can be re-
priced to reflect adverse experience, but rate changes cannot be implemented as quickly as in the group disability market.
Long-term Care Insurance
Long-term care insurance can be affected by a number of demographic, medical, economic, governmental, competitive, and
other factors. Because long-term care insurance is a relatively new product for the insurance industry and is long-duration in
nature, there is not as much historical data as is available for our other products. This creates a level of uncertainty in properly
pricing the product and using appropriate assumptions when establishing reserves. Long-term care insurance is guaranteed
renewable and can be re-priced to reflect adverse experience, but the re-pricing is subject to regulatory approval by our states of
domicile and may also be subject to approval by jurisdictions in which our policyholders reside. The rate approval process can
affect the length of time in which the re-pricing can be implemented, if at all, and the rate increases ultimately approved may be
favorable or unfavorable relative to assumptions used to establish our reserves. We monitor our own experience and industry
studies concerning morbidity, mortality, and policyholder terminations to understand emerging trends. Changes in actual
experience relative to our expectations may adversely affect our profitability and reserves. Mortality continues to improve for
the general population, and life expectancy has increased, which could lengthen the time a claimant receives long-term care
benefits and may subject more policyholders to advanced aging and an associated increase in claims incidence. Medical
advances may continue to have an impact on claim incidence and duration, both favorable and unfavorable. Due to the long
duration of the product, the timing and/or amount of our investment cash flows are difficult to match to those of our maturing
liabilities. Sustained periods of low or declining interest rates could result in increases in reserves and adversely affect our
results of operations.
Group Life Insurance
Group life insurance may be affected by the characteristics of the employees insured, the amount of insurance employees may
elect voluntarily, our risk selection process, our ability to retain employer groups with favorable risk characteristics, the
geographical concentration of employees, and mortality rates. Claim incidence may also be influenced by unexpected
catastrophic events such as terrorist attacks, natural disasters, and pandemic health events, which may also affect the cost of and
availability of reinsurance coverage.
Voluntary Products
Voluntary products sold in the workplace may be affected by the characteristics of the employees insured, the level of employee
participation and the amount of insurance the employees elect, our risk selection process, and our ability to retain employer
groups with favorable risk characteristics. Our voluntary life insurance products generally include interest sensitive forms of
insurance which contain a guaranteed minimum interest crediting rate. It is possible that our investment returns could be lower
than the guaranteed crediting rate. The non-life contracts are guaranteed renewable and can be repriced to reflect adverse
experience, but rate changes cannot be implemented as quickly as for group disability and group life products.
See "Reserves for Policy and Contract Benefits" contained herein in Item 1 and "Executive Summary" and "Critical Accounting
Estimates" included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained
herein in Item 7 for further discussion.
Changes in accounting standards may materially affect our financial statements.
Our financial statements are subject to the application of generally accepted accounting principles, in the United States, the
United Kingdom, and Poland, which are periodically revised and/or expanded. Accordingly, we are required to adopt new or
revised accounting standards issued by recognized authoritative bodies, including the U.S. Financial Accounting Standards
Board (FASB), the U.K. Accounting Standards Board (ASB), and the NAIC. Accounting standards issued by the FASB and
ASB may be influenced by the International Accounting Standards Board (IASB). Future accounting standards we adopt,
including the FASB's accounting standard update related to long-duration target improvements for insurance contracts, will
change current accounting and disclosure requirements applicable to our financial statements. Such changes may have a
material effect on our reported results of operations or financial condition.
See Note 1 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for additional information regarding
accounting updates.
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Our risk management program may leave us exposed to unidentified or unanticipated risk, which could negatively
affect our business.
We have devoted significant resources to develop our enterprise risk management program, which has the objective of
managing our strategic, market, credit, insurance, and operations risks, which ultimately impact our reputational risk. However,
our program may not be comprehensive, and our methods for monitoring and managing risk may not fully predict or mitigate
future exposures. See "Quantitative and Qualitative Disclosures About Market Risk" contained herein in Item 7A for further
information about our risk management program.
Litigation and contingencies are common in our businesses and may result in financial losses and/or harm to our
reputation.
We are, and in the future may be, defendants in a number of litigation matters, and the outcome of this litigation is uncertain.
Some of these proceedings have been brought on behalf of various alleged classes of complainants. Plaintiffs in class action
and other lawsuits against us may seek very large and/or indeterminate amounts, including punitive and treble damages. 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. An adverse outcome in one or more of these actions may, depending on the nature, scope and amount of the ruling,
materially and adversely affect our results of operations or financial condition, encourage other litigation, and limit our ability
to write new business, particularly if the adverse outcomes negatively impact certain of our ratings.
As part of our normal operations in managing claims, we are engaged in claim litigation where disputes arise as a result of a
denial or termination of benefits. Typically those 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 financial condition. Nevertheless, given the inherent unpredictability of litigation, it is
possible that an adverse outcome in certain claim litigation involving punitive damages may, from time to time, have a material
adverse effect on our results of operations. We are unable to estimate a range of reasonably possible punitive losses.
See "Critical Accounting Estimates" included in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained herein in Item 7 and Note 14 of the "Notes to Consolidated Financial Statements" contained herein in
Item 8 for additional information on legal proceedings.
Reinsurance may not be available or affordable, or reinsurers may be unwilling or unable to meet their obligations
under our reinsurance contracts, which may adversely affect our results of operations or financial condition.
As part of our overall risk management and capital management strategies, we purchase reinsurance for certain risks
underwritten by our various businesses. Market conditions beyond our control determine the availability and cost of
reinsurance. Any decrease in the amount of reinsurance will increase our risk of loss and may impact the level of capital
requirements for our insurance subsidiaries, and any increase in the cost of reinsurance will, absent a decrease in the amount of
reinsurance, reduce our results of operations. Accordingly, we may be forced to incur additional expenses for reinsurance or
may be unable to obtain sufficient reinsurance on acceptable terms, which may adversely affect our ability to write future
business, result in the assumption of more risk with respect to the policies we issue, and increase our capital requirements. The
collectibility of our reinsurance recoverable is primarily a function of the solvency of the individual reinsurers. We cannot
provide assurance that our reinsurers will pay the reinsurance recoverables owed to us or that they will pay these recoverables
on a timely basis. The insolvency of a reinsurer or the inability or unwillingness of a reinsurer to comply with the terms of a
reinsurance contract may have an adverse effect on our results of operations or financial condition.
The effectiveness of our hedging programs may be affected by changes in the economic environment, changes in interest
rates, capital market volatility, non-performance by our counterparties, changes in the level of required collateral, or
regulation, which may adversely affect our results of operations, financial condition, or liquidity.
We use derivative financial instruments to help us manage certain risks related to our business operations, primarily interest rate
risk, risk related to matching duration for our assets and liabilities, and foreign currency risk. Factors associated with derivative
financial instruments could adversely affect our results of operations, financial condition, or liquidity. Ineffectiveness of our
hedges due to changes in expected future events, such as the risk created by uncertainty in the economic environment or if our
counterparties fail or refuse to honor their obligations under these derivative instruments, may have a material adverse effect on
our results of operations or financial condition. Capital market turmoil may result in an increase in the risk of non-performance
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by our counterparties, many of which are financial institutions. Non-performance by our counterparties may force us to unwind
hedges, and we may be unable to replace the hedge, thereby leaving the risk unhedged. Under the terms of our hedging
contracts, we are required to post collateral and to maintain a certain level of collateral, which may adversely affect our
liquidity and could subject us to the credit risk of the counterparty to the extent it holds such collateral. Changes in regulations
may have an adverse effect on our ability to execute hedging strategies due to the increased economic cost of derivatives,
primarily as a result of more restrictive collateral requirements. We are monitoring the developments surrounding the transition
from the London Interbank Offered Rate (LIBOR) expected to occur in 2021 and the impact, if any, to our existing and future
derivative financial instruments and our hedging programs.
Currency translation could materially impact our reported operating results.
The functional currency of our U.K. and Polish operations is the British pound sterling and the Polish zloty, respectively.
Fluctuations in exchange rates have an effect on our reported financial results, which may be unfavorably impacted when the
functional currency weakens. However, it is important to distinguish between translating and converting foreign currency.
Except for a limited number of transactions, we do not actually convert our functional currency 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 or
Poland.
Unum Group depends on the ability of its subsidiaries to transfer funds to it so that it can meet its obligations and pay
dividends. Our ability to transfer funds to Unum Group may be impaired by adverse financial results or a change in
capital requirements. Accordingly, internal sources of capital and liquidity may not always be sufficient. If we need to
seek external capital, adverse market conditions may affect our access to capital or our cost of capital.
Unum Group is a holding company for insurance and other subsidiaries and has no significant operations of its own. Our
insurance subsidiaries are subject to insurance laws and regulatory limitations on the payment of dividends and on other
transfers of funds or other assets to affiliates, including to Unum Group. The level of earnings and capital in our subsidiaries,
as well as business conditions and rating agency considerations, could impact our insurance and other subsidiaries' ability to
pay dividends or to make other transfers of funds to Unum Group, which could impair our ability to pay dividends to Unum
Group's common stockholders, meet our debt and other payment obligations, and/or repurchase shares of Unum Group's
common stock. The use of funds held by Unum Group as consideration in any acquisition could affect our capital plan and
render those funds unavailable for other corporate purposes.
A change 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. Deterioration in the credit market, which could delay our ability to
sell our positions in certain of our fixed maturity securities in a timely manner, could also negatively impact our cash flows.
Regulatory changes such as those discussed herein in this Item 1A may impose higher capital or reserve requirements on our
insurance subsidiaries, increase collateral requirements for certain of our derivatives transactions, and/or implement other
requirements which could unfavorably affect our liquidity. Without sufficient liquidity, our ability to maintain and grow our
operations would be limited. If our internal sources of liquidity prove to be insufficient, we may be unable to successfully
obtain additional financing and capital on favorable terms, or at all, which may adversely affect us.
If our financial results are unfavorable, we may need to increase our capital in order to maintain our credit ratings or satisfy
regulatory requirements. Maintaining appropriate levels of statutory surplus is considered important not only by us but by
insurance regulatory authorities in the U.S., the PRA in the U.K., the KNF in Poland, and the rating agencies that rate insurers'
claims-paying abilities and financial strength. Failure to maintain certain levels of statutory surplus could result in increased
regulatory scrutiny, action by regulatory authorities, or a downgrade by the rating agencies. Need for additional capital may
limit a subsidiary's ability to distribute funds to our holding companies.
Obtaining financing for even a small amount of capital could be challenging in unfavorable market conditions and during
periods of economic uncertainty. The markets may exert downward pressure on availability of liquidity and credit capacity for
certain issuers. The availability of financing will depend on a variety of factors such as market conditions, the general
availability of credit, the overall availability of credit to the financial services industry, our credit ratings and credit capacity,
and the possibility that customers or lenders could develop a negative perception of our financial prospects. Similarly, our
access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. Raising capital in
unfavorable market conditions could increase our interest expense or negatively impact our shareholders through increased
dilution of their common stock in Unum Group.
28
We rely on our credit facility as a potential source of liquidity. Our right to borrow funds under this facility is subject to
financial covenants, negative covenants, and events of default. Our ability to borrow under this facility is also subject to the
continued willingness and ability of the lenders to provide funds. Our failure to comply with the covenants in the credit facility
or the failure of lenders to fund their lending commitments would restrict our ability to access this facility when needed, with a
resulting adverse effect on our results of operations, financial condition, or liquidity.
We are also monitoring the developments surrounding the transition from LIBOR to determine the impact, if any, to our
existing and future debt arrangements.
See "Regulation" contained herein in Item 1,"Liquidity and Capital Resources" included in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained herein in Item 7, and Notes 8 and 15 of the "Notes to
Consolidated Financial Statements" contained herein in Item 8 for further discussion.
We have assets which may not be fully recoverable or realizable, which could adversely affect our results of operations
or financial condition.
If our business does not perform well or as initially anticipated in our assumptions, we may be required to accelerate
amortization or recognize an impairment loss on intangible assets or long-lived assets or to establish a valuation allowance
against the deferred income tax asset.
We have intangible assets such as deferred acquisition costs (DAC), value of business acquired (VOBA), and goodwill. DAC
and VOBA are amortized based primarily upon expected future premium income of the related insurance policies.
Recoverability testing for DAC and VOBA is performed on an annual basis. Insurance contracts are grouped on a basis
consistent with our manner of acquiring, servicing, and measuring profitability of the contracts. If recoverability testing
indicates that either DAC and/or VOBA are not recoverable, the deficiency is charged to expense.
Goodwill is not amortized, but on an annual basis, or more frequently if necessary, we review the carrying amount of goodwill
for indications of impairment, considering in that review the financial performance and other relevant factors. In accordance
with accounting guidance, we test for impairment at either the operating segment level or one level below. In addition, certain
events including, but not limited to, a significant adverse change in legal factors or the business environment, an adverse action
by a regulator or rating agency, or unanticipated competition would cause us to review goodwill for impairment more
frequently than annually.
Long-lived assets, including assets such as real estate and information technology software, also require impairment testing to
determine whether changes in circumstances indicate that we may be unable to recover the carrying amount.
We assess our deferred tax assets to determine if they are realizable. Factors in our determination include the performance of
the business, including the ability to generate future taxable income. If based on available information, it is more likely than
not that the deferred income tax asset will not be realized, a valuation allowance is established with a corresponding charge to
net income.
Charges such as accelerated amortization, impairment losses, or the establishment of valuation allowances could have a
material adverse effect on our results of operations or financial condition.
See "Executive Summary" and "Critical Accounting Estimates" included in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained herein in Item 7 and Notes 1, 7, and 13 of the "Notes to Consolidated
Financial Statements" contained herein in Item 8.
The continued threat of terrorism and ongoing military actions may adversely affect the value of certain assets in our
investment portfolio, disrupt our operations, or result in higher claim costs.
The continued threat of terrorism, both within the U.S. and abroad, ongoing military actions, and heightened security measures
in response to these types of threats may cause significant volatility in the global financial markets and result in loss of life,
property damage, business disruption, and reduced economic activity. Some of the assets in our investment portfolio may be
adversely affected by declines in the credit and equity markets and reduced economic activity caused by the continued threat of
terrorism. Terrorist actions also could disrupt our operations centers in the U.S. or abroad. In addition, the occurrence of
terrorist actions could result in higher claims under our insurance policies than anticipated. Beyond obtaining insurance
coverage for our facilities, there are few, if any, commercial options through which to transfer the exposure from extreme events
29
away from us. We purchase reinsurance protection against catastrophic disaster events, including terrorism. The continued
threat of terrorism could result in increased reinsurance prices and reduced insurance coverage and potentially cause us to retain
more risk than we otherwise would retain if we were able to obtain reinsurance at lower prices. See "Reinsurance" contained
herein in Item 1 for further discussion.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
As of December 31, 2018, we owned approximately 2.3 million square feet of office space, comprised of five campuses located
in Chattanooga, Tennessee; Portland, Maine; Columbia, South Carolina; Baton Rouge, Louisiana; and Dorking in the United
Kingdom. In addition, as of December 31, 2018, we leased approximately 0.2 million square feet of office space in Worcester,
Massachusetts and approximately 0.7 million square feet in various other locations throughout the United States, the United
Kingdom, Ireland, and Poland. All of the properties owned or leased are used by one or more of all five reporting segments,
depending on the location. We believe our properties and facilities are suitable and adequate for current operations.
ITEM 3. LEGAL PROCEEDINGS
Refer to Note 14 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for information on legal
proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Common stock of Unum Group is traded on the New York Stock Exchange. The stock symbol is UNM. Quarterly dividends
declared and paid per share of common stock are as follows:
2018
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
2017
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
$
$
0.26
0.26
0.23
0.23
0.23
0.23
0.20
0.20
Our board of directors has the authority to declare cash dividends on shares of our common stock. In determining dividends, the
board takes into account a number of factors including our financial condition and results of operations, regulatory limitations on
the payment of dividends from subsidiaries, cash requirements, general economic conditions, and other factors the board may
deem relevant. For information on restrictions relating to our subsidiaries' ability to pay dividends to Unum Group and certain
of its intermediate holding company subsidiaries, see "Liquidity and Capital Resources - Cash Available from Subsidiaries"
contained herein in Item 7 and Note 15 of the "Notes to Consolidated Financial Statements" contained herein in Item 8. For
information relating to compensation plans under which Unum Group's equity securities are authorized for issuance, see Item 12
contained herein.
As of February 15, 2019, there were 9,157 registered holders of common stock.
The following table provides information about our share repurchase activity for the fourth quarter of 2018:
October 1 - October 31, 2018
November 1 - November 30, 2018
December 1 - December 31, 2018
Total
(a) Total
Number of
Shares
Purchased
(b) Average
Price Paid
per Share (1)
$
438,628
2,507,394
1,258,211
4,204,233
35.46
36.52
34.08
(c) Total Number of
Shares Purchased
as Part of Publicly
Announced
Program (2)
(d) Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under
the Program (2)
$
438,628
2,507,394
1,258,211
4,204,233
634,410,786
542,845,914
499,965,321
(1) The average price paid per share excludes the cost of commissions.
(2) In May 2018, our board of directors authorized the repurchase of up to $750 million of Unum Group's common stock
through November 24, 2019.
31
ITEM 6. SELECTED FINANCIAL DATA
(in millions of dollars, except share data)
Income Statement Data
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 Benefits1
Commissions
Interest and Debt Expense
Other Expenses2
Total Benefits and Expenses
Income Before Income Tax
Income Tax
Net Income
Balance Sheet Data
Assets
Long-term Debt
Accumulated Other Comprehensive Income (Loss)
Other Stockholders' Equity
Total Stockholders' Equity
Per Share Data
Net Income
Basic
Assuming Dilution
Stockholders' Equity
Cash Dividends
At or for the Year Ended December 31
2016
2015
2017
2014
2018
$ 8,986.1
2,453.7
(39.5)
198.2
11,598.5
$ 8,597.1
2,451.7
40.3
197.7
11,286.8
$ 8,357.7
2,459.0
24.2
205.6
11,046.5
$ 8,082.4
2,481.2
(43.8)
211.5
10,731.3
$ 7,797.2
2,492.2
16.1
219.0
10,524.5
8,020.4
1,108.4
167.3
1,674.6
10,970.7
627.8
104.4
7,055.7
1,060.8
159.9
1,606.4
9,882.8
1,404.0
409.8
6,941.8
1,026.7
166.0
1,564.3
9,698.8
1,347.7
416.3
6,782.8
996.3
152.8
1,561.1
9,493.0
1,238.3
371.2
7,310.8
935.3
167.5
1,568.9
9,982.5
542.0
139.9
$
523.4
$
994.2
$
931.4
$
867.1
$
402.1
$ 61,875.6
$ 64,013.1
$ 61,941.5
$ 60,563.6
$ 62,422.5
$ 2,971.3
$ 2,738.4
$ 2,999.4
$ 2,449.4
$ 2,601.6
$
(814.2) $
9,436.0
$ 8,621.8
127.5
9,447.4
$ 9,574.9
$
(51.0) $
9,019.0
$ 8,968.0
16.1
8,647.8
$ 8,663.9
$
166.4
8,355.5
$ 8,521.9
$
$
$
$
2.38
2.38
40.19
0.98
$
$
$
$
4.39
4.37
43.02
0.86
$
$
$
$
3.96
3.95
39.02
0.77
$
$
$
$
3.51
3.50
35.96
0.70
$
$
$
$
1.57
1.57
33.78
0.62
Weighted Average Common Shares Outstanding
Basic (000s)
Assuming Dilution (000s)
219,635.6
220,058.6
226,492.4
227,335.2
235,445.7
235,979.2
246,986.7
247,854.7
255,525.9
256,652.8
32
1 Includes reserve increases of $750.8 million and $698.2 million in 2018 and 2014, respectively, related to our long-term care
closed block business. See Note 6 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further
discussion of the 2018 reserve increase.
2 Includes the net change in deferred acquisition costs as well as compensation expense and other expenses. Includes $64.4
million in 2014 related to a settlement loss for a pension plan amendment.
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The discussion and analysis presented in this section should be read in conjunction with the "Cautionary Statement Regarding
Forward-Looking Statements" included below the Table of Contents, "Risk Factors" included in Item 1A, "Selected Financial
Data" included in Item 6, and the Consolidated Financial Statements and notes thereto included in Item 8.
Executive Summary
2018 Operating Performance and Capital Management
For 2018, we reported net income of $523.4 million, or $2.38 per diluted common share, compared to net income of $994.2
million, or $4.37 per diluted common share, in 2017. Net income includes net realized investment gains and losses. Included in
the 2018 results is a reserve increase related to our long-term care block of business of $750.8 million before tax and $593.1
million after tax, or $2.70 per diluted common share. Excluding these items, after-tax adjusted operating income for 2018 was
$1,145.0 million, or $5.20 per diluted common share. Included in the 2017 results are a loss from a guaranty fund assessment
related to an unaffiliated insurer that was declared insolvent of $20.6 million before tax and $13.4 million after tax, or $0.06 per
diluted common share, a 2017 reserve increase related to unclaimed death benefits of $39.0 million before tax and $25.4 million
after tax, or $0.11 per diluted common share, and a net tax benefit related to U.S. tax reform of $31.5 million, or $0.14 per
diluted common share. Excluding these items, after-tax adjusted operating income for 2017 was $976.2 million, or $4.29 per
diluted common share. See "Long-term Care Reserve Increase," "Unclaimed Death Benefits Reserve Increase," "U.S. Tax
Reform," "Reconciliation of Non-GAAP and Other Financial Measures," and "Consolidated Operating Results" contained herein
in this Item 7 for further discussion and a reconciliation of these items.
Our Unum US segment reported an increase in adjusted operating income of 0.5 percent in 2018 compared to 2017, with growth
in premium income, partially offset by lower net investment income. Included in adjusted operating income for the fourth
quarter of 2017 is a reserve release of $19.5 million in the individual disability product line resulting from our annual review of
reserve adequacy, which reflects the recognition of updated morbidity assumptions in our disabled life reserves. The benefit
ratio for our Unum US segment for 2018 was 67.2 percent, compared to 67.4 percent. Unum US sales decreased 1.3 percent in
2018 compared to 2017. Overall persistency was consistent with our expectations with favorable persistency in our group
product lines and less favorable persistency in our supplemental and voluntary product lines.
Our Unum International segment reported an increase of 2.0 percent in adjusted operating income, as measured in U.S. dollars.
Our Unum UK line of business reported a decrease of 3.0 percent in adjusted operating income compared to 2017, as measured
in local currency, due primarily to lower net investment income, partially offset by an increase in premium income. The benefit
ratio for our Unum UK line of business was 74.4 percent in both 2018 and 2017. Unum UK sales, as measured in local currency,
decreased 6.4 percent in 2018 compared to 2017. Persistency was favorable relative to the prior year and is consistent with our
expectations. The results of our Unum Poland line of business were not material to our 2018 results of operations.
Our Colonial Life segment reported an increase in adjusted operating income of 3.1 percent in 2018 compared to 2017 due to
growth in premium income and net investment income. The 2018 benefit ratio for Colonial Life was 51.4 percent, which was
consistent with 2017. Colonial Life sales increased 8.0 percent in 2018 compared to 2017. Persistency was unfavorable relative
to the prior year but is consistent with our expectations.
Our Closed Block segment reported an increase in adjusted operating income of 1.3 percent in 2018 compared to 2017 due
primarily to an increase in net investment income and overall favorable benefits experience, partially offset by lower premium
income. Benefits experience for individual disability remains within our range of expectations and was favorable in 2018
compared to 2017. Benefits experience in our long-term care line of business, excluding the reserve increase, was consistent
with our expectations.
Although our profit margins continue to be pressured by the impact of the low interest rate environment on our net investment
income yields, our invested asset quality remains strong. The net unrealized gain on our fixed maturity securities was $2.7
billion at December 31, 2018, compared to $5.7 billion at December 31, 2017, with the decrease due to higher credit spreads and
U.S. Treasury rates during 2018. The earned book yield on our investment portfolio was 5.15 percent for 2018 compared to a
yield of 5.23 percent for 2017.
We believe our capital and financial positions are strong. At December 31, 2018, the RBC ratio for our traditional U.S.
insurance subsidiaries, calculated on a weighted average basis using the NAIC Company Action Level formula, was
34
approximately 370 percent, which is in line with our expectations but lower relative to the prior year as a result of the higher
RBC factors adopted by the NAIC in 2018 in response to the lower U.S. statutory income tax rate. During 2018, we repurchased
8.7 million shares of Unum Group common stock under our share repurchase program, at a cost of approximately $351 million.
Our weighted average common shares outstanding, assuming dilution, equaled 220.1 million for 2018 compared to 227.3 million
for 2017, reflecting our capital management strategy of returning capital to shareholders through repurchases of our common
stock. As of December 31, 2018, Unum Group and our intermediate holding companies held fixed maturity securities, short-
term investments, and cash of $602 million.
Long-term Care Reserve Increase
Policy reserves for our long-term care block of business are determined using the gross premium valuation method and, prior to
the third quarter of 2018, were valued based on assumptions established as of December 31, 2014, the date of our last
assumption update under loss recognition. Gross premium valuation assumptions do not change after the date of loss recognition
unless reserves are again determined to be deficient. We undertake a review of policy reserve adequacy annually during the
fourth quarter of each year, or more frequently if appropriate, using best estimate assumptions as of the date of the review.
During the third quarter of 2018, we completed our annual review of policy reserve adequacy, which incorporated our most
recent experience and included a review of all assumptions. The review utilized internal and external data and outside consulting
firms for quality assurance and industry benchmarking. Based on our analysis, during the third quarter of 2018, we updated our
reserve assumptions and determined that our policy and claim reserves should be increased by $750.8 million, or $593.1 million
after-tax, to reflect our current estimate of future benefit obligations. This increase was primarily driven by the update to our
liability and interest rate assumptions, particularly claims incidence and claim termination rates, which resulted in an increase to
reserves of approximately $2.2 billion. Partially offsetting the increase was the update to our assumptions for premium rate
increases which decreased reserves approximately $1.4 billion, resulting in the net increase to reserves of $750.8 million. See
"Trends in Key Assumptions" contained herein in the "Critical Accounting Estimates" of this Item 7 for further discussion of the
assumptions used in our long-term care reserve update.
2018 and 2016 Acquisitions of Business
In November 2018, we acquired 100 percent of the shares and voting interests in Jaimini Health, Inc. (Jaimini Health), a dental
health maintenance organization. The acquisition of Jaimini Health will broaden our employee benefit dental offerings in the
U.S., particularly in the state of California and is reported in our Unum US segment.
In October 2018, we acquired 100 percent of the shares and voting interests in Pramerica Zycie TUiR S.A. (which we have
subsequently renamed Unum Zycie TUiR S.A. and refer to as Unum Poland), a financial protection benefits provider in Poland.
This acquisition will expand our European presence, which we believe to be an attractive market for financial protection
benefits.
In January 2018, we acquired 100 percent of the shares and voting interests in Leavelogic, Inc (Leavelogic), a leave management
technology provider. The acquisition of Leavelogic will enhance our current leave management offerings by providing tools for
employers and employees to better manage the family leave process and is reported in our Unum US segment.
In August 2016, we acquired 100 percent of the shares and voting interests in H&J Capital, L.L.C., parent of Starmount Life
Insurance Company and AlwaysCare Benefits (which collectively we refer to as Starmount). Starmount Life Insurance
Company is an independent provider of dental and vision insurance in the U.S. workplace, and AlwaysCare Benefits is a
nationally licensed, third-party administrator. The acquisition of Starmount broadens our employee benefit offerings in the U.S.
Starmount's dental and vision products and new dental and vision products marketed by Unum US are reported in our Unum US
segment within our supplemental and voluntary product lines. Colonial Life dental and vision products were introduced in 2018
and are reported in our Colonial Life segment within our accident, sickness, and disability product line.
See Note 13 of the " Notes to Consolidated Financial Statements” contained herein in Item 8 for further details.
Unclaimed Death Benefits (UDB) 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
35
implementing this on a forward-looking basis, in 2013 we began an initiative to search for potential claims from previous years.
During 2013, we completed our assessment of benefits which we estimated would be paid under this initiative, and as such,
established additional reserves for payment of these benefits.
Similar to other insurers, we have undergone 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. In the fourth quarter of 2017, we started
the process to reach a Global Resolution Agreement with the third party regarding settlement of the examination, which we
finalized in January of 2018. During the fourth quarter of 2017, we established reserves which reflected our estimate of the
liability expected to be paid as we execute on the terms of the settlement. Claim reserves were increased $18.5 million for
Unum US group life, $8.1 million for Unum US voluntary life, and $12.4 million for Colonial Life voluntary life, for a total
reserve increase of $39.0 million before tax and $25.4 million after tax.
U.S. Tax Reform
On December 22, 2017, the U.S. Federal government enacted a tax bill, H.R.1, An Act to Provide Reconciliation Pursuant to
Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, more commonly known as the Tax Cuts and
Jobs Act (TCJA). The TCJA, among other things, included a reduction to the U.S. corporate statutory tax rate from 35 percent to
21 percent and a tax on undistributed and previously untaxed foreign earnings and profits (Deemed Repatriation Tax) at reduced
rates. As a result of these changes, we recognized a tax benefit of $97.9 million in 2017 related to the revaluation of our net
deferred tax liabilities associated with our U.S. operations to the newly enacted U.S. corporate tax rate and a tax expense of
$66.4 million resulting from the Deemed Repatriation Tax. See "Regulation" contained herein in Item 1 and Note 7 of the
"Notes to Consolidated Financial Statements" contained herein in Item 8 for further details.
U.K. Referendum
During 2016, the U.K. held a referendum and voted to leave the EU. The U.K. subsequently invoked Article 50 of the Treaty on
European Union (EU) and is due to leave the EU on March 29, 2019. We expect to see continued dampening of growth in the
U.K. as well as earnings volatility due to the current disruption and uncertainty in the U.K. economy. We may also experience
volatility in the fair values of our investments in U.K. and EU-based issuers, but we do not expect a material increase in other-
than-temporary impairments or defaults, nor do we believe this volatility will impact our ability to hold these investments. The
magnitude and longevity of potential negative economic impacts on our growth will depend on whether an agreement is reached
between the U.K. and EU as a result of exit negotiations and, if reached, the nature of the agreement and the resulting response
of the U.K. marketplace. There are currently no indications that capital requirements for our U.K. operations will change, but
economic conditions may cause volatility in our solvency ratios. Our reported consolidated financial results may continue to be
impacted by fluctuations in the British pound sterling to dollar exchange rate. See "Regulation" contained herein in Item 1 and
"Unum International Segment" contained herein this Item 7.
Consolidated Company Outlook for 2019
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. 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. Our strategy is underpinned by our core values and is centered on market growth through the expansion of our
product portfolio, distribution system, and geographic footprint, and enhancing the customer experience through efficiency,
simplification, and investment in digital capabilities.
Our outlook for 2019 is for continued solid premium growth trends in our core businesses, with stable persistency and a
disciplined approach to sales growth. We expect to have generally stable benefits experience due to our focus on disciplined
pricing, risk selection, and management of renewals. We will maintain our commitment to expense discipline and improving our
operational efficiencies.
The low interest rate environment continues to place pressure on our profit margins. Our reported consolidated financial results
may also continue to be unfavorably impacted by political and economic uncertainty in the U.K., specifically lower interest
rates, wage inflation and employer spending, and claims volatility. We expect our effective tax rate for 2019 to be approximately
20 percent. The reduction in the corporate tax rate resulting from tax reform has improved the statutory earnings and cash
generation of our insurance subsidiaries and our capital position remains strong.
36
We continue to analyze and employ strategies that we believe will help us navigate the current environment and allow us to
maintain solid operating margins and significant financial flexibility to support the needs of our businesses, while also
continuing to return capital to our shareholders and exploring merger and acquisition opportunities to enhance our business lines.
We have substantial leverage to rising interest rates and an improving economy which generates payroll growth and wage
inflation. We believe that consistent operating results, combined with the implementation of strategic initiatives and the effective
deployment of capital, will allow us to meet our long-term financial objectives.
Further discussion is included in "Reconciliation of Non-GAAP Financial Measures," "Consolidated Operating Results,"
"Segment Results," "Investments," and "Liquidity and Capital Resources" contained herein in this Item 7 and in the "Notes to
Consolidated Financial Statements" contained herein in Item 8.
Reconciliation of Non-GAAP and Other 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
measure of "after-tax adjusted operating income" differs from net income as presented in our consolidated operating results and
income statements prepared in accordance with GAAP due to the exclusion of net realized investment gains and losses and
certain other items as specified in the reconciliations below. We believe after-tax adjusted operating income is a better
performance measure and 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 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.
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. We exclude these items as
we believe them to be infrequent or unusual in nature, 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.
See "Executive Summary" contained herein in Item 7 and Notes 6, 7, and 14 of the "Notes to Consolidated Financial Statements"
contained herein in Item 8 for further discussion regarding the impacts of the long-term care reserve increase, the TCJA, the
unclaimed death benefit reserve increase, and the loss from a guaranty fund assessment, respectively.
37
A reconciliation of GAAP financial measures to our non-GAAP financial measures is as follows:
2018
Year Ended December 31
2017
2016
(in millions)
523.4
$
per share *
2.38
$
(in millions)
994.2
$
per share *
4.37
$
(in millions)
931.4
$
per share *
3.95
$
(28.5)
(0.12)
25.3
0.11
15.8
0.07
—
—
—
—
—
—
(593.1)
(2.70)
(13.4)
(0.06)
(25.4)
(0.11)
31.5
—
0.14
—
—
—
—
—
—
—
—
—
$
1,145.0
$
5.20
$
976.2
$
4.29
$
915.6
$
3.88
Net Income
Excluding:
Net Realized Investment Gain (Loss)
(net of tax expense (benefit) of
$(11.0); $15.0; $8.4)
Loss from Guaranty Fund
Assessment (net of tax benefit of $-;
$7.2; $-)
Unclaimed Death Benefits Reserve
Increase (net of tax benefit of $-;
$13.6; $-)
Net Tax Benefit from Impacts of
TCJA
Long-term Care Reserve Increase
(net of tax benefit of $157.7; $-; $-)
After-tax Adjusted Operating
Income
* Assuming Dilution
We measure and analyze our segment performance on the basis of "adjusted operating revenue" and "adjusted operating income"
or "adjusted operating loss", which 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 and certain other items as specified in the
reconciliations below. These performance measures are in accordance with GAAP guidance for segment reporting, but they
should not be viewed as a substitute for total revenue, income before income tax, or net income.
A reconciliation of total revenue to "adjusted operating revenue" and income before income tax to "adjusted operating income" is
as follows:
2018
Year Ended December 31
2017
(in millions of dollars)
$
11,286.8
$
11,598.5
(39.5)
11,638.0
627.8
(39.5)
—
—
(750.8)
1,418.1
$
$
$
40.3
11,246.5
1,404.0
40.3
(20.6)
(39.0)
—
1,423.3
$
$
$
2016
11,046.5
24.2
11,022.3
1,347.7
24.2
—
—
—
1,323.5
Total Revenue
Excluding:
Net Realized Investment Gain (Loss)
Adjusted Operating Revenue
Income Before Income Tax
Excluding:
Net Realized Investment Gain (Loss)
Loss from Guaranty Fund Assessment
Unclaimed Death Benefits Reserve Increase
Long-term Care Reserve Increase
Adjusted Operating Income
$
$
$
$
38
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 in Item 8.
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 $43.3 billion and $42.1 billion at December 31, 2018 and 2017, respectively, or approximately 81.3
percent and 77.4 percent of our total liabilities, respectively. Reserves ceded to reinsurers were $7.2 billion at both December
31, 2018 and 2017 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 non-interest
sensitive products, including our individual disability and voluntary benefits products in our Unum US segment; individual
disability and life products in our Unum International 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. Depending on the funding mechanism, a full
policy reserve is held during disability reflecting continued funding of the full policy reserve during a disability claim, or a
fractional policy reserve is held reflecting that the individual policyholder would need to recover before he or she can again
generate future claims for a separate occurrence. 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 either reach the terminal age for coverage, die,
or voluntarily lapse the policy. Policy reserves for Unum US, Unum International, and Colonial Life products are determined
39
using the net level premium method as prescribed by GAAP. In applying this method, we use, as applicable by product type,
morbidity and mortality incidence rate assumptions, claim resolution rate assumptions, and policy persistency assumptions,
among others, to determine our expected future claim payments and expected future premium income. We then apply an
interest, or discount, rate to determine the present value of the expected future claims and claim expenses we will pay and the
expected future premiums we will receive, with a provision for profit allowed.
Policy reserves for our Closed Block segment include certain older policy forms for individual disability, individual and group
long-term care, and certain other products, all of which are no longer actively marketed. The reserves for individual disability
and individual and group long-term care are determined using the gross premium valuation method. Key assumptions are
persistency, mortality and morbidity, claim incidence, claim resolution rates, commission rates, and maintenance expense rates.
For long-term care, premium rate increases are also a key assumption. 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 in the future.
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 $5.9 billion on a gross basis. We have ceded
$5.1 billion of reserves related to the other products, which are primarily comprised of 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, the age, and, as appropriate, the occupation and cause of
disability 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, discount rate, and policy benefit offsets, including those for social security and
other government-based welfare benefits. 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, these reserves are
also established 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 loss
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.
We use a tabular reserve methodology on reported claims for our Unum US group long-term disability and individual disability
claims as well as for our Closed Block individual disability and group and individual long-term care claims. 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, as well as assumptions regarding claim duration, discount rate, and policy
benefit offsets. 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 on
40
IBNR claims, is determined in aggregate using a paid loss development method rather than on the individual claimant basis that
we use for reported claims on long-term products. 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 for Unum US group life and accidental death and dismemberment 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 paid loss development method, and the waiver of
premium benefits reserve is calculated using the tabular reserve methodology.
Claim reserves supporting the group and individual dental and vision products reported in our Unum US and Colonial Life
segments have a short claim payout period. As a result, the reserves, which primarily represent IBNR and a small amount of
claims pending payment, are calculated using the paid loss development method.
Claim reserves supporting our Unum International segment are calculated using generally the same methodology that we use for
Unum US disability and group term life reserves. Claim reserves for our Unum UK group dependent life product are calculated
using discounted cash flows, based on our assumptions for claim duration and discount rates. The assumptions used in
calculating claim reserves for this segment are based on standard country-specific industry experience, adjusted for our 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 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.
41
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 the expected benefits payable under each incurred claim, along with other expenses associated
with the payment of the claims. 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. Impacting year over year comparability of policy and claim
reserves in the following chart is the 2018 long-term care reserve increase. See "Executive Summary" contained herein in this
Item 7 and Note 6 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
(in millions of dollars)
December 31, 2018
Gross
Claim Reserves
Policy
Reserves
%
Incurred
IBNR
%
Total
Total
Reinsurance
Ceded
Total Net
Group Disability
$
—
—% $ 5,900.0
$
670.8
28.4% $ 6,570.8
$
71.0
$ 6,499.8
Group Life and Accidental Death &
Dismemberment
Individual Disability
Voluntary Benefits
Dental and Vision
Unum US Segment
52.9
518.4
1,643.9
—
0.3
2.6
8.1
—
750.7
1,357.8
49.0
0.1
217.8
137.1
58.1
14.5
4.2
6.4
0.5
0.2
1,021.4
2,013.3
1,751.0
14.6
7.1
217.1
27.1
0.2
1,014.3
1,796.2
1,723.9
14.4
2,215.2
11.0
8,057.6
1,098.3
39.7
11,371.1
322.5
11,048.6
Unum International Segment
175.7
0.9
1,838.4
115.0
8.4
2,129.1
84.6
2,044.5
Colonial Life Segment
2,112.5
10.5
292.6
131.4
1.8
2,536.5
8.0
2,528.5
Individual Disability
Long-term Care
Other
Closed Block Segment
332.2
9,463.2
5,869.5
15,664.9
1.6
46.9
29.1
77.6
9,085.0
1,787.6
187.6
11,060.2
199.6
235.7
120.2
555.5
40.1
8.7
1.3
9,616.8
11,486.5
6,177.3
1,646.6
7,970.2
39.9
11,446.6
5,119.8
1,057.5
50.1
27,280.6
6,806.3
20,474.3
Subtotal
$ 20,168.3
100.0% $ 21,248.8
$ 1,900.2
100.0%
43,317.3
7,221.4
36,095.9
Adjustment Related to Unrealized
Investment Gains and Losses
Consolidated
3,220.3
261.4
2,958.9
$ 46,537.6
$
7,482.8
$ 39,054.8
42
December 31, 2017
Gross
Claim Reserves
Policy
Reserves
%
Incurred
IBNR
%
Total
Total
Reinsurance
Ceded
Total Net
Group Disability
$
—
—% $ 6,047.0
$
624.2
28.7% $ 6,671.2
$
73.8
$ 6,597.4
Group Life and Accidental Death &
Dismemberment
Individual Disability
Voluntary Benefits
Dental and Vision
Unum US Segment
54.9
533.4
1,566.7
—
0.3
2.8
8.3
—
735.5
1,318.0
46.7
0.7
208.0
137.6
61.0
11.3
4.1
6.3
0.5
0.1
998.4
1,989.0
1,674.4
12.0
5.2
207.5
27.3
0.3
993.2
1,781.5
1,647.1
11.7
2,155.0
11.4
8,147.9
1,042.1
39.7
11,345.0
314.1
11,030.9
Unum International Segment
18.1
0.1
1,918.3
108.3
8.7
2,044.7
87.0
1,957.7
Colonial Life Segment
1,989.4
10.5
288.3
137.2
1.8
2,414.9
8.5
2,406.4
Individual Disability
Long-term Care
Other
Closed Block Segment
418.5
8,414.3
5,894.8
14,727.6
2.2
44.5
31.3
78.0
9,407.4
1,494.8
187.3
11,089.5
219.1
150.9
120.4
490.4
41.5
10,045.0
1,619.8
8,425.2
7.1
1.2
10,060.0
6,202.5
40.3
10,019.7
5,090.6
1,111.9
49.8
26,307.5
6,750.7
19,556.8
Subtotal
$ 18,890.1
100.0% $ 21,444.0
$ 1,778.0
100.0%
42,112.1
7,160.3
34,951.8
Adjustment Related to Unrealized
Investment Gains and Losses
Consolidated
Key Assumptions
5,094.7
375.8
4,718.9
$ 47,206.8
$
7,536.1
$ 39,670.7
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 differs from the investment yield of
the existing investment portfolio, it is likely that the discount rate assumption on claims will be adjusted to
reflect the impact 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 initial disability. We primarily use our own
claim experience to develop our claim resolution assumptions. These assumptions are established for the
43
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, including changes to social security and
other government-based welfare benefits programs which provide policy benefit offsets, among other factors, will influence
claim incidence rates, claim resolution rates, and claim costs. 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, while it is possible to evaluate the sensitivity of overall adequacy results in
our reserves based upon a change in each individual assumption, the actual impacts of changes to a variety of underlying
assumptions must be considered in the aggregate by product line in order to judge the overall potential implications to reserve
adequacy. 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.
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 and believe claim incidence trends may continue to somewhat follow general economic
conditions and demographics of the general workforce.
Claim incidence rates for Unum US group long-term disability were generally consistent in 2018 compared to the prior year.
In 2018, both short-term and long-term interest rates increased. The long-term interest rates supporting the majority of our lines
of business remain below historical norms. The assumptions we used to discount reserves during this period were slightly lower
for certain of our product lines. Reserve discount rate assumptions for new policies and new claims are periodically 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 portfolios which support the reserves for the
majority of our lines of business.
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 are very sensitive to operational and environmental changes and 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 long-term disability product line and
in our Closed Block individual disability product line have exhibited some variability over the last several years. Relative to the
resolution rate we expect to experience over the life of the block of business, actual quarterly rates during 2018 and 2017 have
varied between +10 and -13 percent in our Closed Block individual disability line of business. Actual quarterly rates during
2018 and 2017 have varied by +5 and -5 percent in our Unum US group long-term disability line of business. During 2018,
claim resolution rates pertaining to overall mortality experience were relatively consistent with the levels of 2017 and 2016. On
44
an annual basis for the years 2016 to 2018, our overall claim resolution rates were fairly consistent with or slightly favorable to
our long-term assumptions.
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
potential results as illustrated in the chart below. 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.
Unum US group long-term disability
Closed Block individual disability
Potential impact, positive or negative, of variations in reserve
assumptions on our December 31, 2018 claim reserve balance
(in millions of dollars)
3.3%
2.6%
$207
$209
In addition to our Unum US group long-term disability and Closed Block individual disability lines of business, 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 during the third quarter of 2018, the date of the latest 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,
claims incidence and resolutions, 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.
During the third quarter of 2018, we completed our annual review of policy reserve adequacy for our long-term care line of
business, which incorporated our most recent experience and included a review of all assumptions. The review utilized internal
and external data and outside consulting firms for quality assurance and industry benchmarking. Based on our analysis, we
updated our reserve assumptions as discussed in the following paragraphs. In addition, we have also included a sensitivity
analysis for these assumptions for both favorable and unfavorable deviations applied throughout the entire life of the block. This
sensitivity analysis was completed as of the date of our assumption update announcement in the third quarter of 2018 and will
not be updated unless reserves are again determined to be deficient in the future.
• We updated our active policy termination assumptions, which are affected by both policyholder mortality and lapses. We
aligned our mortality assumptions with industry data based on a 2012 individual annuitant mortality industry table, adjusted
for our experience in earlier policy durations. We also lowered our lapse assumptions for individual policies based on
emerging company experience, which resulted in an ultimate lapse rate of 0.25 percent. A six percent unfavorable change in
the active policy termination assumption would result in approximately a $330 million decrease to reserve margin and a six
percent favorable change would result in approximately a $320 million increase to reserve margin.
• We updated our claims incidence assumptions to consider both the elevated claim levels that we have recently experienced
as well as longer term experience based on our analysis of numerous claim factors, including variations by age, gender,
product, premium funding method, and other factors. A 2.5 percent unfavorable change in the claim incidence assumption
would result in approximately a $290 million decrease to reserve margin and a 2.5 percent favorable change would result in
approximately a $300 million increase to reserve margin.
• We updated our claim termination assumptions, which are primarily affected by the death, and to a lesser extent, the
recovery of the insured to largely reflect our experience. A three percent unfavorable change in the claim termination
assumption would result in approximately a $370 million decrease to reserve margin and a three percent favorable change
would result in approximately a $360 million increase to reserve margin.
• We have observed morbidity improvement in our own claims experience over a ten year period of approximately three
percent per year, normalized for variables such as age and claim type. However, we believe that a longer-term view is the
best way to evaluate this type of improvement. Accordingly, we updated our morbidity assumptions to reflect minor
improvement, one percent per year, including a partially offsetting assumption of 0.6 percent per year mortality
improvement. If no improvement occurs in the morbidity and mortality assumptions, reserve margin would decrease by
approximately $1 billion. If a three percent per year improvement in the morbidity and mortality assumptions occurs,
reserve margin would increase by approximately $1.6 billion.
45
• We updated our premium rate increase assumptions to reflect both our estimate of previously filed rate increases, informed
by our historical approval rates, and our anticipated future rate filings. The impact of the update to the premium rate
increase assumptions resulted in approximately a $1.4 billion decrease to reserves, of which approximately $700 million
relates to currently outstanding requests pending approval with the remaining $700 million related to future rate increase
submissions, with a focus on group policies, that will be completed and filed during the next several quarters. A ten percent
change in the premium rate increase success rate assumption would result in an approximately $140 million change in
reserve margin depending on whether the change was favorable or unfavorable.
• We updated our discount rate assumption to reflect our expectation for the low interest rate environment to persist and our
expected impact on future long-term care new money yield rates. Our updated expectation for long-term care new money
yield rates assumes a rate of 5.5 percent through 2021 and then a gradual increase to 6.25 percent by 2025, when we assume
no further increase. A 0.25 percent change in the new money yield rate assumption would result in an approximately $250
million change in reserve margin depending on whether the change was favorable or unfavorable. Alternatively, a 0.25
percent change in the overall assumed discount rate, which includes the new money yield rate assumption, would impact the
reserve margin within an approximate range of $450 million to $500 million, assuming 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
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 89.4 percent of our DAC relates to 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
non-interest sensitive 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 2018, our key assumptions used to
develop the future amortization of acquisition costs deferred during 2018 did not change materially from those used in 2017.
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.
46
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,
2018 and 2017.
Amortization
Period
Balance Remaining as a %
of Initial Deferral
Year 10
Year 3
Year 15
Unum US
Group Disability
Group Life and Accidental Death &
Dismemberment
Supplemental and Voluntary:
Individual Disability
Voluntary Benefits
Dental and Vision
Unum International
Group Long-term Disability
Group Life
Supplemental
Colonial Life
Accident, Sickness, and Disability
Life
Cancer and Critical Illness
Totals
6
6
20
20
4
3
3
21
15
25
19
26%
28%
71%
54%
29%
0%
0%
58%
44%
67%
57%
0%
0%
47%
19%
0%
0%
0%
14%
11%
29%
25%
0%
0%
20%
7%
0%
0%
0%
4%
1%
13%
10%
DAC Balances
at December 31
2018
2017
(in millions of dollars)
$
100.3
$
96.8
80.0
77.7
430.8
619.7
8.6
2.4
1.1
16.5
530.1
293.9
226.0
431.3
596.2
3.4
3.2
1.3
16.8
494.0
252.5
211.4
$ 2,309.4
$ 2,184.6
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 non-interest sensitive 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 in Item 8 for further discussion of our DAC
accounting policy.
Fair Value of Investments
All of our fixed maturity securities, which are classified as available-for-sale, and all our unrestricted equity securities are
reported at fair value. Our derivative financial instruments, including certain derivative instruments embedded in other
contracts, are reported as either assets or liabilities and measured at fair value. We report our investments in private equity
partnerships at our share of the partnerships' net asset value per share or its equivalent (NAV), as a practical expedient for 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.
47
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, 2018, 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 2.51 percent for five-year maturities to 3.02 percent for 30-year maturities were derived from
the December 31, 2018 yield curve for U.S. Treasury Bonds with similar maturities. This compares to interest rates of
2.21 percent for five-year maturities to 2.74 percent for 30-year maturities used at December 31, 2017.
• Baa corporate bond spread adjustments ranging from 1.23 percent to 2.68 percent were added to the risk-free rate to
reflect additional credit risk and the lack of liquidity. We used spread adjustments ranging from 0.83 percent to 1.97
percent at December 31, 2017. 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, 2018, approximately 11.7 percent of our fixed maturity securities were categorized as Level 1, 84.5 percent
as Level 2, and 3.8 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 in Item 8.
48
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.
49
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 in Item 8.
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. 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, the OPEB plan was closed to new
entrants on December 31, 2012, and the U.K. plan was closed to new entrants on December 31, 2002.
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, the long-term rate of return on plan assets, and mortality
rates. 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. The discount rate, expected long-term rate of
return, and mortality rate 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.
• Discount rate - This interest assumption is based on the yield derived from a portfolio of high quality fixed income
corporate debt instruments that reasonably match the timing and amounts of projected future benefits for each of our
retirement-related benefit plans. The rate is determined at the measurement date. A lower discount rate increases the
present value of benefit obligations and increases our net periodic benefit cost.
•
Long-term rate of return - This assumption is selected from a range of probable return outcomes from an analysis of the
asset portfolio. The market-related value as it relates to our estimate of long-term rate of return equals the fair value of
plan assets, determined as of the measurement date. The return on plan assets recognizes all asset gains and losses,
including changes in fair value, through the measurement date. 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. The expected return for the total
portfolio is calculated based on the plan's strategic asset allocation. 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 lower long-term rate of return on plan assets increases our net periodic benefit
cost.
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. We believe our investment portfolios are well
50
diversified by asset class and sector, with no undue risk concentrations in any one category. See Note 9 of the "Notes to
Consolidated Financial Statements" contained herein in Item 8 for further discussion of the investment portfolios for
our plans.
• Mortality rate - This assumption reflects our best estimate, as of the measurement date, of the life expectancies of plan
participants in order to determine the expected length of time for benefit payments. We derive our assumptions from
industry mortality tables.
The weighted average assumptions used in the measurement of our net periodic benefit costs for the years ended December 31
are as follows:
Assumption
Discount Rate
Expected Long-term Rate of Return on Plan Assets
Pension Benefits
U.S. Plans
U.K. Plan
OPEB
2019
2018
2019
2018
2019
2018
4.40%
7.00%
3.80%
6.75%
2.90%
4.30%
2.50%
3.90%
4.40%
5.75%
3.70%
5.75%
The following illustrates the sensitivity of the below items to a 50 basis point change in the discount rate or the expected long-
term rate of return on plan assets:
($ in millions)
Assumption
Discount Rate
Discount Rate
Expected Long-term Rate of Return on Plan Assets
Expected Long-term Rate of Return on Plan Assets
Benefit Obligation and Fair Value of Plan Assets
At or for the Year Ended December 31, 2018
Net Periodic
Benefit Cost,
Before Tax
Benefit
Obligation
Stockholders'
Equity, After
Tax
$
(3.8) $
1.7
(9.0)
9.0
(159.4) $
180.0
N/A
N/A
126.5
(141.2)
N/A
N/A
Change
+ 50 bp
- 50 bp
+ 50 bp
- 50 bp
During 2018, the fair value of plan assets in our U.S. qualified defined benefit pension plan decreased $127.7 million, or 8.1
percent due to an unfavorable return on assets which resulted in a loss of approximately 3.4 percent and the payment of benefits
and expenses. The fair value of plan assets in our U.K. pension plan decreased £17.5 million, or 9.3 percent, due to an
unfavorable return on assets which resulted in a loss of approximately 6.4 percent, as well as the payment of benefits and
expenses. Although our rate of return on plan assets for 2018 did not meet our assumptions used in the measurement of our net
periodic benefit costs, we believe our assumptions appropriately reflect the impact of the current economic environment and our
expectations for the future investment returns based on the plan's asset allocation.
As of December 31, 2018, our pension and OPEB plans have an aggregate unrecognized net actuarial loss of $700.6 million and
an unrecognized prior service credit of $2.3 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. The unrecognized net actuarial
loss for our pension plans, which is $721.5 million at December 31, 2018, will be amortized over the average remaining life
expectancy of the plan, which is approximately 24 years for the U.S. plan and 31 years for the U.K. plan, to the extent that it
exceeds the 10 percent corridor, as described below. The unrecognized net actuarial gain of $20.9 million for our OPEB plan
will be amortized over the average future working life of OPEB plan participants, estimated at three years, to the extent the loss
is outside of the corridor. 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, 2018, $479.3 million of the actuarial loss was outside of the
corridor for the U.S. plans and £21.3 million was outside of the corridor for the U.K. plan. At December 31, 2018, $8.3 million
of the actuarial gain was outside of the corridor for the OPEB plan.
The amortization of the unrecognized actuarial gain or loss and the unrecognized prior service credit is a component of our net
periodic benefit cost and equaled $22.1 million, $19.6 million, and $15.8 million in 2018, 2017, and 2016, respectively.
The fair value of plan assets in our U.S. qualified defined benefit pension plan was $1,454.9 million at December 31, 2018,
compared to $1,582.6 million at December 31, 2017. The plan was in an underfunded position of $294.2 million and $348.8
51
million at December 31, 2018 and December 31, 2017, respectively. This year-over-year change was due primarily to the
decrease in period benefit obligations due to the increase in discount rate, partially offset by lower than expected asset returns.
The fair value of plan assets in our U.K. pension plan was £170.2 million at December 31, 2018, compared to £187.6 million at
December 31, 2017. The U.K. pension plan was in an overfunded position of £4.7 million and £7.2 million at December 31,
2018 and 2017, respectively.
The fair value of plan assets in our OPEB plan was $10.1 million and $10.5 million at December 31, 2018 and 2017,
respectively. 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.
See Note 9 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
Income Taxes
We provide for federal, state, and foreign income taxes currently payable, as well as those deferred due to temporary differences
between the financial reporting and tax bases of assets and liabilities. Our accounting for income taxes represents our best
estimate of various events and transactions. 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.
We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized.
Significant judgment is required in determining valuation allowances. In evaluating the ability to recover deferred tax assets, we
consider 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 will not be able to realize all or part of our deferred tax assets in the future, an increase to the
valuation allowance is 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 will be realized, the previously provided valuation allowance is reversed.
In establishing a liability for unrecognized tax benefits, assumptions are made in determining whether, and to what extent, a tax
position may be sustained. 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.
Changes in tax laws, tax regulations, or interpretations of such laws or regulations, could have an impact on our provision for
income tax and our effective tax rate, which could significantly affect the amounts reported in our financial statements. The
TCJA did not significantly change our process for evaluating the above items.
In connection with the TCJA, we recognized a tax benefit of $97.9 million in 2017 related to the revaluation of our net deferred
tax liabilities associated with our U.S. operations to the newly enacted U.S. corporate tax rate and a tax expense of $66.4 million
resulting from the tax on undistributed and previously untaxed foreign earnings and profits. During 2018, we continued to refine
our calculations during the one-year measurement period after the enactment date as allowed by SAB 118 and increased our
provisional Repatriation Tax estimate by $11.5 million to $77.9 million.
See "Regulation" contained herein in Item 1. See Note 7 of the "Notes to Consolidated Financial Statements" contained herein
in Item 8.
52
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 in Item 8.
Accounting Developments
For 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 in Item 8.
53
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
Compensation Expense
Other Expenses
Total Benefits and Expenses
2018
$
8,986.1
2,453.7
(39.5)
198.2
11,598.5
8,020.4
1,108.4
167.3
(668.0)
565.5
885.9
891.2
10,970.7
Year Ended December 31
2017
% Change
% Change
2016
4.5% $
0.1
(198.0)
0.3
2.8
8,597.1
2,451.7
40.3
197.7
11,286.8
2.9% $
(0.3)
66.5
(3.8)
2.2
8,357.7
2,459.0
24.2
205.6
11,046.5
13.7
4.5
4.6
6.4
7.3
3.9
4.2
11.0
7,055.7
1,060.8
159.9
(628.0)
527.1
852.3
855.0
9,882.8
1,404.0
409.8
1.6
3.3
(3.7)
6.0
6.9
1.6
3.7
1.9
4.2
(1.6)
6,941.8
1,026.7
166.0
(592.4)
493.0
839.1
824.6
9,698.8
1,347.7
416.3
Income Before Income Tax
Income Tax
627.8
104.4
(55.3)
(74.5)
Net Income
$
523.4
(47.4)
$
994.2
6.7
$
931.4
Fluctuations in exchange rates, particularly between the British pound sterling and the U.S. dollar for our U.K. operations, have
an effect on our consolidated financial results. In periods when the pound weakens relative to the preceding period, 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.
The weighted average pound/dollar exchange rate for our Unum UK line of business was 1.336, 1.290, and 1.357 for the years
ended 2018, 2017, and 2016, respectively. If the 2017 and 2016 results for our U.K. operations had been translated at the 2018
exchange rate, our adjusted operating revenue by segment would have been higher by approximately $23 million in 2017 and
lower by approximately $9 million in 2016. Additionally, our adjusted operating income would have been higher by
approximately $4 million in 2017 and lower by approximately $2 million in 2016. 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.
We continued to report year-over-year premium growth in 2018 and 2017 in each of our principal operating business segments,
as measured in local currency, due to overall sales growth, the expansion of our dental and vision products, and generally stable
persistency. Premium income continues to decline, as expected, in our Closed Block segment.
Net investment income increased slightly in 2018 relative to 2017 due primarily to an increase in the level of invested assets and
higher miscellaneous investment income, partially offset by a decline in the yield on invested assets. Net investment income
decreased slightly in 2017 relative to 2016 due primarily to a decrease in yield on invested assets and the unfavorable impact of
the lower foreign currency exchange rate on translated financial results, mostly offset by an increase in the level of invested
assets, higher income from inflation index-linked bonds in our Unum International segment, and higher miscellaneous
investment income.
We recognized $17.5 million of other-than-temporary impairment losses on fixed maturity securities in 2018 compared to losses
of $8.1 million and $30.5 million in 2017 and 2016, respectively. Also included in net realized investment gains and losses were
54
changes in the fair value of an embedded derivative in a modified coinsurance arrangement, which resulted in realized gains
(losses) of $(15.2) million, $30.8 million, and $40.9 million in 2018, 2017, and 2016, respectively. See Notes 3 and 4 of the
"Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion.
Overall benefits experience was unfavorable in 2018 relative to the prior periods, with a consolidated benefit ratio of 89.3
percent in 2018 compared to 82.1 percent in 2017 and 83.1 percent in 2016. Excluding the 2018 long term care reserve increase
and the 2017 unclaimed death benefits reserve increase, the benefit ratios for 2018 and 2017 were 80.9 percent and 81.6 percent,
respectively. The underlying benefits experience for each of our operating business segments is discussed more fully in
"Segment Results" contained herein in this Item 7.
Commissions and the deferral of acquisition costs increased year-over-year in 2018 and 2017 due primarily to overall sales
growth. The amortization of deferred acquisition costs increased year-over-year in 2018 and 2017 due to growth in the level of
the deferred asset in our Unum US and Colonial Life segments.
Interest and debt expense was higher in 2018 relative to 2017 due primarily to a higher level of outstanding debt and a higher
overall rate of interest. Interest and debt expense was lower in 2017 relative to 2016 due primarily to a lower level of
outstanding debt, partially offset by a higher overall rate of interest. See Note 8 of the "Notes to Consolidated Financial
Statements" contained herein in Item 8 for further discussion.
Other expenses, including compensation expense, increased in each of the years presented above. Excluding the loss from a
guaranty fund assessment in 2017, the year-over-year premium growth rates mostly offset the growth rates in compensation and
other expenses as we continue our focus on expense management and operating efficiencies, resulting in a generally stable other
expense ratio relative to the prior years.
Our effective income tax rate for 2018 was 16.6 percent, compared to 29.2 percent in 2017 and 30.9 percent in 2016. The TCJA
was enacted in December 2017 and stipulated a reduction of the U.S. statutory rate from 35 percent to 21 percent effective in
2018. Our 2018 effective tax rate differed from the U.S. statutory rate due to favorable tax credits and adjustments related to our
prior year tax return. Our effective tax rate for 2017 was favorably impacted by the enactment of the TCJA, which reduced the
net deferred tax liability related to our U.S. operations by $97.9 million in 2017 partially offset by a tax of $66.4 million Deemed
Repatriation Tax. Our effective tax rate in 2016 differed from the U.S. statutory rate due to tax credits and foreign earnings
taxed at lower rates than the U.S. statutory rate including a favorable impact of the enactment of an income tax rate reduction by
the U.K. government. This enactment reduced the net deferred tax liability related to our U.K. operations by $4.5 million in
2016.
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. We also measure and analyze our segment performance on the basis of "adjusted
operating revenue" and "adjusted operating income" or "adjusted operating loss", which 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 and certain other items. These performance measures are in accordance with GAAP guidance for segment reporting,
but they should not be viewed as a substitute for total revenue, income before income tax, or net income. See "Reconciliation of
Non-GAAP Financial Measures" contained herein in this Item 7. See also "Segment Results" contained herein in this Item 7 for
further discussion of operating and sales results for each of our segments and major product lines.
55
Consolidated Sales Results
Shown below are sales results for our three principal operating business segments.
(in millions)
Unum US
Unum International
Colonial Life
2018
$ 1,114.6
Year Ended December 31
2017
% Change
% Change
2016
(1.3)% $ 1,129.0
19.6% $
943.8
$
$
87.0
1.3 % $
85.9
1.7% $
84.5
561.3
8.0 % $
519.7
7.5% $
483.6
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 levels 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.
56
Segment Results
Our reporting segments are comprised of the following: Unum US, Unum International, Colonial Life, Closed Block, and
Corporate. Financial information for each of our reporting segments is as follows.
Unum US Segment
The Unum US segment includes group long-term and short-term disability insurance, group life and accidental death and
dismemberment products, and supplemental and voluntary lines of business, which are comprised of individual disability,
voluntary benefits, and dental and vision 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)
Adjusted Operating Revenue
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
UDB Reserve Increase
Adjusted Operating Income
Operating Ratios (% of Premium Income):
Benefit Ratio
Benefit Ratio Excluding UDB Reserve Increase
Other Expense Ratio
Income Ratio
Adjusted Operating Income Ratio
N.M. = not a meaningful percentage
2018
$ 5,736.4
778.7
118.5
6,633.6
3,856.5
620.6
(344.0)
315.1
1,170.8
5,619.0
Year Ended December 31
2017
% Change
% Change
2016
5.4% $ 5,443.5
(4.0)
811.2
113.2
4.7
6,367.9
4.2
3.9% $ 5,240.9
(2.1)
828.7
(0.1)
113.3
6,182.9
3.0
4.4
5.0
5.7
7.3
3.4
4.3
3,693.4
590.8
(325.5)
293.6
1,132.7
5,385.0
1.9
1.8
3.6
6.7
2.7
2.2
3,624.3
580.4
(314.1)
275.2
1,102.9
5,268.7
1,014.6
—
$ 1,014.6
3.2
N.M.
0.5
982.9
26.6
$ 1,009.5
7.5
N.M.
10.4
$
914.2
—
914.2
67.2%
20.4%
17.7%
67.8%
67.4%
20.8%
18.1%
18.5%
69.2%
21.0%
17.4%
57
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)
Adjusted Operating Revenue
Premium Income
Group Long-term Disability
Group Short-term Disability
Total Premium Income
Net Investment Income
Other Income
Total
2018
$ 1,766.2
706.3
2,472.5
432.7
109.0
3,014.2
Year Ended December 31
2017
% Change
% Change
2016
0.9% $ 1,749.6
639.8
10.4
2,389.4
3.5
(6.0)
460.5
98.3
10.9
2,948.2
2.2
1.3% $ 1,726.6
626.1
2.2
2,352.7
1.6
(4.0)
479.5
91.1
7.9
2,923.3
0.9
Benefits and Expenses
Benefits and Change in Reserves for Future Benefits
Commissions
Deferral of Acquisition Costs
Amortization of Deferred Acquisition Costs
Other Expenses
Total
1,880.7
186.5
(48.2)
44.7
612.2
2,675.9
2.9
2.5
2.8
12.0
4.3
3.3
1,828.5
181.9
(46.9)
39.9
587.0
2,590.4
(1.9)
2.1
1.1
11.1
2.6
(0.5)
1,863.8
178.2
(46.4)
35.9
572.1
2,603.6
Adjusted Operating Income
$
338.3
(5.4)
$
357.8
11.9
$
319.7
Operating Ratios (% of Premium Income):
Benefit Ratio
Other Expense Ratio
Adjusted Operating Income Ratio
Persistency:
Group Long-term Disability
Group Short-term Disability
76.1%
24.8%
13.7%
90.9%
87.2%
76.5%
24.6%
15.0%
89.9%
86.6%
79.2%
24.3%
13.6%
91.0%
87.7%
58
Year Ended December 31, 2018 Compared with Year Ended December 31, 2017
Premium income increased compared to 2017, driven primarily by growth in the in-force block due to higher prior period sales
and improved persistency. Net investment income was lower relative to 2017 due to a decrease in the level of invested assets
and a decline in yield on invested assets, partially offset by higher miscellaneous investment income. Other income is comprised
primarily of fees from administrative services products.
Benefits experience was favorable compared to 2017 due primarily to favorable claim recovery experience in our group long-
term disability product line, partially offset by higher claims incidence in certain of our group short-term disability products.
Commissions and the deferral of acquisition costs were higher compared to 2017 due to prior period sales growth. The
amortization of deferred acquisition costs increased relative to 2017 due to growth in the level of the deferred asset. Our other
expense ratio for 2018 increased compared to 2017 due primarily to an increase in operational investments in our business
balanced with our continued focus on expense management and operating efficiencies.
We had goodwill of $8.9 million at December 31, 2018, none of which is currently believed to be at risk for future impairment.
Year Ended December 31, 2017 Compared with Year Ended December 31, 2016
Premium income increased compared to 2016, driven primarily by growth in the in-force block due to higher sales, partially
offset by lower persistency. Net investment income was lower relative to 2016 due to a decline in yield and a lower level of
invested assets, partially offset by higher miscellaneous investment income. Other income is comprised primarily of fees from
administrative services products.
Benefits experience was favorable compared to 2016 due primarily to continued favorable claims incidence trends in our group
long-term disability product line and lower prevalence rates in our group short-term disability product line. Partially offsetting
the favorable claims experience was a 50 basis point decrease in the discount rate for group long-term disability claim incurrals
which we implemented in the fourth quarter of 2016.
Commissions and the deferral of acquisition costs were higher compared to 2016 due to sales growth. The amortization of
deferred acquisition costs increased relative to 2016 due to growth in the level of the deferred asset. Our other expense ratio for
2017 increased slightly compared to 2016 due to the continued investment in the growth of our business balanced with our
continued focus on expense management and operating efficiencies.
59
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.
Year Ended December 31
2017
% Change
% Change
2016
(in millions of dollars, except ratios)
Adjusted Operating Revenue
Premium Income
Group Life
Accidental Death & Dismemberment
Total Premium Income
Net Investment Income
Other Income
Total
2018
$ 1,583.7
156.3
1,740.0
106.5
4.7
1,851.2
7.9% $ 1,467.5
147.5
6.0
1,615.0
7.7
(3.1)
109.9
(2.1)
4.8
1,729.7
7.0
Benefits and Expenses
Benefits and Change in Reserves for Future Benefits
Commissions
Deferral of Acquisition Costs
Amortization of Deferred Acquisition Costs
Other Expenses
Total
1,237.7
141.1
(38.2)
35.9
214.6
1,591.1
5.8
7.5
5.5
12.5
(1.3)
5.1
1,169.8
131.3
(36.2)
31.9
217.4
1,514.2
4.1% $ 1,410.0
140.3
5.1
1,550.3
4.2
(3.1)
113.4
4.5
6.7
1,668.2
3.7
5.1
3.5
1.4
9.2
1.8
4.7
1,112.6
126.8
(35.7)
29.2
213.5
1,446.4
Income Before Income Tax and Net Realized
Investment Gains and Losses
UDB Reserve Increase
Adjusted Operating Income
Operating Ratios (% of Premium Income):
Benefit Ratio
Benefit Ratio Excluding UDB Reserve Increase
Other Expense Ratio
Income Ratio
Adjusted Operating Income Ratio
Persistency:
Group Life
Accidental Death & Dismemberment
N.M. = not a meaningful percentage
260.1
—
260.1
$
20.7
N.M.
11.2
$
215.5
18.5
234.0
(2.8)
N.M.
5.5
$
221.8
—
221.8
72.4%
71.3%
13.5%
13.3%
14.5%
88.0%
87.2%
71.8%
13.8%
14.3%
90.7%
90.3%
71.1%
12.3%
14.9%
91.2%
89.9%
60
Year Ended December 31, 2018 Compared with Year Ended December 31, 2017
Premium income increased compared to 2017 with growth in the in-force block due to prior period sales growth and favorable
persistency. Net investment income was lower compared to 2017 due to a decline in yield on invested assets, partially offset by
an increase in the level of invested assets and higher miscellaneous investment income.
Benefits experience was favorable compared to 2017 due to the previously discussed 2017 reserve increase for unclaimed death
benefits in our group life product line and favorable 2018 experience in our accidental death and dismemberment product line.
Excluding the 2017 reserve increase, benefits experience was generally consistent with the prior year.
Commissions and the deferral of acquisition costs were higher compared to 2017 due to prior period sales growth. The
amortization of deferred acquisition costs increased relative to 2017 due to growth in the level of the deferred asset. The other
expense ratio improved compared to 2017 due to growth in premium income and a continued focus on expense management and
operating efficiencies balanced with continued investment in the growth of our business.
Year Ended December 31, 2017 Compared with Year Ended December 31, 2016
Premium income increased compared to 2016 with growth in the in-force block due to higher sales, partially offset by a decline
in persistency. Net investment income was lower compared to 2016 due to a decline in yield and a lower level of invested assets,
partially offset by higher miscellaneous investment income.
Benefits experience was unfavorable compared to 2016 due to the 2017 reserve increase for unclaimed death benefits in the
group life product line. Excluding this reserve increase, benefits experience was favorable due primarily to favorable average
claim size in our group life product line, partially offset by higher incidence in the accidental death and dismemberment product
line.
Commissions and the deferral of acquisition costs were higher compared to 2016 due to sales growth. The amortization of
deferred acquisition costs increased relative to 2016 due to growth in the level of the deferred asset. The other expense ratio was
favorable to 2016 due to growth in premium income and a continued focus on expense management and operating efficiencies.
61
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)
Adjusted Operating Revenue
Premium Income
Individual Disability
Voluntary Benefits
Dental and Vision
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
2018
$
425.4
895.7
202.8
1,523.9
239.5
4.8
1,768.2
738.1
293.0
(257.6)
234.5
344.0
1,352.0
Year Ended December 31
2017
% Change
% Change
1.2% $
5.5
19.6
5.9
(0.5)
(52.5)
4.6
420.2
849.4
169.5
1,439.1
240.8
10.1
1,690.0
(12.5)% $
6.6
177.4
7.6
2.1
(42.9)
6.2
6.2
5.5
6.3
5.7
4.8
5.6
695.1
277.6
(242.4)
221.8
328.3
1,280.4
7.3
0.8
4.5
5.6
3.5
5.1
2016
480.3
796.5
61.1
1,337.9
235.8
17.7
1,591.4
647.9
275.4
(232.0)
210.1
317.3
1,218.7
Income Before Income Tax and Net Realized Investment
Gains and Losses
UDB Reserve Increase
Adjusted Operating Income
416.2
—
416.2
$
1.6
N.M.
(0.4)
$
409.6
8.1
417.7
9.9
N.M.
12.1
$
372.7
—
372.7
Operating Ratios (% of Premium Income):
Benefit Ratios:
Individual Disability
Voluntary Benefits
Voluntary Benefits Excluding UDB Reserve Increase
Dental and Vision
Other Expense Ratio
Income Ratio
Adjusted Operating Income Ratio
Persistency:
Individual Disability
Voluntary Benefits
Dental and Vision
N.M. = not a meaningful percentage
50.6%
42.8%
68.5%
22.6%
27.3%
90.3%
75.9%
84.5%
62
47.2%
44.6%
43.6%
69.6%
22.8%
28.5%
29.0%
91.0%
77.5%
85.4%
52.9%
44.3%
66.6%
23.7%
27.9%
91.1%
76.9%
84.6%
Year Ended December 31, 2018 Compared with Year Ended December 31, 2017
Premium income increased compared to 2017 driven by higher sales, including dental and vision where we continue to expand
its distribution, partially offset by unfavorable persistency. Net investment income was slightly lower compared to 2017 due to a
decline in yield on invested assets and lower miscellaneous investment income, partially offset by a higher level of invested
assets. Other income is comprised primarily of surrender fees in our voluntary benefits product line, which continue to decline
as our interest sensitive life products mature.
Benefits experience for the individual disability product line compared to 2017 was less favorable due to a prior year reserve
release of $19.5 million resulting from our 2017 annual reserve adequacy update that did not recur and unfavorable claims
activity, partially offset by favorable mortality experience in 2018. Benefits experience for voluntary benefits was favorable
compared to 2017 due primarily to the previously discussed 2017 reserve increase for unclaimed death benefits. Excluding this
reserve increase, benefits experience was favorable across most of our voluntary product lines. Benefits experience for the
dental and vision product line was favorable compared to 2017 and was within our expectations.
Commissions and the deferral of acquisition costs were higher compared to 2017 due primarily to sales growth. The
amortization of deferred acquisition costs increased year over year due to growth in the level of the deferred asset. Our other
expense ratio improved relative to 2017 due to growth in premium income and our continued focus on expense management and
operating efficiencies balanced with an increase in operational investments in our business.
We had goodwill of $271.1 million at December 31, 2018, none of which is currently believed to be at risk for future
impairment.
Year Ended December 31, 2017 Compared with Year Ended December 31, 2016
Premium income increased compared to 2016 driven by growth in the dental and vision product line associated with the
acquisition of Starmount during the third quarter of 2016 as well as growth in the voluntary benefits product line due to higher
sales. Premium income for our individual disability product line declined compared to 2016 due to the impact of a reinsurance
agreement we entered into during the fourth quarter of 2016 whereby we ceded 30 percent of the risk for certain blocks of our
individual disability business on a non-proportional modified coinsurance basis. Excluding the impact of this agreement,
premium income for our individual disability product line increased relative to 2016, driven by higher sales.
Net investment income was higher compared to 2016 due to an increase in the level of invested assets and higher miscellaneous
investment income, partially offset by a decline in yield. Other income decreased relative to 2016 due primarily to the expected
decline in surrender fees as our interest sensitive life products mature.
Benefits experience was favorable for the individual disability product line compared to 2016 due primarily to lower claim
volumes and a reserve release of $19.5 million resulting from our annual reserve adequacy update, partially offset by the impact
to our benefit ratio from the reinsurance agreement we entered into during the fourth quarter of 2016. Benefits experience for
voluntary benefits was unfavorable compared to 2016 due primarily to the 2017 reserve increase for unclaimed death benefits.
Excluding this reserve increase, benefits experience was favorable driven primarily by a continued shift in product mix and
favorable claims experience, primarily in our critical illness product line. The dental and vision product line will typically have a
higher benefit ratio than the other product lines reported in our supplemental and voluntary line of business, but did experience
less favorable claims experience relative to 2016.
Commissions were slightly higher compared to 2016 due primarily to sales growth in the dental and vision and voluntary
benefits product lines, mostly offset by commissions ceded in the individual disability product line related to the fourth quarter
of 2016 reinsurance agreement. The deferral of acquisition costs increased relative to 2016 due primarily to sales growth in our
voluntary benefits and dental and vision product lines. Amortization of deferred acquisition costs increased year over year due
to growth in the level of the deferred asset and less favorable persistency in our individual disability product line. Our other
expense ratio improved relative to 2016 due to growth in premium income as well as expense allowances received related to the
individual disability product line reinsurance agreement and our continued focus on expense management and operating
efficiencies.
63
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
Voluntary Benefits
Dental and Vision
Subtotal
Total Sales
Sales by Market Sector
Group Disability and Group Life and AD&D
Core Market (< 2,000 employees)
Large Case Market
Subtotal
Supplemental and Voluntary
Total Sales
N.M. = not a meaningful percentage
Year Ended December 31
2017
% Change
% Change
2018
$
243.8
138.7
282.4
664.9
77.2
303.1
69.4
449.7
$ 1,114.6
1.2 % $
240.8
162.5
310.5
713.8
67.9
292.5
54.8
415.2
$ 1,129.0
(14.6)
(9.0)
(6.9)
13.7
3.6
26.6
8.3
(1.3)
$
395.1
269.8
664.9
449.7
$ 1,114.6
(5.2)% $
(9.1)
(6.9)
8.3
(1.3)
416.9
296.9
713.8
415.2
$ 1,129.0
2016
217.8
114.6
270.1
602.5
65.1
261.7
14.5
341.3
943.8
378.1
224.4
602.5
341.3
943.8
10.6% $
41.8
15.0
18.5
4.3
11.8
N.M
21.7
19.6
$
10.3% $
32.3
18.5
21.7
19.6
$
Year Ended December 31, 2018 Compared with Year Ended December 31, 2017
Group sales decreased compared to 2017 due to lower sales to new and existing customers in both the core market segment,
which we define as employee groups with fewer than 2,000 employees, and in the large case market segment. The sales mix in
the group market sector for 2018 was approximately 59 percent core market and 41 percent large case market.
Individual disability sales, which are primarily concentrated in the multi-life market, increased compared to 2017 due to higher
sales to both new and existing customers. Voluntary benefits sales increased compared to 2017, primarily driven by higher sales
to existing customers in both the core and large case markets, partially offset by lower sales to new customers in the large case
market. Dental and vision sales increased compared to 2017 driven by higher sales to both new and existing customers resulting
from our continued expansion.
Year Ended December 31, 2017 Compared with Year Ended December 31, 2016
Group sales increased compared to 2016 due to higher sales to new customers in both the core market segment and in the large
case market segment. The sales mix in the group market sector for 2017 was approximately 58 percent core market and 42
percent large case market.
Individual disability sales increased compared to 2016 due to higher sales to new customers. Voluntary benefits sales increased
compared to 2016, primarily driven by higher sales in both the core and large case markets. Also contributing to supplemental
and voluntary sales in 2017 compared to 2016 were higher sales of the dental and vision products resulting from the Starmount
acquisition in the third quarter of 2016.
64
Segment Outlook
We remain committed to offering consumers a broad set of financial protection benefit products at the worksite. During 2019,
we will continue to invest in a unique customer experience defined by simplicity, empathy, and deep industry expertise through
the re-design of our processes and the increased utilization of digital capabilities and technology to enhance enrollment,
underwriting, and claims processing. We will continue to focus on the expansion of products, which includes dental and vision,
medical stop-loss, and leave management services, while also introducing new voluntary benefits products. Additionally, we
will focus on client expansion, consumer engagement, and collaborative partnerships, all underpinned by strong risk
management. We believe our active client management and differentiated integrated customer experience across our product
lines will continue to enable us to grow our market.
We anticipate stable adjusted operating income growth in 2019, with disciplined sales and premium growth, consistent risk
management, and improving operational efficiency. We believe our underlying profitability will remain strong throughout the
year, driven primarily by our continued product mix shift, expense efficiencies, and consistent operating effectiveness.
The low interest rate environment continues to place pressure on our profit margins by impacting net investment income yields
as well as discount rates on our insurance liabilities. Our net investment income may be unfavorably impacted by fluctuations in
miscellaneous investment income and lower asset levels resulting from improved capital efficiency. As part of our continued
pricing discipline and our reserving methodology, we continuously monitor emerging interest rate experience and adjust our
pricing and reserve discount rates, as appropriate. We expect that our underwriting results in 2019 will continue at a level
generally consistent with 2018. We continuously monitor key indicators to assess our risks and attempt to adjust our business
plans accordingly.
65
Unum International Segment
The Unum International segment is comprised of our operations in both the United Kingdom and Poland and includes insurance
for group long-term disability, group life, and supplemental lines of business which include dental, individual disability, critical
illness, and our Unum Poland products. Unum International's products are sold primarily through field sales personnel and
independent brokers and consultants.
Operating Results
Shown below are financial results and key performance indicators for the Unum International segment.
(in millions of dollars, except ratios)
Adjusted Operating Revenue
Premium Income
Group Long-term Disability
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
$
2018
358.9
110.8
99.1
568.8
117.2
0.4
686.4
419.8
39.1
(8.1)
8.2
113.5
572.5
Year Ended December 31
2017
% Change
% Change
5.5% $
7.5
42.4
10.9
(2.5)
(42.9)
8.3
9.9
10.1
15.7
(9.9)
10.5
9.6
340.3
103.1
69.6
513.0
120.2
0.7
633.9
381.9
35.5
(7.0)
9.1
102.7
522.2
(4.2)% $
(2.5)
1.8
(3.1)
1.8
N.M.
(2.1)
3.9
(8.7)
(14.6)
(6.2)
(7.6)
0.6
2016
355.2
105.7
68.4
529.3
118.1
0.2
647.6
367.4
38.9
(8.2)
9.7
111.2
519.0
Adjusted Operating Income
$
113.9
2.0
$
111.7
(13.1)
$
128.6
N.M. = not a meaningful percentage
Foreign Currency Translation
The functional currency of Unum UK and Unum Poland is the British pound sterling and the Polish zloty, respectively. Unum
UK's and Unum Poland's premium income, net investment income, claims, and expenses are received or paid in the functional
currency, and we hold functional currency-denominated assets to support Unum UK's and Unum Poland's functional currency-
denominated policy reserves and liabilities. We translate Unum UK's and Unum Poland's functional currency-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 exchange rates have an effect on Unum UK's and Unum Poland's reported financial results and our consolidated
financial results. In periods when the functional currency strengthens relative to the preceding period, translation increases
current period results relative to the prior period. In periods when the functional currency weakens, translation decreases current
period results relative to the prior period.
Goodwill
We had total goodwill of $42.6 million for the Unum International segment at December 31, 2018, none of which is currently
believed to be at risk for future impairment.
66
Unum UK Operating Results
Shown below are financial results and key performance indicators for the Unum UK product lines.
(in millions of pounds, except ratios)
Adjusted Operating Revenue
Premium Income
Group Long-term Disability
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
£
2018
269.0
83.0
61.3
413.3
86.5
—
499.8
307.4
27.1
(5.0)
6.1
80.2
415.8
Year Ended December 31
2017
% Change
% Change
2016
1.9% £
3.8
13.7
3.9
(7.3)
(100.0)
1.6
264.0
80.0
53.9
397.9
93.3
0.5
491.7
0.8% £
2.6
6.7
1.9
6.9
N.M.
2.9
262.0
78.0
50.5
390.5
87.3
0.1
477.9
3.8
(1.8)
(7.4)
(12.9)
0.6
2.6
296.2
27.6
(5.4)
7.0
79.7
405.1
9.3
(4.5)
(11.5)
(2.8)
(3.0)
5.7
270.9
28.9
(6.1)
7.2
82.2
383.1
Adjusted Operating Income
£
84.0
(3.0)
£
86.6
(8.6)
£
94.8
Weighted Average Pound/Dollar Exchange Rate
1.336
1.290
1.357
Operating Ratios (% of Premium Income):
Benefit Ratio
Other Expense Ratio
Adjusted Operating Income Ratio
Persistency:
Group Long-term Disability
Group Life
Supplemental
N.M. = not a meaningful percentage
74.4%
19.4%
20.3%
87.8%
88.5%
93.1%
74.4%
20.0%
21.8%
87.4%
84.1%
91.0%
69.4%
21.0%
24.3%
89.5%
81.3%
89.9%
67
Year Ended December 31, 2018 Compared with Year Ended December 31, 2017
Premium income was higher compared to 2017 due primarily to growth in the in-force block driven by higher persistency and
rate increases in our group long-term disability product line.
Net investment income was lower compared to 2017 due primarily to a lower yield on our fixed-rate bonds, partially offset by a
higher level of invested assets and higher investment 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 index-linked increases in benefits. The
increase in net investment income attributable to these index-linked bonds was offset by an increase in the reserves for future
claims payments related to inflation index-linked group long-term disability and group life policies.
Benefits experience was consistent with 2017 as favorable claims recoveries in our group long-term disability product line were
offset by unfavorable claims activity in our group life and supplemental product lines and the impact of inflation-linked increases
in benefits.
Commissions and the deferral of acquisition costs were lower relative to 2017 driven by lower sales. The amortization of
acquisition costs was lower in 2018 compared to 2017 due to a decline in the deferred asset. The other expense ratio was lower
relative to 2017 due to higher premiums and our continued focus on expense management and operating efficiencies.
Year Ended December 31, 2017 Compared with Year Ended December 31, 2016
Premium income was higher compared to 2016 due primarily to growth in the in-force block, resulting from sales growth and
stable persistency.
Net investment income increased compared to 2016 due primarily to higher investment income from inflation index-linked
bonds and the growth in the level of invested assets, partially offset by a decline in yield on our fixed-rate bonds. The increase in
net investment income attributable to these index-linked bonds was mostly offset by an increase in the reserves for future claims
payments related to the inflation index-linked group long-term disability and group life policies.
Overall benefits experience was unfavorable compared to 2016 due primarily to a higher average claim size and unfavorable
claim incidence in our group long-term disability product line, partially offset by favorable claim incidence in our group life
product line. Also contributing to the less favorable benefits experience was the impact of inflation-linked increases in benefits
and an 80 basis point decrease in the discount rate on new claim incurrals implemented in the first quarter of 2017 across several
of our products.
Commissions were lower compared to 2016 due to certain commissions costs in 2016 that did not recur in 2017. The deferral of
acquisition costs was lower compared to 2016 due to lower deferrable commissions and operating expenses. The amortization of
acquisition costs was lower in 2017 compared to 2016 due to a decline in the deferred asset. The other expense ratio was lower
relative to 2016 due to higher premiums and our continued focus on expense management and operating efficiencies.
68
Year Ended December 31
2017
% Change
% Change
(5.1)% $
(11.9)
44.4
1.3 % $
20.4 % $
(28.0)
(7.4)
44.4
1.3
$
(8.5)% £
(14.3)
13.3
(6.4)
£
16.9 % £
(30.7)
(10.5)
13.3
(6.4)
£
47.1
24.4
14.4
85.9
30.4
41.1
71.5
14.4
85.9
36.6
18.9
11.3
66.8
23.6
31.9
55.5
11.3
66.8
(6.2)% $
2.5
37.1
1.7 % $
(27.6)% $
28.4
(3.4)
37.1
1.7
$
(1.6)% £
6.2
46.8
6.5
£
(24.4)% £
34.0
0.9
46.8
6.5
£
2016
50.2
23.8
10.5
84.5
42.0
32.0
74.0
10.5
84.5
37.2
17.8
7.7
62.7
31.2
23.8
55.0
7.7
62.7
Sales
(in millions of dollars and pounds)
Unum International Sales by Product
Group Long-term Disability
Group Life
Supplemental
Total Sales
Unum International Sales by Market Sector
Group Long-term Disability and Group Life
Core Market (< 500 employees)
Large Case Market
Subtotal
Supplemental
Total Sales
Unum UK Sales by Product
Group Long-term Disability
Group Life
Supplemental
Total Sales
Unum UK Sales by Market Sector
Group Long-term Disability and Group Life
Core Market (< 500 employees)
Large Case Market
Subtotal
Supplemental
Total Sales
2018
44.7
21.5
20.8
87.0
36.6
29.6
66.2
20.8
87.0
33.5
16.2
12.8
62.5
27.6
22.1
49.7
12.8
62.5
$
$
$
$
£
£
£
£
69
The following discussion of sales results relates only to our Unum UK product lines and is based on functional currency.
Year Ended December 31, 2018 Compared with Year Ended December 31, 2017
Group long-term disability sales decreased compared to 2017 due to lower sales to new customers in the large case market,
partially offset by higher sales to both new and existing customers in our core market, or employee groups with fewer than 500
employees, and higher sales to existing customers in our large case market.
Group life sales decreased compared to 2017 due to lower sales to new and existing customers in our large case market, partially
offset by an increase in sales to new and existing customers in our core market.
Supplemental sales increased compared to 2017 due primarily to an increase in the group critical illness product line, partially
offset by a decline in dental product sales.
Year Ended December 31, 2017 Compared with Year Ended December 31, 2016
Group long-term disability sales decreased compared to 2016 due to lower sales to new customers in our core market and to
existing customers in our large case market, mostly offset by higher sales to new customers in our large case market.
Group life sales increased compared to 2016 due to higher sales to new and existing customers in our large case market, partially
offset by a decline in sales to new and existing customers in our core market.
Supplemental sales increased compared to 2016 due primarily to an increase in the group critical illness and dental product lines,
partially offset by a decline in individual disability sales.
Segment Outlook
We are committed to driving growth in the Unum International segment, and during 2019, we will build on those capabilities that
we believe will generate growth and profitability in our businesses. Expanding our Unum UK group long-term disability market
position remains a significant opportunity and priority. Completing the integration of our Unum Poland business and growing
that business through the expansion of its product offerings is also a significant priority and opportunity. Other key priorities in
2019, specifically for our Unum UK business, include the continued disciplined implementation of price increases across interest
sensitive product lines, which has been successful in offsetting pressure from lower interest rates and heightened disability
claims experience, while maintaining solid persistency results and continuing to follow a disciplined approach to new sales
activity in the competitive pricing environment. We intend to build upon the strong sales momentum we have seen in our group
critical illness and dental products through increased participation rates as well as accelerate growth in our group life line of
business. We have simplified our processes and operations to deliver efficiencies and further improvements to customer service
and remain focused on risk discipline. The investments that we have made in the operating model for our UK business have
significantly improved our operational effectiveness and we plan to reinvest a portion of these expense savings to build
marketing and digital capabilities, which we believe will drive sustainable growth through the development of new distribution
capabilities and reaching new customers.
Negotiations regarding the U.K.'s formal notice to withdraw from the EU are continuing to generate uncertainty in the U.K.
economy. The magnitude and longevity of potential negative economic impacts on our growth will depend on the agreements
reached by the U.K. and EU as a result of exit negotiations and the resulting response of the U.K. marketplace, but we believe
we are well positioned to capitalize on future growth opportunities as these negotiations are resolved and the operating
environment improves. Overall, we expect the economic conditions experienced in 2018 to continue into 2019 for the U.K.,
with lower economic growth, wage inflation, and interest rates presenting challenges in the short to medium term.
We expect the current environment to continue to have a negative impact on our growth expectations in the near-term and may
also lead to a higher rate of claim incidence, lower levels of claim recoveries, or lower claim discount rates. As part of our
continued pricing discipline and our reserving strategy, we continuously monitor emerging interest rate experience and adjust our
pricing and reserve discount rates, as appropriate. We will likely continue to experience volatility in net investment income and
our benefit ratio due to fluctuations in the level of inflation in the U.K., however, we do not expect this to have a significant
impact on adjusted operating income. There are no indications currently that capital requirements for our U.K. operations will
change, but economic conditions may in the near term cause volatility in our solvency ratios. We continuously monitor key
indicators to assess our risks and attempt to adjust our business plans accordingly to respond to external challenges.
70
Colonial Life Segment
The Colonial Life segment includes insurance for accident, sickness, and disability products, which includes our expanded dental
and vision products, life products, and cancer and critical illness products issued primarily by Colonial Life & Accident
Insurance Company and marketed to employees, on both a group and an individual basis, 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)
Adjusted Operating Revenue
Premium Income
Accident, Sickness, and Disability
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
2018
$
929.3
328.4
346.1
1,603.8
151.2
1.2
1,756.2
824.9
364.6
(315.9)
242.2
305.2
1,421.0
Year Ended December 31
2017
% Change
% Change
2016
5.1% $
9.3
5.9
6.1
4.3
9.1
6.0
884.2
300.4
326.8
1,511.4
144.9
1.1
1,657.4
4.6
5.8
6.9
7.9
7.9
5.7
788.6
344.5
(295.5)
224.4
282.8
1,344.8
6.5% $
9.7
4.3
6.7
2.4
(8.3)
6.3
830.0
273.8
313.3
1,417.1
141.5
1.2
1,559.8
8.6
9.9
9.4
7.8
5.7
8.0
726.4
313.6
(270.1)
208.1
267.6
1,245.6
Income Before Income Tax and Net Realized Investment
Gains and Losses
UDB Reserve Increase
Adjusted Operating Income
335.2
—
335.2
$
7.2
N.M.
3.1
$
312.6
12.4
325.0
(0.5)
N.M.
3.4
$
314.2
—
314.2
Operating Ratios (% of Premium Income):
Benefit Ratio
Benefit Ratio Excluding UDB Reserve Increase
Other Expense Ratio
Income Ratio
Adjusted Operating Income Ratio
Persistency:
Accident, Sickness, and Disability
Life
Cancer and Critical Illness
N.M. = not a meaningful percentage
51.4%
19.0%
20.9%
74.2%
83.6%
82.4%
71
52.2%
51.4%
18.7%
20.7%
21.5%
75.1%
84.4%
82.7%
51.3%
18.9%
22.2%
75.6%
85.0%
82.9%
Year Ended December 31, 2018 Compared with Year Ended December 31, 2017
Premium income increased in 2018 relative to 2017 as a result of sales growth. Net investment income increased relative to the
prior year due to an increase in the level of invested assets and higher miscellaneous investment income, partially offset by a
decline in yield on invested assets.
Benefits experience was favorable in 2018 compared to 2017 due to the previously discussed 2017 reserve increase for
unclaimed death benefits. Excluding this reserve increase, benefits experience was consistent with 2017.
Commissions and the deferral of acquisition costs were higher relative to 2017 due to sales growth. The amortization of deferred
acquisition costs increased compared to the prior year due primarily to growth in the level of the deferred asset. The other
expense ratio was higher relative to 2017 due to costs related to our territory expansion initiatives, investments in our business,
and the roll-out of our dental and vision products.
We had goodwill of $27.7 million at December 31, 2018, none of which is currently believed to be at risk for future impairment.
Year Ended December 31, 2017 Compared with Year Ended December 31, 2016
Premium income increased in 2017 relative to 2016 as a result of sales growth and overall stable persistency. Net investment
income increased relative to 2016 due to an increase in the level of invested assets, partially offset by a decline in yield and
lower miscellaneous investment income.
Benefits experience was less favorable in 2017 compared to 2016 due to the 2017 reserve increase for unclaimed death benefits.
Excluding the reserve increase, benefits experience was generally consistent with 2016, with marginally less favorable
experience in each line of business.
Commissions and the deferral of acquisition costs were higher relative to 2016 due to overall sales growth. The amortization of
deferred acquisition costs increased compared to 2016 due primarily to growth in the level of the deferred asset. The other
expense ratio improved relative to 2016 due to growth in premium income and our continued focus on operating effectiveness
and expense management.
72
Sales
Certain prior year amounts below were reclassified to conform to current year presentation.
(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 employees)
Large Case Market
Subtotal
Public Sector
Total Sales
2018
355.0
111.9
94.4
561.3
349.0
95.5
444.5
116.8
561.3
$
$
$
$
Year Ended December 31
2017
% Change
% Change
2016
9.8% $
3.9
6.3
8.0
$
323.2
107.7
88.8
519.7
4.1% $
14.6
12.4
7.5
$
310.6
94.0
79.0
483.6
11.3% $
5.1
9.9
1.3
8.0
$
313.5
90.9
404.4
115.3
519.7
7.6% $
17.4
9.7
0.3
7.5
$
291.3
77.4
368.7
114.9
483.6
Year Ended December 31, 2018 Compared with Year Ended December 31, 2017
Sales were higher in 2018 compared to 2017 due to growth in both new and existing customer account sales and the expansion
of our dental and vision products. Commercial market sales increased primarily due to higher new and existing customer
account sales in the core market, which we define as accounts with fewer than 1,000 employees, and higher existing sales in the
large case market. The slight increase in our public sector market for 2018 was primarily driven by an increase in existing
customer account sales, partially offset by a decrease in new account sales. The number of new accounts increased 9.8 percent
in 2018 compared to 2017, while the average new case size decreased 4.0 percent.
Year Ended December 31, 2017 Compared with Year Ended December 31, 2016
Sales were higher in 2017 due to growth in both new and existing customer account sales. Commercial market sales increased
due to higher new and existing customer account sales in both the core market and the large case market. The slight increase in
our public sector market for 2017 was primarily driven by higher new customer account sales. The number of new accounts
increased 9.1 percent in 2017 compared to 2016, and the average new case size increased 1.1 percent.
Segment Outlook
We remain committed to providing employees and their families with simple, modern, and personal benefit solutions. During
2019, we will continue to focus on expanding our distribution system through the growth and development of our agency sales
force and establishing effective broker partnerships. We will also invest in new solutions and digital capabilities to enhance the
customer experience for our business partners and further improve productivity. We will seek to capitalize on the expansion of
our new dental products, which we believe will open doors for new cases while also allowing for further cross-selling
opportunities to existing clients. We will continue to focus on accelerating growth during 2019 through territory expansion,
territory growth, persistency investments, and increased participation rates. We believe our distribution system, customer service
capabilities, the expansion of our new dental products, and ability to serve all market sizes position us well for future growth.
We expect to see continued favorable sales, premium, and adjusted operating earnings growth trends in 2019. We also anticipate
a decline in the operating expense ratio as we continue to balance operating efficiencies with the continued investments in our
future growth. The lower interest rate environment will continue to have an unfavorable impact on our profit margins, and
volatility in miscellaneous investment income is likely to continue. We expect our annual benefit ratio for 2019 to be generally
consistent with the level of 2018. While we believe our underlying profitability will remain strong, current economic conditions
and increasing competition in the voluntary workplace market are seen 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.
73
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. Individual disability 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.
74
Year Ended December 31
2017
% Change
% Change
2016
Operating Results
Shown below are financial results and key performance indicators for the Closed Block segment.
(in millions of dollars, except ratios)
Adjusted 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
Other Expenses
Total
2018
$ 420.8
648.3
8.0
1,077.1
1,377.1
75.4
2,529.6
2,919.2
84.1
6.9
144.7
3,154.9
(10.8)% $
(0.1)
(8.0)
(4.6)
1.7
(5.5)
(1.3)
471.8
648.7
8.7
1,129.2
1,354.0
79.8
2,563.0
33.2
(6.6)
3.0
(3.9)
29.3
2,191.8
90.0
6.7
150.6
2,439.1
Income (Loss) Before Income Tax and Net Realized
Investment Gains and Losses
Long-term Care Reserve Increase
Adjusted Operating Income
(625.3)
750.8
$ 125.5
N.M.
N.M.
1.3
$
123.9
—
123.9
(9.6)% $
0.7
89.1
(3.5)
0.1
(7.2)
(1.7)
521.9
643.9
4.6
1,170.4
1,352.2
86.0
2,608.6
(1.4)
(4.1)
(2.9)
(2.7)
(1.6)
(4.3)
—
(4.3)
2,223.7
93.8
6.9
154.7
2,479.1
129.5
—
129.5
$
82.4%
91.1%
13.3%
11.0%
89.6%
95.9%
83.6%
91.1%
13.2%
11.1%
90.9%
94.8%
Interest Adjusted Loss Ratios:
Individual Disability
Long-term Care
Long-term Care Excluding Reserve Increase
Operating Ratios (% of Premium Income):
Other Expense Ratio
Income (Loss) Ratio
Adjusted Operating Income Ratio
Persistency:
Individual Disability
Long-term Care
N.M. = not a meaningful percentage
80.4 %
(206.8)%
91.0 %
13.4 %
(58.1)%
11.7 %
88.3 %
95.8 %
75
Year Ended December 31, 2018 Compared with Year Ended December 31, 2017
Premium income for individual disability decreased compared to 2017 due to policy terminations and maturities. Premium
income for long-term care was generally consistent with the prior year, with rate increases offsetting policy terminations. 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 which reflect assumptions as of the date of filings. In states for which a rate increase is submitted
and approved, we routinely provide customers options for coverage changes or other approaches that might fit their current
financial and insurance needs.
Net investment income was higher relative to 2017 primarily due to an increase in the level of invested assets and higher
miscellaneous investment income, partially offset by a decline in yield on invested assets. Other income, which includes the
underlying results and associated net investment income of certain blocks of individual disability reinsured business, continues
to decline due to expected terminations and maturities.
Individual disability benefits experience was favorable relative to 2017 due primarily to lower claims incidence and a lower
average size of new claims. The interest adjusted loss ratio for long-term care, excluding the previously discussed reserve
increase, was not comparable to 2017 due to the update in our assumptions during the third quarter of 2018, but was generally
consistent with our expectations in the second half of 2018, with an interest adjusted loss ratio of 85.4 percent.
The other expense ratio was slightly higher than 2017 due to the expected decline in premium income for individual disability,
partially offset by our continued focus on expense management and operating efficiencies.
Year Ended December 31, 2017 Compared with Year Ended December 31, 2016
Premium income for individual disability decreased compared to 2016 due to expected policy terminations and maturities.
Premium income for long-term care increased slightly due to rate increases.
Net investment income was slightly higher relative to 2016 due to a higher level of invested assets, partially offset by a lower
yield and lower miscellaneous investment income. Other income declined due to expected terminations and maturities.
Individual disability benefits experience was favorable relative to 2016 due to lower new claim volumes and a reduction in the
claim reserve discount rate taken in 2016 to recognize the impact on future portfolio yields from increased levels experienced for
bond tenders and calls. Long-term care benefits experience was consistent with 2016 as unfavorable policyholder terminations,
due primarily to mortality experience, offset by the impact of a large group case moving to an individual policy ported status
during 2016. Also impacting benefits experience relative to 2016 was unfavorable mortality experience in our group pension
product.
The other expense ratio was slightly higher than 2016 due to the expected decline in premium income for individual disability,
partially offset by our continued focus on expense management and operating efficiencies.
76
Segment Outlook
During 2019, we will continue to execute on our well-defined strategy of implementing long-term care premium rate increases,
efficient capital management, improved financial analysis, and operational effectiveness. Despite continued premium rate
increases in our long-term care business, we expect overall premium income and adjusted operating revenue to decline over time
as these closed blocks of business wind down. We will likely experience volatility in net investment income due to fluctuations
of miscellaneous investment income and the increased allocation towards alternative assets in the long-term care product line
portfolio. 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, resolutions,
investment returns, premium rate increases, 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 continue to
experience quarterly volatility, particularly in the near term for our long-term care product lines as our claim block matures and
as we continue the implementation of premium rate increases. Specific to our long-term care line of business, which is in loss
recognition and should report levels of benefits plus operating expenses that equal the gross premium reported, we expect the
long term interest adjusted loss ratio to be in the 85 to 90 percent range with some quarterly volatility. 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, resolutions, premium rate increases, benefit change elections, and persistency, could result in a material
impact on the adequacy of our reserves, including adjustments to reserves established under loss recognition.
77
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 expenses not allocated to a line
of business.
Operating Results
(in millions of dollars)
Adjusted Operating Revenue
Net Investment Income
Other Income
Total
Interest and Other Expenses
Loss Before Income Tax and Net Realized Investment
Gains and Losses
Loss from Guaranty Fund Assessment
Adjusted Operating Loss
N.M. = not a meaningful percentage
2018
Year Ended December 31
2017
% Change
% Change
2016
$
$
29.5
2.7
32.2
37.9% $
(6.9)
32.5
21.4
2.9
24.3
15.7% $
(40.8)
3.8
18.5
4.9
23.4
203.3
6.1
191.7
2.8
186.4
(171.1)
—
(171.1)
(2.2)
N.M.
(16.6)
$
(167.4)
20.6
(146.8)
(2.7)
N.M.
9.9
$
(163.0)
—
(163.0)
Year Ended December 31, 2018 Compared with Year Ended December 31, 2017
Net investment income was higher relative to 2017 due primarily to an increase in the level of invested assets and a higher yield.
Interest and other expenses were higher relative to 2017 due primarily to a higher level of outstanding debt, a higher overall rate
of interest, increased acquisition-related expenses, and certain restructuring costs. Interest and other expenses for 2017 includes
a $20.6 million loss incurred in 2017 from a guaranty fund assessment related to an unaffiliated insurer that was declared
insolvent. See Note 14 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion on
the loss from a guaranty fund assessment.
Year Ended December 31, 2017 Compared with Year Ended December 31, 2016
Net investment income was higher relative to 2016 due primarily to a higher yield on invested assets, partially offset by a lower
asset level.
Interest and other expenses were higher relative to 2016 due primarily to the 2017 guaranty fund assessment and an increase in
the amortization of prior period actuarial losses for our pension and other postretirement benefit plans, partially offset by lower
levels of outstanding debt and expenses incurred in 2016 related to the acquisition of Starmount.
Segment Outlook
We expect to continue to generate excess capital on an annual basis through the statutory earnings in our insurance subsidiaries,
aided in part by the reduction in the corporate tax rate resulting from tax reform. We believe we are well positioned with
flexibility to preserve our capital strength while also continuing to return capital to our shareholders.
78
Investments
Overview
Our investment portfolio is well diversified by type of investment and industry sector. We have established an investment
strategy that we believe will provide for adequate cash flows from operations and allow us to hold our securities through periods
where significant decreases in fair value occur. We believe our emphasis on risk management in our investment portfolio,
including credit and interest rate management, has positioned us well and generally reduced the volatility in our results.
We have a formal investment policy that includes overall quality and diversification objectives and establishes limits by asset
class, investment rating, and single issuer. The majority of our investments are in investment-grade publicly traded securities.
This ensures the desired liquidity and preserves the capital value of our portfolios, although due to the long-term nature of our
insurance liabilities we are also able to invest in less liquid investments to obtain superior returns within the limits of our
investment policy. Our asset mix guidelines and limits are established by us, reviewed by the risk and finance committee of
Unum Group's board of directors, and approved by the boards of directors of our insurance subsidiaries. We review our policies
and guidelines annually, or more frequently if deemed necessary, and recommend adjustments as appropriate.
See "Critical Accounting Estimates" contained herein in this Item 7 for further discussion of our valuation of investments.
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, 2018
(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
Gross
Unrealized
Gain
80.2
74.6
58.0
28.6
205.5
103.4
48.6
8.3
4.8
35.8
29.9
15.3
63.4
756.4
$
$
1,551.0
2,872.8
1,915.2
774.0
3,708.0
3,125.4
1,841.9
1,299.6
913.3
684.6
1,357.1
147.9
308.4
260.6
79.2
446.7
373.7
165.8
67.2
162.7
33.0
167.4
3,709.1
6,347.0
30,099.0
$
$
430.3
850.0
3,492.9
Classification
Fair Value
Basic Industry
Capital Goods
Communications
Consumer Cyclical
Consumer Non-Cyclical
Energy
Financial Institutions
Mortgage/Asset-Backed
Sovereigns
Technology
Transportation
U.S. Government Agencies and
Municipalities
Public Utilities
Total
Net
Unrealized
Gain (Loss)
67.7
$
233.8
202.6
50.6
241.2
270.3
117.2
58.9
157.9
(2.8)
137.5
$
$
1,288.3
1,266.8
904.4
592.1
2,741.6
1,373.0
1,234.5
283.1
70.4
870.0
693.2
$
2,839.3
4,139.6
2,819.6
1,366.1
6,449.6
4,498.4
3,076.4
1,582.7
983.7
1,554.6
2,050.3
4,238.6
7,412.8
43,011.7
$
$
415.0
786.6
2,736.5
$
529.5
1,065.8
12,912.7
$
79
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, 2018 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, 2018. The increase in the unrealized loss on fixed maturity securities during
2018 was due to an increase in credit spreads and U.S. Treasury rates.
Unrealized Loss on Investment-Grade Fixed Maturity Securities
Length of Time in Unrealized Loss Position
(in millions of dollars)
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
<= 90 days
> 180 <= 270 days
> 270 days <= 1 year
> 1 year <= 2 years
Sub-total
December 31 September 30
June 30
March 31
2018
2017
December 31
$
$
52.1
36.0
90.2
200.0
94.5
50.5
1.7
525.0
1.6
—
—
2.9
4.5
$
25.9
61.7
158.2
43.9
95.7
9.7
1.9
397.0
—
—
14.2
—
14.2
56.0
149.1
40.3
38.8
51.3
2.0
1.2
338.7
—
13.9
—
—
13.9
$
$
79.8
40.5
30.5
—
44.8
2.9
0.2
198.7
—
—
—
—
—
20.8
9.5
—
1.2
32.1
1.7
—
65.3
1.2
—
—
—
1.2
Total
$
529.5
$
411.2
$
352.6
$
198.7
$
66.5
80
Unrealized Loss on Below-Investment-Grade Fixed Maturity Securities
Length of Time in Unrealized Loss Position
(in millions of dollars)
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
> 1 year <= 2 years
> 2 years <= 3 years
> 3 years
Sub-total
Fair Value < 40% of Amortized Cost
> 3 years
Sub-total
Total
December 31 September 30
June 30
March 31
2018
2017
December 31
$
$
39.7
19.0
11.1
52.8
27.1
4.8
31.6
186.1
0.7
11.3
17.8
29.8
11.0
11.0
$
2.3
6.9
19.5
11.5
13.8
1.9
24.4
80.3
—
—
5.1
5.1
—
—
$
6.4
29.3
14.8
4.7
10.3
9.5
22.5
97.5
—
5.0
—
5.0
—
—
$
19.8
13.6
2.9
—
10.5
13.1
26.6
86.5
—
7.9
—
7.9
—
—
4.7
1.5
0.4
0.7
2.7
13.1
19.6
42.7
—
7.3
7.0
14.3
—
—
$
226.9
$
85.4
$
102.5
$
94.4
$
57.0
At December 31, 2018, we held two below-investment grade fixed maturity securities with a gross unrealized loss greater than
$10.0 million. One security is related to a global pharmaceutical company and had a fair value of $61.5 million and a gross
unrealized loss of $15.5 million. The other security is related to a U.S. based oil and natural gas producer and had a fair value of
$5.0 million and a gross unrealized loss of $11.0 million. We also held one investment grade fixed maturity security at
December 31, 2018 related to a large U.S. based utility with a fair value of $99.5 million and a gross unrealized loss of $7.3
million which, in January 2019, filed for reorganization under Chapter 11 in the U.S. Bankruptcy Court and was downgraded to
below-investment grade. We intend to and have the ability to continue to hold these securities to maturity and believe that the
declines in fair value are temporary.
We had no individual realized investment losses of $10.0 million or greater from other-than-temporary impairments during 2018
or 2017 and no individual realized investment losses of $10.0 million or greater from the sale of fixed maturity securities during
2018, 2017, or 2016.
During 2016, we recognized an other-than-temporary impairment loss of $11.6 million on fixed maturity securities issued by a
large U.S.-based energy company. At the time of the impairment loss, the company had a high debt-to-equity ratio, and its
projected liquidity had decreased significantly as a result of the declines in oil prices and the likelihood that prices may stay at
depressed levels for an extended period of time. The company has assets it can sell, but liquidation may be difficult in the
current environment. Additionally, the lower oil prices resulted in the company's banks significantly reducing the availability on
the company’s revolving line of credit. At the time of the impairment loss, these securities had been in an unrealized loss
position for a period of greater than one year but less than two years.
At December 31, 2018, our mortgage/asset-backed securities had an average life of 6.38 years, effective duration of 5.06 years,
and a weighted average credit rating of Aaa. The mortgage/asset-backed securities are valued on a monthly basis using
81
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, 2018, the amortized cost and fair value of our below-investment-grade fixed maturity securities was
$3,236.8 million and $3,038.6 million, respectively. Below-investment-grade securities are inherently riskier 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.
Fixed Maturity Securities - Foreign Exposure
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 do not have exposure to 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 continually evaluate our foreign
investment risk exposure.
Our monitoring is heightened for investments in certain countries due to our concerns over the current economic and political
environments, and we believe these investments are more vulnerable to potential credit problems. At December 31, 2018, we
had minimal exposure in those countries and had no direct exposure to financial institutions of those countries.
Mortgage Loans
Our mortgage loan portfolio was $2,295.0 million and $2,213.2 million on an amortized cost basis at December 31, 2018 and
2017, 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 impaired mortgage loan at December 31, 2018 with a net realizable value of $3.4 million,
net of a valuation allowance of $0.2 million. We held no impaired mortgage loans at December 31, 2017.
82
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 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 $0.9 million at December 31,
2018. We held $24.0 million of cash collateral from our counterparties at December 31, 2018. The carrying value of fixed
maturity securities posted as collateral to our counterparties was $33.4 million at December 31, 2018. We had nine hundred
thousand cash collateral posted to our counterparties at December 31, 2018. We believe that our credit risk is mitigated by our
use of multiple counterparties, all of which have an investment-grade credit rating, 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 $36.0 million and $32.9 million on a fair value basis at December 31, 2018 and 2017,
respectively.
See Notes 3 and 4 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 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 additional sources of liquidity. Cash is applied to the payment of policy benefits, costs of
acquiring new business (principally commissions), operating expenses, and taxes, as well as purchases of new investments.
We have established an investment strategy that we believe will provide for adequate cash flows from operations. We attempt to
match our asset cash flows and durations with expected liability cash flows and durations to meet the funding requirements of
our business. However, deterioration in the credit market may delay our ability to sell our positions in certain of our fixed
maturity securities in a timely manner and adversely impact the price we receive for such securities, which may negatively
impact our cash flows. Furthermore, if we experience defaults on securities held in the investment portfolios of our insurance
subsidiaries, this will negatively impact statutory capital, which could reduce our insurance subsidiaries' capacity to pay
dividends to our holding companies. A reduction in dividends to our holding companies could force us to seek external
financing to avoid impairing our ability to pay dividends to our stockholders or meet our debt and other payment obligations.
Our policy benefits are primarily in the form of claim payments, and we have minimal exposure to the policy withdrawal risk
associated with deposit products such as individual life policies or annuities. A decrease in demand for our insurance products or
an increase in the incidence of new claims or the duration of existing claims could negatively impact our cash flows from
operations. However, our historical pattern of benefits paid to revenues is generally consistent, even during cycles of economic
downturns, which serves to minimize liquidity risk.
The liquidity requirements of the holding company Unum Group include common stock dividends, interest and debt service,
acquisitions, and ongoing investments in our businesses. Unum Group's liquidity requirements are met by assets held by Unum
Group and our intermediate holding companies, dividends from primarily our insurance subsidiaries, and issuance of common
stock, debt, or other capital securities and borrowings from existing credit facilities, as needed. As of December 31, 2018, Unum
Group and our intermediate holding companies held fixed maturity securities, short-term investments, and cash of $602 million.
Fixed maturity securities consisted primarily of mortgage/asset-backed securities with an average maturity of 5.9 years. Short-
term investments consisted primarily of commercial paper. No significant restrictions exist on our ability to use or access funds
in any of our U.S. or foreign intermediate holding companies. As a result of the TCJA, future amounts repatriated from our
foreign subsidiaries are eligible for a 100 percent exemption from U.S. income tax but may be subject to tax on foreign currency
gain or loss. See "Regulation" contained herein in Item 1 for further discussion regarding the TCJA and, specifically, a transition
tax on undistributed and previously untaxed foreign earnings and profits at reduced rates.
83
As part of our capital deployment strategy, we repurchase 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 May 2018 and authorizes the
repurchase of up to $750 million of common stock through November 2019, with the pace of repurchase activity to depend upon
various factors such as the level of available cash, alternative uses for cash, and our stock price. During 2018, we repurchased
8.7 million shares at a cost of approximately $350 million. The dollar value of shares remaining under the current repurchase
program was approximately $500 million at December 31, 2018. See Note 10 of the "Notes to Consolidated Financial
Statements" contained herein in Item 8.
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) and
Fairwind Insurance Company (Fairwind), both of which are affiliated captive reinsurance subsidiaries domiciled in the United
States with Unum Group as the ultimate parent. The ability of Northwind Re and Fairwind to pay dividends to their respective
parent companies will depend on their satisfaction of applicable regulatory requirements and on the performance of the business
reinsured by Northwind Re and Fairwind.
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. The impacts of the decrease in the U.S. corporate tax rate due to the TCJA resulted in both the reduction of our
admitted deferred tax assets at December 31, 2017, and a decrease in our RBC ratios at December 31, 2018 as a result of the
NAIC's modification of the RBC factors in 2018. Although the RBC ratios for our U.S. insurance subsidiaries are lower, the
RBC ratios are in line with our expectations and are significantly above the level that would require state regulatory action.
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 is subject to the requirements of Solvency II, a European Union (EU) directive, which prescribes capital
requirements and risk management standards for the European insurance industry. Our European holding company is also
subject to the Solvency II requirements relevant to insurance holding companies, while its subsidiaries (the Unum European
Economic Area (EEA) Group), which includes Unum Limited, are subject to group supervision under Solvency II. The Unum
EEA Group received approval from the U.K. Prudential Regulation Authority to use its own internal model for calculating
regulatory capital and also received approval for certain associated regulatory permissions including transitional relief as the
Solvency II capital regime continues to be implemented. There are currently no indications that capital requirements for the
Unum EEA Group will change as a result of the U.K.'s exit from the EU, but economic conditions may in the near term cause
volatility in our solvency ratios.
The payment of dividends to the parent company from our subsidiaries also requires the approval of the individual subsidiary's
board of directors.
The amount available during 2018 for the payment of ordinary dividends from Unum Group's traditional U.S. insurance
subsidiaries, which excludes our captive reinsurers, was approximately $797 million, of which $670.5 million was declared and
paid. The traditional U.S. insurance subsidiaries also paid extraordinary dividends of $89.8 million in 2018. The amount
available during 2018 from Unum Limited was approximately £200 million, of which £115.0 million was declared and paid to
one of our U.K. holding companies. During 2018, Northwind Re paid dividends of $98.0 million to Northwind Holdings.
Fairwind paid no dividends during 2018.
84
During 2019, we intend to maintain a level of capital in our insurance subsidiaries above the applicable capital adequacy
requirements and minimum solvency margins. Although we may not utilize the entire amount of available dividends, based on
applicable restrictions under current law, approximately $995 million is available, without prior approval by regulatory
authorities, during 2019 for the payment of dividends from Unum Group's traditional U.S. insurance subsidiaries, which
excludes our captive reinsurers. Approximately £140 million is available for the payment of dividends from Unum Limited
during 2019, 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 Benefit Plans
We made contributions of $69.3 million and £3.1 million to our U.S. and U.K. defined contribution plans, respectively, in 2018
and expect to make contributions of approximately $75 million and £3 million during 2019. We made a de minimis amount of
contributions to our U.S. qualified defined benefit pension plan and no contribution to our U.K. defined benefit pension plan
during 2018. We do not expect to make any contributions to either plan during 2019. We have met all minimum pension
funding requirements set forth by the Employee Retirement Income Security Act. We have estimated our future funding
requirements under the Pension Protection Act of 2006 and under applicable U.K. law 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 in Item 8 for further discussion of our employee benefit plans.
Debt
There are no significant financial covenants associated with any of our outstanding debt obligations. We continually monitor our
debt covenants to ensure we remain in compliance. We have not observed any current trends that would cause a breach of any
debt covenants.
Maturities, Purchases, and Retirement of Debt
In 2018, our $200.0 million 7.00% senior unsecured notes matured.
Northwind Holdings made principal payments on its floating rate, senior secured notes of $60.0 million, in both 2018 and 2017,
and $64.0 million in 2016.
In 2017, we purchased and retired the remaining $3.4 million of principal on our senior secured floating rate notes acquired
through our purchase of Starmount.
In 2016, our $350.0 million 7.125% senior unsecured notes matured.
Issuance of Debt
In 2018, we issued $300.0 million of 6.25% junior subordinated notes due 2058. The notes are redeemable at or above par on or
after June 15, 2023 and rank equally in the right of payment with our other junior subordinated debt securities.
In 2016, we issued a total of $600.0 million aggregate principal amount of senior notes: (i) $350.0 million aggregate principal
amount of senior notes due in 2021 with an annual coupon rate of 3.00%, and (ii) $250.0 million aggregate principal amount of
senior notes due in 2042 with an annual coupon rate of 5.75%, pursuant to a reopening of the $250.0 million aggregate principal
amount outstanding of our 5.75% senior notes due 2042 issued in 2012. Both issuances are callable at or above par and rank
equally in right of payment with all of our other unsecured and unsubordinated debt. A portion of the net proceeds of the
offering were used for repayment of the debt which matured in 2016.
Credit Facility
In 2016, we amended the terms of our five-year, $400 million unsecured revolving credit facility, which was previously set to
expire in 2018, to extend through March 2021. Under the terms of the agreement, we may request that the credit facility be
increased up to $600 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 borrowing at an interest
85
rate based either on the prime rate or LIBOR. In addition, the credit facility provides for the issuance of letters of credit subject
to certain terms and limitations. At December 31, 2018, letters of credit totaling $2.1 million had been issued from the credit
facility, but there was no borrowed amount outstanding. Our credit facility's financial covenants contain provisions regarding
our leverage and net worth. We do not anticipate any violation of these 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 or lines of credit through 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 filed a shelf registration with the Securities and Exchange Commission in 2017 to issue various types of securities, including
common stock, preferred stock, debt securities, depository shares, stock purchase contracts, units and warrants. 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 in Item 8 for additional information on our
debt.
Commitments
The following table summarizes contractual obligations and our reinsurance recoverable by period as of December 31, 2018:
(in millions of dollars)
Payments Due
Long-term Debt
Total
In 1 Year or
Less
After 1 Year
up to 3 Years
After 3 Years
up to 5 Years
After 5
Years
$
5,363.5
$
162.3
$
1,034.8
$
254.2
$
3,912.2
Policyholder Liabilities
45,275.4
4,714.2
7,280.8
5,543.9
27,736.5
Pension and OPEB
Payables for Collateral on Investments
Miscellaneous Liabilities
Operating Leases
Purchase Obligations
Total
Receipts Due
783.5
128.5
864.8
157.7
572.7
19.4
128.5
672.4
30.4
537.9
38.4
—
35.0
48.5
29.1
112.4
613.3
—
9.6
30.5
5.7
—
147.8
48.3
—
$
53,146.1
$
6,265.1
$
8,466.6
$
5,956.3
$
32,458.1
Reinsurance Recoverable
$
7,957.3
$
345.5
$
660.8
$
616.2
$
6,334.8
Long-term debt includes contractual principal and interest payments and therefore exceeds the amount shown in the consolidated
balance sheets.
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-
86
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.
Pensions and OPEB commitments relate to our defined benefit pension and postretirement plans for our employees, including
our non-qualified pension plan. Pension plan obligations, other than the non-qualified plan, represent our contributions to the
pension plans and are projected based on the expected future minimum contributions as required under current U.S. and U.K.
legislative funding requirements. Non-qualified pension plan and other postretirement benefit obligations represent the expected
benefit payments related to these plans which we expect to pay, as incurred, from our general assets.
Payables for collateral on investments include obligations to return unrestricted cash collateral to our securities lending and
derivative counterparties and obligations to repay advances from regional Federal Home Loan Banks (FHLBs). The amounts
presented in the preceding chart include contractual interest payments and therefore exceed what is reported in the consolidated
balance sheets.
Miscellaneous liabilities include commissions due and accrued, deferred compensation liabilities, contingent considerations,
state premium taxes payable, amounts due to reinsurance companies, legally binding commitments to fund investments, and
various other liabilities that represent contractual obligations. Obligations where the timing of the payment is uncertain are
included in the one year or less category.
See "Critical Accounting Estimates" contained herein in this Item 7 and Notes 3, 4, 6, 8, 9, 13, and 14 of the "Notes to
Consolidated Financial Statements" contained herein in Item 8 for additional information on our various commitments and
obligations.
Off-Balance Sheet Arrangements
Operating leases include noncancelable obligations on certain office space, equipment, and software. Purchase obligations
include commitments of $515.6 million to fund certain of our investments. These are included in the preceding table based on
the expiration date of the commitments. The funds are due upon satisfaction of contractual notice from appropriate external
parties and 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
$57.1 million at December 31, 2018.
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 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 $0.9 million at December 31, 2018.
We held cash collateral from our counterparties of $24.0 million at December 31, 2018 and had posted fixed maturity securities
with a carrying value of $33.4 million as collateral to our counterparties.
See Notes 3, 4, and 14 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 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 increases our investment income with minimal risk. We account for all of our securities lending
87
agreements and repurchase agreements as secured borrowings. We had $0.1 million of securities lending agreements
outstanding which were collateralized by cash at December 31, 2018 and were reported as payables for collateral on investments
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, 2018 was $12.2 million, and the maximum amount outstanding at any month end
was $29.9 million. In addition, at December 31, 2018, we had $171.4 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, 2018 was $145.9 million, and the maximum amount outstanding
at any month end was $219.4 million.
We had no repurchase agreements outstanding at December 31, 2018, nor did we utilize any repurchase agreements during 2018.
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.
Certain of our U.S. insurance subsidiaries are members of regional Federal Home Loan Banks (FHLB). As of December 31,
2018, we owned $24.1 million of FHLB common stock and had obtained $104.0 million in advances from the regional FHLBs
for the purpose of purchasing fixed maturity securities.
See Note 3 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for additional information.
Consolidated Cash Flows
(in millions of dollars)
Net Cash Provided by Operating Activities
Net Cash Used by Investing Activities
Net Cash Used by Financing Activities
Net Change in Cash and Bank Deposits
Operating Cash Flows
Year Ended December 31
2017
2018
2016
$
$
1,536.5
(930.1)
(589.8)
16.6
$
$
$
1,164.1
(499.3)
(687.8)
(23.0) $
1,121.6
(715.5)
(418.6)
(12.5)
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 policy 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.
The variance in the change in insurance reserves and liabilities to reconcile net income to net cash provided by operating
activities as reported in our consolidated statements of cash flows for 2018 compared to the prior two years was due primarily to
the 2018 reserve increase for our long-term care line 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. 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. When market
opportunities arise, 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 proceeds received from issuance of debt, 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, repay maturing debt, and/or to fund our capital deployment program. Our 2018 cash
outflows include a combined purchase amount of $145.4 million, net of cash acquired, for all of our acquisitions during the year.
Our 2016 cash outflows include $129.2 million related to our purchase of Starmount.
88
See Notes 3 and 13 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further information.
Financing Cash Flows
Financing cash flows consist primarily of borrowings and repayments of debt, repurchase of common stock, and dividends paid
to stockholders.
During 2018, our $200.0 million 7.00% senior unsecured notes matured. During 2017, we purchased and retired the
remaining $3.4 million of principal on our senior secured floating rate notes acquired through our purchase of Starmount.
During 2016, we repaid $350.0 million principal upon maturity of our 7.125% notes. We made principal payments of $60.0
million in both 2018 and 2017 and $64.0 million in 2016, on our senior secured non-recourse notes issued by Northwind
Holdings.
During 2018, we issued $300.0 million of 6.25% junior subordinated notes due 2058 and received total proceeds of $290.7
million. During 2016, we issued $350.0 million of 3.00% unsecured senior notes due in 2021 and $250.0 million of 5.75%
unsecured senior notes due in 2042 and received total proceeds of $609.1 million, excluding the associated debt issuance costs
and discounts.
Cash used to repurchase shares of Unum Group's common stock during 2018, 2017, and 2016 was $356.2 million, $401.8
million, and $405.2 million, respectively. During 2018, 2017, and 2016 we paid dividends of $215.6 million, $196.0 million,
and $182.6 million, respectively, to holders of Unum Group's common stock.
See "Debt" contained herein in this Item 7, and Notes 8 and 10 of the "Notes to Consolidated Financial Statements" contained
herein in Item 8 for further information.
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 outlook as well as 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.
Outlook
Issuer Credit Ratings
Financial Strength Ratings
Provident Life and Accident Insurance Company
Provident Life and Casualty Insurance Company
Unum Life Insurance Company of America
First Unum Life Insurance Company
Colonial Life & Accident Insurance Company
The Paul Revere Life Insurance Company
Starmount Life Insurance Company
Unum Insurance Company
Unum Limited
NR = not rated
89
AM Best
Stable
Fitch
Negative
Moody's
Stable
S&P
Stable
bbb
BBB
Baa2
BBB
A
A
A
A
A
A
A-
A-
NR
A
A
A
A
A
A
NR
A
NR
A2
NR
A2
A2
A2
A2
NR
A2
NR
A
NR
A
A
A
A
NR
NR
A-
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.
Fitch, Moody's, and S&P affirmed their ratings for our domestic insurance subsidiaries and issuer credit ratings for Unum Group
during 2018. Fitch also revised their outlook to negative from stable, citing the adverse reserve development in our long-term
care business. There have been no other changes in any of the rating agencies' outlook statements or ratings during 2018 or in
2019 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. Although the outlook for capital
requirements has become more clear, there remains some uncertainty in the industry on how rating agencies will incorporate
recently announced NAIC RBC formula changes in response to tax reform. We continue to work closely with the rating
agencies on these changes. 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 herein in Item 1 and "Risk Factors" contained herein in Item 1A for further discussion.
ITEM 7A. 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 "Risk Factors" contained herein in Item 1A, "Investments" contained herein in Item 7,
and Notes 2, 3, and 4 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for further discussion 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.
90
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.
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.
Debt is not carried at fair value in our consolidated balance sheets. If we modify or replace existing 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, 2018 and 2017 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.
The hypothetical potential changes in fair value of our financial instruments at December 31, 2018 and 2017 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)
Notional
Amount of
Derivatives
December 31, 2018
Hypothetical
Fair Value
FV + 100 BP
Change in
FV
$
$
$
43,011.7
2,317.4
381.8
39,532.1
2,179.6
354.2
$
(3,479.6)
(137.8)
(27.6)
(2,986.8) $
(3,069.2)
(470.7) $
(2,866.2)
2,516.1
203.0
Swaps
Embedded Derivative in Modified Coinsurance Arrangement
$
799.2
$
(7.1) $
(31.1)
(29.1) $
(32.5)
(22.0)
(1.4)
91
(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
Notional
Amount of
Derivatives
December 31, 2017
Hypothetical
Fair Value
FV + 100 BP
Change in
FV
$
$
$
45,457.8
2,306.2
370.0
41,706.3
2,175.6
342.4
$
(3,751.5)
(130.6)
(27.6)
(4,770.3) $
(3,048.7)
(2,645.8) $
(2,819.0)
2,124.5
229.7
Derivatives (1)
Swaps
Embedded Derivative in Modified Coinsurance Arrangement
$
904.5
$
(32.7) $
(15.9)
(54.2) $
(21.0)
(21.5)
(5.1)
(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 had been realized. Changes in this adjustment are also reported as a
component of other comprehensive income or loss, net of deferred taxes.
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 flow
analyses. Because we actively manage our investments and liabilities, actual changes could be less than those estimated above.
We remain in an environment of low interest rates, which continues to place pressure on our profit margins as we invest cash
flows to support our businesses. We estimate that we will have approximately $2.9 billion of investable cash flows in 2019.
Assuming interest rates and credit spreads remain constant throughout 2020 at the January 2019 market levels, our net
investment income would decrease by approximately $0.1 million in 2019 and $1.2 million in 2020 as a result of the investment
of cash flows at levels below 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 assumptions and any mitigating factors such as
pricing adjustments. In addition, a continued low or declining 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 2019 or 2020.
92
Foreign Currency Risk
The functional currency of our U.K. operations is the British pound sterling. The functional currency of our operations in Poland
is the Polish zloty. We are exposed to foreign currency risk arising from fluctuations in the British pound sterling and Polish
zloty to U.S. dollar exchange rates primarily as they relate to the translation of the financial results of our U.K. and Polish
operations. Fluctuations in exchange rates 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 our functional currency 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. or Polish operations.
Assuming the pound to dollar exchange rate decreased 10 percent from the December 31, 2018 and 2017 levels, stockholders'
equity as reported in U.S. dollars would have been lower by approximately $62 million and $71 million, respectively. Assuming
the pound to dollar average exchange rate decreased 10 percent from the actual average exchange rates for 2018 and 2017,
adjusted operating income, as reported in U.S. dollars, would have decreased approximately $11 million in each year. Our
Polish operations are currently not a significant portion of our overall operations, any changes in the dollar exchange rate would
not represent a material impact to our reported financial results in U.S. dollars.
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. We
use foreign currency interest rate swaps to hedge or minimize the foreign exchange risk associated with these instruments.
See "Risk Factors" contained herein in Item 1A and "Consolidated Operating Results" and "Unum International Segment"
contained herein in Item 7 for further information concerning foreign currency translation.
Risk Management
Effectively taking and managing risks is essential to the success of our Company. To facilitate this effort, we have a formal
Enterprise Risk Management (ERM) program, with a framework comprising the following key components:
• Risk-aware 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,
optimizing capital, and protecting franchise value.
Risk-Aware Culture and Governance
We employ a 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 integrity, commitment,
and accountability and we believe these values allow our employees to feel comfortable identifying issues as well as taking
ownership for addressing potential problems.
Our employees have an obligation to report issues that they believe will have a material financial, reputational, or regulatory
impact to the Company. We offer several channels for employees to report their issues or concerns and encourage employees to
use the channel that is most appropriate for their situation. We recommend that an employee initially discuss their concerns with
their manager; however, if that channel is not appropriate an employee may use any of the other reporting channels available.
93
By employing various approaches, we have established a culture that supports candid discussion and reporting of risks while
empowering our employees to take ownership for risk management.
Our 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
Business processes and procedures
employed throughout the Company
through which management assumes
and monitors significant risks
2nd Line: Oversee
3rd Line: Independent Assurance
Management committees chartered
with oversight of activities within the
1st and 2nd lines of defense,
mitigation of substantial exposures,
and management of emerging risks
Independent assurance on the
effectiveness of governance, risk
management, and internal control
performed by internal audit and the
board of directors
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. Our
internal audit team provides periodic independent reviews and assurance activities serving as our third line of risk control.
In addition, our board has an active role, as a whole and through its committees, in overseeing management of our risks. The
board is responsible for the oversight of strategic risk and regularly reviews information regarding our capital, liquidity, and
operations, as well as the risks associated with each. The risk and finance 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. It also 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 audit committee of the
board is responsible for oversight of risks relating to financial reporting risk and certain operational risks. Cyber-related
operational risk is the joint responsibility of the risk and finance committee and the audit committee. The human capital
committee of the board is responsible for oversight of risks relating to our compensation plans and programs. 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.
Our executive risk management committee is responsible for overseeing our enterprise-wide risk management program. The
chief risk officer, 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 operating segments.
Operating segment risk committees for Unum US, Unum International, 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 strategic 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.
94
We monitor our risk profile against our established risk tolerance and limits. Risks falling outside our risk tolerance and limits
are reported to the applicable governance group, where decisions are made pertaining to acceptance of the risk or
implementation of remediation plans or corrective actions as deemed appropriate by that governance group.
Risk Identification and Prioritization
Risk identification and prioritization is an ongoing process, whereby we identify and assess our risk positions and exposures,
including notable risk events. Additionally, we identify emerging risks and analyze how material future risks might affect us.
Knowing the potential risks we face, allows us to monitor and manage their potential effects including adjusting our strategies as
appropriate and holding capital levels which provide financial flexibility. Risk and other management committees have primary
responsibility for identifying and prioritizing risks within their respective areas.
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 on page 1 and "Risk Factors"
contained herein in Item 1A.
Risk Modeling and Controls
We assess material risks, including how they affect us and how individual risks interrelate, to provide valuable information to
management in order that they may effectively manage our risks. We use qualitative and quantitative approaches to assess
existing and emerging risks and to develop mitigating strategies to limit our exposure to both.
We utilize stress testing and scenario analysis for risk management and to shape our business, financial, and strategic planning
activities. Both are key components of our risk appetite policy and play an important role in monitoring, assessing, managing,
and mitigating our primary risk exposures.
In particular, stress testing of our capital and liquidity management strategies enables us to identify areas of high exposure,
assess mitigating actions, develop contingency plans, and guide decisions around our target capital and liquidity levels. For
example, we periodically perform stress tests on certain categories of assets or liabilities to support development of capital and
liquidity risk contingency plans. These tests help ensure that we have a buffer to support our operations in uncertain times and
financial flexibility to respond to market opportunities. Stress testing is also central to reserve adequacy testing, cash flow
testing, and asset and liability management.
In addition, we aim to constantly improve our capital modeling techniques and methodologies that are used to determine a level
of capital that is commensurate with our risk profile and to ensure compliance with evolving regulatory and rating agency
requirements. Our capital modeling reflects appropriate aggregation of risks and diversification benefits resulting from our mix
of products and business units.
Our internal capital modeling and allocation aids us in making significant business decisions including strategic planning, capital
management, risk limit determination, reinsurance purchases, hedging activities, asset allocation, pricing, and corporate
development.
Risk Management Activities
We accept and manage strategic, credit, and insurance risks in accordance with our corporate strategy, investment policy, and
annual business plans. The following fundamental principles are embedded in our risk management efforts across our Company.
• We believe in the benefits of specialization and a focused business strategy. We seek profitable risk-taking in areas
where we have established risk management skills and capabilities.
• We seek to manage our exposure to insurance risk through a combination of prudent underwriting with effective risk
selection, maintaining pricing discipline, sound reserving practices, claims operational effectiveness, and selective use
of reinsurance. 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.
95
• We value the importance of managing cyber-related risks, and have policies and procedures in place to help protect
•
against insider trading and allow for timely disclosure of material cybersecurity events.
Finally, we foster a risk-aware 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.
Annually, we file our Own Risk and Solvency Assessment (ORSA) summary report with the applicable insurance regulators for
our U.S. insurance subsidiaries. This report provides 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. See "Regulation" contained herein in Item 1 for additional information regarding the ORSA.
96
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Unum Group
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Unum Group and subsidiaries (the Company) as of
December 31, 2018 and 2017, 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, 2018, and the related notes and financial statement
schedules listed in the Index at Item 15(a)(2) (collectively referred to as the "financial statements"). In our opinion, the
financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company
at December 31, 2018 and 2017, and the consolidated results of operations and its cash flows for each of the three years in the
period ended December 31, 2018, 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)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control -Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) and our report dated February 19, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express
an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due
to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1999.
Chattanooga, Tennessee
February 19, 2019
97
CONSOLIDATED BALANCE SHEETS
Unum Group and Subsidiaries
Assets
Investments
Fixed Maturity Securities - at fair value (amortized cost: $40,275.2; $39,780.5)
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
Deferred Income Tax
Other Assets
December 31
2018
2017
(in millions of dollars)
$
43,011.7
2,295.0
3,729.9
702.9
968.1
50,707.6
94.0
1,615.5
4,662.4
690.6
2,309.4
350.3
546.9
109.9
789.0
45,457.8
2,213.2
3,571.1
646.8
1,155.1
53,044.0
77.4
1,665.7
4,879.2
690.1
2,184.6
338.6
504.8
—
628.7
Total Assets
$
61,875.6
$
64,013.1
See notes to consolidated financial statements.
98
CONSOLIDATED BALANCE SHEETS - Continued
Unum Group and Subsidiaries
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
Payables for Collateral on Investments
Other Liabilities
December 31
2017
2018
(in millions of dollars)
$
$
1,695.7
44,841.9
363.3
1,594.8
24.0
—
—
2,971.3
128.1
1,634.7
1,605.2
45,601.6
373.1
1,595.0
2.9
199.0
199.9
2,738.4
396.2
1,726.9
Total Liabilities
53,253.8
54,438.2
Commitments and Contingent Liabilities - Note 14
Stockholders' Equity
Common Stock, $0.10 par
Authorized: 725,000,000 shares
Issued: 305,104,548 and 304,448,032 shares
Additional Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Treasury Stock - at cost: 90,551,513 and 81,900,950 shares
Total Stockholders' Equity
30.5
2,321.7
(814.2)
9,863.1
(2,779.3)
30.5
2,303.3
127.5
9,542.2
(2,428.6)
8,621.8
9,574.9
Total Liabilities and Stockholders' Equity
$
61,875.6
$
64,013.1
See notes to consolidated financial statements.
99
CONSOLIDATED STATEMENTS OF INCOME
Unum Group and Subsidiaries
Revenue
Premium Income
Net Investment Income
Realized Investment Gain (Loss)
Other-Than-Temporary Impairment Loss on Fixed Maturity
Securities
Net Realized Investment Gain (Loss), Excluding Other-Than-
Temporary Impairment Loss on Fixed Maturity Securities
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
Compensation Expense
Other Expenses
Total Benefits and Expenses
Income Before Income Tax
Income Tax Expense (Benefit)
Current
Deferred
Total Income Tax Expense
Net Income
Net Income Per Common Share
Basic
Assuming Dilution
See notes to consolidated financial statements.
100
Year Ended December 31
2018
2016
2017
(in millions of dollars, except share data)
As Adjusted
$
$
8,986.1
2,453.7
$
8,597.1
2,451.7
8,357.7
2,459.0
(17.5)
(8.1)
(30.5)
(22.0)
(39.5)
198.2
11,598.5
8,020.4
1,108.4
167.3
(668.0)
565.5
885.9
891.2
10,970.7
48.4
40.3
197.7
11,286.8
54.7
24.2
205.6
11,046.5
7,055.7
1,060.8
159.9
(628.0)
527.1
852.3
855.0
9,882.8
6,941.8
1,026.7
166.0
(592.4)
493.0
839.1
824.6
9,698.8
627.8
1,404.0
1,347.7
227.4
(123.0)
104.4
401.3
8.5
409.8
385.7
30.6
416.3
523.4
$
994.2
$
931.4
2.38
2.38
$
$
4.39
4.37
$
$
3.96
3.95
$
$
$
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unum Group and Subsidiaries
Net Income
Other Comprehensive Income (Loss)
Change in Net Unrealized Gain on Securities Before Adjustment
(net of tax expense (benefit) of $(614.2); $328.1; $318.0
Change in Adjustment to Deferred Acquisition Costs and Reserves
for Future Policy and Contract Benefits, Net of Reinsurance (net
of tax expense (benefit) of $371.7; $(245.0); $(200.6)
Change in Net Gain on Hedges (net of tax benefit of $8.2; $24.4;
$25.4)
Change in Foreign Currency Translation Adjustment (net of tax
benefit of $0.6; $-; $-)
Change in Unrecognized Pension and Postretirement Benefit
Costs (net of tax expense (benefit) of $17.0; $(8.3); $(34.2))
Total Other Comprehensive Income (Loss)
2018
$
Year Ended December 31
2017
(in millions of dollars)
$
994.2
$
523.4
2016
931.4
(2,314.5)
721.7
661.9
1,411.8
(554.5)
(425.6)
(31.7)
(50.7)
60.9
(924.2)
(45.2)
99.5
(43.0)
178.5
(50.5)
(180.4)
(72.5)
(67.1)
Comprehensive Income (Loss)
$
(400.8) $
1,172.7
$
864.3
See notes to consolidated financial statements.
101
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unum Group and Subsidiaries
Common Stock
Balance at Beginning of Year
Common Stock Activity
Balance at End of Year
Additional Paid-in Capital
Balance at Beginning of Year
Common Stock Activity
Balance at End of Year
Accumulated Other Comprehensive Income (Loss)
Balance at Beginning of Year
Adjustment to Adopt Accounting Standard Update - Note 1
Other Comprehensive Income (Loss)
Balance at End of Year
Retained Earnings
Balance at Beginning of Year
Adjustment to Adopt Accounting Standard Update - Note 1
Net Income
Dividends to Stockholders (per common share: $0.98; $0.86; $0.77)
Balance at End of Year
Treasury Stock
Balance at Beginning of Year
Purchases of Treasury Stock
Balance at End of Year
2018
Year Ended December 31
2017
(in millions of dollars)
2016
$
$
30.5
—
30.5
$
30.4
0.1
30.5
30.3
0.1
30.4
2,303.3
18.4
2,321.7
127.5
(17.5)
(924.2)
(814.2)
9,542.2
14.5
523.4
(217.0)
9,863.1
2,272.8
30.5
2,303.3
2,247.2
25.6
2,272.8
(51.0)
—
178.5
127.5
8,744.0
—
994.2
(196.0)
9,542.2
16.1
—
(67.1)
(51.0)
7,995.2
—
931.4
(182.6)
8,744.0
(2,428.6)
(350.7)
(2,779.3)
(2,028.2)
(400.4)
(2,428.6)
(1,624.9)
(403.3)
(2,028.2)
Total Stockholders' Equity at End of Year
$
8,621.8
$
9,574.9
$
8,968.0
See notes to consolidated financial statements.
102
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unum Group and Subsidiaries
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
Change in Insurance Reserves and Liabilities
Change in Income Taxes
Change in Other Accrued Liabilities
Non-cash Components of 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 Decrease in Payables for Collateral on Investments
Acquisition of Business (Net of Cash Acquired)
Net Purchases of Property and Equipment
Net Cash Used by Investing Activities
Cash Flows from Financing Activities
Short-term Debt Repayment
Issuance of Long-term Debt
Long-term Debt Repayment
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
2018
Year Ended December 31
2017
(in millions of dollars)
2016
As Adjusted
$
523.4
$
994.2
$
931.4
(4.7)
(102.5)
1,193.1
(39.1)
(10.1)
(211.1)
39.5
101.4
46.6
1,536.5
642.5
2,815.4
454.0
(3,861.7)
(623.2)
200.5
(268.1)
(145.4)
(144.1)
(930.1)
(200.0)
290.7
(60.0)
4.6
(356.2)
(215.6)
(53.3)
(589.8)
16.6
77.4
(101.8)
(100.9)
441.9
25.6
14.6
(200.1)
(40.3)
103.4
27.5
1,164.1
436.3
2,560.8
257.9
(2,808.5)
(474.3)
(356.4)
(9.8)
—
(105.3)
(499.3)
—
—
(63.5)
10.8
(401.8)
(196.0)
(37.3)
(687.8)
(167.3)
(99.4)
368.2
34.7
125.8
(187.7)
(24.2)
101.7
38.4
1,121.6
911.5
2,197.8
331.3
(3,362.8)
(576.0)
6.3
(9.4)
(129.2)
(85.0)
(715.5)
—
609.1
(414.0)
8.5
(405.2)
(182.6)
(34.4)
(418.6)
(23.0)
(12.5)
100.4
112.9
Cash and Bank Deposits at End of Year
$
94.0
$
77.4
$
100.4
See notes to consolidated financial statements.
103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unum Group and Subsidiaries
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 a leading provider of financial protection benefits in the United States and the United
Kingdom. Our products include disability, life, accident, critical illness, dental and vision, and other related services. We market
our products primarily through the workplace.
We have three principal operating business segments: Unum US, Unum International, 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. Our fixed
maturity securities 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 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 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 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
104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 1 - Significant Accounting Policies - Continued
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 over the remaining life of
the investment. 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 and assign an internal credit quality rating 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 $3,449.3 million and
$3,307.5 million of policy loans ceded to reinsurers at December 31, 2018 and 2017, 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
proportional 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 premium tax or a reduction of income tax. The amortization of
the principal amount invested in these partnerships is reported as a component of either premium tax or income tax.
Our investments in private equity partnerships are passive in nature and represent funds that are primarily invested in private
credit, private equity, and real assets. We account for our investments in these partnerships using either the equity method or at
fair value through net income depending on the level of ownership and the degree of our influence over partnership operating
and financial policies. For investments in partnerships accounted for under the equity method, we report our investments at our
share of the partnership's net asset value (NAV) and record our portion of partnership earnings is recorded as a component of net
investment income. For investments in partnerships accounted for at fair value through net income, we also report our
investments at our share of the partnership's NAV as a practical expedient for fair value with increases or decreases recorded as a
component of net investment income. Distributions received from the funds arise from income generated by the underlying
investments as well as the liquidation of the underlying investments and there is generally not a public market for these
investments.
See notes 2 and 3 for further discussion of our other long-term investments.
Short-term Investments: Short-term investments are carried at cost. Short-term investments include investments maturing
within one year of purchase, such as corporate commercial paper and U.S. Treasury bills, bank term deposits, and other cash
accounts and cash equivalents earning interest.
105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 1 - Significant Accounting Policies - Continued
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.
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 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. For gains or losses on the derivative instrument that are excluded from the assessment of hedge
effectiveness, those gains and losses are recognized in other comprehensive income or loss and amortized into earnings in the
same income statement line as the related hedged item. 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.
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 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 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.
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, 3 and 4.
106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 1 - Significant Accounting Policies - Continued
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. Therefore, 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 non-interest sensitive policies are amortized in proportion to the premium income we expect
to receive over the lives of the policies. 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.
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 impairment charge is
107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 1 - Significant Accounting Policies - Continued
determined by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and
liabilities. The carrying amount of goodwill is then 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 $1,151.8
million and $1,067.7 million as of December 31, 2018 and 2017, 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
non-interest sensitive 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 $96.7 million and $27.9 million at December 31, 2018 and 2017, respectively.
The accumulated amortization for value of business acquired was $133.0 million and $130.4 million as of December 31, 2018
and 2017, respectively.
The amortization of value of business acquired, which is included in other expenses in the consolidated statements of income,
was $6.4 million, $4.8 million, and $5.1 million for the years ended December 31, 2018, 2017, and 2016, 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 non-interest sensitive 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 non-interest sensitive 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. Discount rate assumptions are based on actual and expected net investment returns.
Persistency assumptions are based on our actual historical experience adjusted for future expectations. Claim incidence and
claim resolution rate assumptions related to morbidity and mortality 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 are developed 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.
Policy reserves require ongoing loss recognition testing. 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. This becomes the new basis for policy reserves going forward, subject to future loss
recognition testing.
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 and long-term care 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
108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 1 - Significant Accounting Policies - Continued
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 factors affecting
claim experience change. Claim reserves do not include a provision for adverse deviation. 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 adjustments to our deferred taxes
resulting from tax rate changes through income as of the date of enactment. 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 and deferred debt issuance costs. Short-term debt consists of debt due within the next twelve months, including that
portion of debt otherwise classified as long-term. Original issue discount or premium as well as debt issuance 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. See Note 10.
Revenue Recognition: Our non-interest sensitive 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.
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.
109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 1 - Significant Accounting Policies - Continued
Where applicable, gains or losses on reinsurance transactions are deferred and amortized into earnings based upon expected
future premium income for non-interest sensitive 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, 2018 and 2017 was $12.5 million and $17.7 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, 2018, 2017, and 2016, premium tax expense was $155.8 million, $158.0 million, and $152.5 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. Stock-based awards are expensed over the requisite service period, or for
performance share units over the requisite service period, or remaining service period, if and when it becomes probable that the
performance conditions will be satisfied, with an offsetting increase to additional paid-in capital in stockholders' equity.
Forfeitures of stock-based awards are recognized as they occur. 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 $301.2 million and $328.3
million at December 31, 2018 and 2017, respectively.
110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 1 - Significant Accounting Policies - Continued
Accounting Updates Adopted in 2018:
Accounting
Standards
Codification
(ASC)
ASC 230
"Statement of
Cash Flows"
Description
This update provided clarifying guidance intended to
reduce the diversity in practice in how certain cash
receipts and cash payments are presented and
classified in the statement of cash flows. The update
addressed eight specific cash flow issues that relate to
various types of transactions. The guidance was
applied retrospectively.
ASC 606
"Revenue from
Contracts with
Customers"
These updates superseded virtually all existing
guidance regarding the recognition of revenue from
customers. Specifically excluded from the scope of
these updates are insurance contracts, although our
fee-based service products are included within the
scope. Our fee-based service products, which are
primarily sold in our Unum US segment, are reported
in other income within our consolidated statements of
income and represent less than one percent of our total
revenue. The core principle of this guidance is that
revenue recognition should depict the transfer of
goods or services to customers in an amount that
reflects the consideration to which an entity expects to
be entitled in exchange for those goods or services.
Accordingly, we continue to recognize revenue for
these fee-based service products as services are
rendered. The guidance was applied retrospectively
for all periods presented or retrospectively with a
cumulative-effect adjustment at the date of adoption.
111
Effect on Financial
Date of
Adoption
Statements
January 1, 2018 The adoption of this update
resulted in the reclassification
of certain cash inflows
between investing activities
and operating activities
within our consolidated
statements of cash flows.
The reclassification primarily
related to cash distributions
from equity method investees
and the bifurcation of those
distributions as either returns
on investment or returns of
investment which resulted in
a reclassification of cash
inflows from investing
activities to operating
activities. The remaining
portion of the reclassification
related to the receipt of
proceeds from corporate-
owned life insurance benefits
which resulted in a
reclassification of cash
inflows from operating
activities to investing
activities. The adoption of
this update had no effect on
our financial position or
results of operations. See the
summary tables contained
herein for the financial
statement impacts of this
retrospective adoption.
January 1, 2018 The adoption of these updates
did not have an impact on our
financial position or results of
operations and did not result
in expanded disclosures due
to the immaterial nature of
our fee-based service
products relative to our
overall business.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 1 - Significant Accounting Policies - Continued
ASC
ASC 715
"Compensation -
Retirement
Benefits"
Description
This update required the service cost component of net
periodic pension and postretirement benefit costs to be
included as a component of compensation costs in an
entity's statement of income. Other components of net
periodic pension and postretirement benefit costs are
required to be presented separately from the service
cost along with a disclosure identifying the line items
in which these costs are presented in the statement of
income. The amendments in this update were applied
retrospectively or prospectively depending on the
specific requirement of the update.
ASC 740
"Income Taxes"
This update eliminated the exception that required the
tax effect of intra-entity asset transfers other than
inventory to be deferred until the transferred asset is
sold to a third party or otherwise recovered through
use. It required recognition of tax expense from the
sale of the asset in the seller’s tax jurisdiction when
the transfer occurs, even though the pre-tax effects of
that transaction are eliminated in consolidation. The
guidance was applied retrospectively.
ASC 815
"Derivatives and
Hedge
Accounting"
This update provided targeted improvements to
accounting for hedging activities for both nonfinancial
and financial risk components, aligns the recognition
and presentation of the effects of the hedging
instrument and the hedged item in the financial
statements, eases certain documentation and
effectiveness assessment requirements, and enhances
transparency through expanded disclosures. For cash
flow and net investment hedges existing at the date of
adoption, the guidance was applied using a modified
retrospective approach through a cumulative-effect
adjustment to accumulated other comprehensive
income with a corresponding adjustment to retained
earnings as of the beginning of the fiscal year the
guidance is adopted. The amended presentation and
disclosure guidance were required prospectively.
Early adoption was permitted.
Effect on Financial
Date of
Adoption
Statements
January 1, 2018 The adoption of this update
resulted in the reclassification
of service cost from the other
expenses line item to the
compensation expense line
item on our consolidated
statements of income but had
no effect on our financial
position or results of
operations. We elected to use
the practical expedient for the
retrospective application of
this update. See the summary
tables contained herein for
the financial statement
impacts of this retrospective
adoption.
January 1, 2018
The adoption of this update
did not have an impact on our
financial position or results of
operations.
January 1, 2018 We elected to early adopt this
update. The adoption of this
update did not have an
impact on our financial
position or results of
operations; however, it
expanded our disclosures.
This update also simplified
hedge documentation
requirements and expanded
available hedging strategies.
112
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 1 - Significant Accounting Policies - Continued
ASC
ASC 820 "Fair
Value
Measurement"
ASC 825
"Financial
Instruments -
Overall"
Description
This update amended the fair value measurement
guidance by removing or clarifying certain existing
disclosure requirements, while also adding new
disclosure requirements. Specifically, this update
removed certain disclosures related to Level 1 and
Level 2 transfers and also removed the discussion
regarding valuation processes of Level 3 fair value
measurements. The update modifies guidance related
to investments in certain entities that calculate net
asset value to explicitly require disclosure regarding
timing of liquidation of the investee's assets and
timing of redemption restrictions. The update adds
disclosures around the changes in unrealized gains and
losses in other comprehensive income for recurring
Level 3 investments held at the end of the reporting
period and adds disclosures regarding certain
unobservable inputs on Level 3 fair value
measurements. The guidance was applied
retrospectively or prospectively depending on the
specific requirement of the update. Entities are
permitted to early adopt any removed or modified
disclosures and may delay adoption of the additional
disclosures until their effective date.
This update changed the accounting and disclosure
requirements for certain financial instruments. These
changes include a requirement to measure equity
investments, other than those that result in
consolidation or are accounted for under the equity
method, at fair value through net income unless the
investment qualifies for certain practicability
exceptions. In addition, the update clarified guidance
related to the valuation allowance assessment when
recognizing deferred tax assets resulting from
unrealized losses on available-for-sale fixed maturity
securities. Changes also included the modification of
certain disclosures around the fair value of financial
instruments, including the requirement for separate
presentation of financial assets and liabilities by
measurement category, as well as the elimination of
certain disclosures around methods and significant
assumptions used to estimate fair value. The guidance
was applied using a modified retrospective approach
through a cumulative-effect adjustment to
accumulated other comprehensive income with a
corresponding adjustment to retained earnings as of
the beginning of the fiscal year of adoption.
Date of
Adoption
December 31,
2018 for the
removal and
modification of
certain
disclosures and
January 1, 2020
for the addition
of certain
disclosures.
Effect on Financial
Statements
We elected to early adopt the
removal and modification of
disclosures, as permitted by
the update. We have elected
to delay the adoption of the
additional disclosures until
the effective date. The
adoption of this update will
modify our disclosures but
will not have an impact on
our financial position or
results of operations.
January 1, 2018 See the summary tables
contained herein for the
financial statement impacts
of this modified retrospective
adoption on our financial
statement line items at
January 1, 2018.
113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 1 - Significant Accounting Policies - Continued
Summary of Financial Statement Impacts of Accounting Updates Adopted in 2018:
For the Year Ended December 31
Historical
Accounting
Method
2017
As
Adjusted
Effect of
Change
Historical
Accounting
Method
(in millions of dollars)
2016
As
Adjusted
Effect of
Change
Adjustments due to ASC 230
Consolidated Statements of Cash Flow
Cash Flows from Operating Activities
Other, Net
$
12.8
$
27.5
$
14.7
$
32.9
$
38.4
$
5.5
Cash Flows from Investing Activities
Proceeds from Sales and Maturities of
Other Investments
Adjustments due to ASC 715
Consolidated Statements of Income
Compensation Expense
Other Expenses
Adjustments due to ASC 825
Consolidated Balance Sheets
Assets
Investments
Other Long-term Investments
Liabilities
Deferred Income Tax
Stockholders' Equity
272.6
257.9
(14.7)
336.8
331.3
(5.5)
For the Year Ended December 31
Historical
Accounting
Method
2017
As
Adjusted
Effect of
Change
Historical
Accounting
Method
(in millions of dollars)
2016
As
Adjusted
Effect of
Change
$
$
844.4
862.9
$
852.3
855.0
$
7.9
(7.9)
$
832.1
831.6
$
839.1
824.6
7.0
(7.0)
Balance at
December 31,
2017
Balance at
January 1, 2018
(in millions of dollars)
Effect of
Change
$
646.8
$
643.0
$
(3.8)
199.0
198.2
(0.8)
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
127.5
9,542.2
110.0
9,556.7
(17.5)
14.5
For the adoption of these updates, certain reclassifications have been made to prior year amounts in order to conform to current
year presentation.
114
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 1 - Significant Accounting Policies - Continued
Accounting Updates Adopted in 2017:
ASC
ASC 944 "Financial
Services -
Insurance"
Description
This update changed the disclosure requirements for
certain insurance contracts. These changes included a
requirement to disclose the rollforward of the liability for
unpaid claims and claim adjustment expenses in both
interim and annual reporting periods for long-duration and
short-duration insurance contracts. Additional claims
disclosures were also required for short-duration
contracts. The guidance was applied retrospectively.
Date of
Adoption
January 1, 2016
for annual
reporting period
disclosures and
January 1, 2017
for interim
reporting period
disclosures.
Effect on Financial
Statements
The adoption of this
update expanded our
interim reporting period
disclosures but had no
effect on our financial
position or results of
operations. The annual
reporting period
disclosure requirements
were only applicable to
our individual dental
products, which we
deem immaterial, and
therefore did not alter
our annual disclosures.
ASC 718
"Compensation -
Stock
Compensation"
This update changed the accounting and disclosure
requirements for certain aspects of share-based payments
to employees. The update required all income tax effects
of stock-based compensation awards to be recognized in
the income statement when the awards vest or are settled.
The update also allows an employer to repurchase more of
an employee's shares than it can today for tax withholding
purposes without triggering liability accounting and to
make a policy election to account for forfeitures as they
occur. Additionally, the update required reclassification of
tax-related cash flows resulting from share-based
payments to be classified as operating activities instead of
financing activities on the statement of cash flows.
Transition guidance for the amendments varied between
the retrospective, modified retrospective, and prospective
methods depending on the specific requirement of the
update.
January 1, 2017 The adoption of this
update did not have a
material effect on our
financial position or
results of operations.
The impact of the
update reduced our
effective income tax
rate by a de minimis
amount for the year
ended December 31,
2017. During periods
in which the vesting
date fair value differs
from the grant date fair
value of certain stock-
based compensation
awards, we may
experience volatility in
the income tax
recognized in our
results of operations.
The amendment related
to the reclassification of
tax-related cash flows
in our consolidated
statements of cash
flows has been applied
prospectively.
115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 1 - Significant Accounting Policies - Continued
Accounting Updates Adopted in 2016:
ASC
ASC 820 "Fair
Value Measurement"
ASC 835 "Interest -
Imputation of
Interest"
Description
This update eliminated the requirement to categorize
within the fair value hierarchy table investments whose
fair value is measured at net asset value using the practical
expedient. Instead, entities are required to disclose the
fair value of these investments so that financial statement
users can reconcile amounts reported in the fair value
hierarchy table to the amounts reported on the
consolidated balance sheets. The guidance was applied
retrospectively.
This update simplified the presentation of deferred debt
issuance costs by requiring these costs to be presented in
the balance sheet as a reduction of the carrying amount of
the debt liability to which the deferred costs relate, rather
than classifying the deferred costs as an asset. This
classification is consistent with the treatment of debt
discounts. We applied the amendments in the update
retrospectively, adjusting all prior periods in our
consolidated financial statements and accompanying
notes.
Date of
Adoption
January 1, 2016 The adoption of this
Effect on Financial
Statements
update modified certain
of our annual reporting
period disclosures for
invested assets held in
our employee benefit
plans but had no effect
on our financial
position or results of
operations.
January 1, 2016 The adoption of this
update resulted in
reclassification
adjustments to our
consolidated balance
sheets but had no effect
on our financial
position or results of
operations.
116
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 1 - Significant Accounting Policies - Continued
Accounting Updates Outstanding:
ASC
ASC 220 "Income
Statement -
Reporting
Comprehensive
Income"
ASC 310
"Receivables -
Nonrefundable Fees
and Other Costs"
Description
This update allows entities to make an optional
accounting policy election to reclassify the stranded tax
effects arising as a result of the recognition of the
enactment of the tax bill, H.R.1, An Act to Provide
Reconciliation Pursuant to Titles II and V of the
Concurrent Resolution on the Budget for Fiscal Year
2018, more commonly known as the Tax Cuts and Jobs
Act (TCJA) from accumulated other comprehensive
income to retained earnings. Tax effects that are stranded
in accumulated other comprehensive income for reasons
other than the TCJA may not be reclassified. This update
requires additional disclosures on whether an entity elects
to reclassify the stranded tax effects and its policy for
releasing tax effects from accumulated other
comprehensive income. This guidance may be applied in
the period of adoption or retrospectively to each period in
which the effect of the change in federal income tax rate
in the TCJA is recognized, with early adoption permitted.
This update shortens the amortization period to the
earliest call date for certain callable debt securities held at
a premium. This update does not impact securities held
at a discount. The guidance is to be applied using a
modified retrospective approach through a cumulative-
effect adjustment to retained earnings as of the beginning
of the period of adoption, with early adoption permitted.
Effect on Financial
Statements
Date of
Adoption
January 1, 2019 The adoption of this
update will expand
certain of our
disclosures but will
have no impact on our
financial position or
results of operations
because we do not
intend to make the
optional accounting
policy election to
reclassify the stranded
tax effects resulting
from the TCJA from
accumulated other
comprehensive income
to retained earnings.
January 1, 2019 We have determined
that certain of our
callable debt securities
are within the scope of
this update. The
adoption of this update
will not have a material
impact on our financial
position or results of
operations.
117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 1 - Significant Accounting Policies - Continued
ASC
ASC 718
"Compensation -
Stock
Compensation"
ASC 842 "Leases"
Description
This update generally aligns the accounting guidance for
share-based payments issued to non-employees with
guidance for share-based payments issued to employees.
Specifically, the update requires non-employee share-
based payments to be measured using the grant date fair
value of the equity instruments that an entity is obligated
to issue when the good has been delivered or the service
has been rendered rather than being remeasured through
the performance completion date. Additionally, for non-
employee share-based payments that contain performance
conditions, the update will change the criteria regarding
the recognition of compensation cost to when
achievement of a performance condition is probable
rather than upon actual achievement of the performance
condition. The guidance is to be applied using a
modified retrospective approach through a cumulative-
effect adjustment to retained earnings as of the beginning
of the period of adoption, with early adoption permitted.
For purposes of determining the cumulative effect
adjustment, the guidance shall be applied only to equity-
classified non-employee share-based payments for which
a measurement date has not been established and
liability-classified non-employee share-based payments
that have not been settled as of the date of adoption.
This update changes the accounting for leases, requiring
lessees to report most leases on their balance sheets,
regardless of whether the lease is classified as a finance
lease or an operating lease. For lessees, the initial lease
liability is equal to the present value of lease payments,
and a corresponding right-of-use asset, adjusted for
certain items, is also recorded. Expense recognition for
lessees will remain similar to current accounting
requirements for capital and operating leases. For
lessors, the guidance modifies the classification criteria
and the accounting for sales-type and direct financing
leases. The guidance may be applied using a modified
retrospective approach at either the beginning of the
earliest comparative period presented or as of the
beginning of the period of adoption. The guidance also
allows practical expedients related to adoption
considerations for leases that commenced before the date
of adoption. Early adoption is permitted.
Date of
Adoption
January 1, 2019 The adoption of this
Effect on Financial
Statements
update will not have an
impact on our financial
position or results of
operations.
January 1, 2019 We will adopt this
update using the
modified retrospective
transition option that
allows for application
of the guidance at the
beginning of the period
of adoption. The
adoption of this update
on January 1, 2019 will
result in the recognition
of a lease liability of
approximately $125
million with a
corresponding right-of-
use asset, less an
immaterial cumulative-
effect decrease to
retained earnings
related to our operating
leases. We will elect to
apply the package of
practical expedients
available to leases that
commenced prior to the
date of adoption. We
do not expect this
update to have an
impact to our results of
operations but it will
expand our disclosures.
118
Date of
Adoption
January 1, 2020 We have not yet
Effect on Financial
Statements
determined the
expected impact on our
financial position or
results of operations.
January 1, 2020 The adoption of this
update will not have a
material effect on our
financial position or
results of operations.
December 31,
2020
We have not yet
determined the
expected impact on our
disclosures.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 1 - Significant Accounting Policies - Continued
ASC
ASC 326 "Financial
Instruments - Credit
Losses"
ASC 350
"Intangibles -
Goodwill and
Other"
ASC 715
"Compensation -
Retirement
Benefits"
Description
This update amends the guidance on the impairment of
financial instruments. The update adds an impairment
model known as the current expected credit loss model
that is based on expected losses rather than incurred
losses and will generally result in earlier recognition of
allowances for losses. The current expected credit loss
model applies to financial instruments such as mortgage
loans, fixed maturity securities classified as held-to-
maturity, and certain receivables. The update also
modifies the other-than-temporary impairment model
used for available-for-sale fixed maturity securities such
that credit losses are recognized as an allowance rather
than as a reduction in the amortized cost of the security.
The reversal of previously recognized credit losses on
available-for-sale fixed maturity securities is allowed
under specified circumstances. Additional disclosures
will also be required, including information used to
develop the allowance for losses. The guidance is to be
applied to most instruments in scope using a modified
retrospective approach through a cumulative-effect
adjustment to retained earnings as of the beginning of the
period of adoption. For available-for-sale fixed maturity
securities, the update is applied prospectively. Other-
than-temporary impairment losses recognized on
available-for-sale fixed maturity securities prior to
adoption of the update cannot be reversed. Early
adoption is permitted.
This update eliminates the requirement to calculate the
implied fair value of goodwill (the second step in the
current two-step test) to measure a goodwill impairment
charge. Instead, entities should perform the goodwill
impairment test by comparing the fair value of a
reporting unit with its carrying amount and recognize an
impairment charge for the excess of the carrying amount
over the fair value, with the loss not to exceed the total
amount of goodwill allocated to that reporting unit. The
guidance is to be applied prospectively, with early
adoption permitted for goodwill impairment tests
performed on testing dates after January 1, 2017.
This update amends the defined benefit pension and other
postretirement benefit guidance by removing or
clarifying certain existing disclosures requirements, while
also adding new disclosure requirements. Specifically,
this update removes the requirement to disclose the
effects of a one-percentage point change in the assumed
healthcare cost trend and the requirement to disclose
amounts in accumulated other comprehensive income
expected to be recognized as part of net periodic benefit
cost of the next year. This update adds a requirement to
describe the reasons for significant gains and losses
related to changes in the benefit obligation for the period.
The update also clarifies that the projected benefit
obligation (PBO) and accumulated benefit obligation
(ABO) and fair value of plan assets are to be disclosed
for plans with PBOs or ABOs in excess of plan assets.
The guidance is to be applied retrospectively and early
adoption is permitted.
119
Effect on Financial
Statements
Date of
Adoption
January 1, 2021 We have not yet
determined the
expected impact on our
financial position or
results of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 1 - Significant Accounting Policies - Continued
ASC
ASC 944 "Financial
Services -
Insurance"
Description
This update significantly amends the accounting and
disclosure requirements for long-duration insurance
contracts. These changes include a requirement to
review, and if necessary, update cash flow assumptions
used to measure the liability for future policy benefits for
traditional and limited-payment contracts at least
annually, with changes recognized in earnings. In
addition, an entity will be required to update the discount
rate assumption at each reporting date using a yield that
is reflective of an upper-medium grade fixed-income
instrument, with changes recognized in other
comprehensive income. These changes result in the
elimination of the provision for risk of adverse deviation
and premium deficiency (or loss recognition) testing.
The update also requires that an entity measure all market
risk benefits associated with deposit contracts at fair
value, with changes recognized in earnings except for the
portion attributable to a change in the instrument-specific
credit risk, which is to be recognized in other
comprehensive income. This update also simplifies the
amortization of deferred acquisition costs by requiring
amortization on a constant level basis over the expected
term of the related contracts. Deferred acquisition costs
are required to be written off for unexpected contract
terminations but are no longer subject to an impairment
test. Significant additional disclosures will also be
required, which include disaggregated rollforwards of
certain liability balances and the disclosure of qualitative
and quantitative information about expected cash flows,
estimates, and assumptions. The application of this
guidance will vary based upon the specific requirements
of the update but will generally result in either a modified
retrospective or full retrospective approach with changes
applied as of the beginning of the earliest period
presented. Early adoption is permitted.
120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 2 - Fair Values of Financial Instruments
Fair Value Measurements for Financial Instruments Carried at Fair Value
We report fixed maturity securities, which are classified as available-for-sale securities, derivative financial instruments, and
unrestricted equity securities at fair value in our consolidated balance sheets. We report our investments in private equity
partnerships at our share of the partnerships' net asset value per share or its equivalent (NAV) as a practical expedient for fair
value. See Note 1.
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.
We classify financial instruments in accordance with a fair value hierarchy consisting of three levels based on the observability
of valuation inputs:
• Level 1 - the highest category of the fair value hierarchy classification wherein inputs are unadjusted and represent
quoted prices in active markets for identical assets or liabilities at the measurement date.
• Level 2 - 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.
• Level 3 - 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.
Valuation Methodologies of Financial Instruments Measured at Fair Value
Valuation techniques used for assets and liabilities accounted for at fair value are generally categorized into three types. The
market approach uses prices and other relevant information from market transactions involving identical or comparable assets or
liabilities. The income approach converts future amounts, such as cash flows or earnings, to a single present amount, or a
discounted amount. The cost approach is based upon the amount that currently would be required to replace the service capacity
of an asset, or the current replacement cost.
We use valuation techniques that are appropriate in the circumstances and for which sufficient data are available that can be
obtained without undue cost and effort. In some cases, a single valuation technique will be appropriate (for example, when
valuing an asset or liability using quoted prices in an active market for identical assets or liabilities). In other cases, multiple
valuation techniques will be appropriate. If we use multiple valuation techniques to measure fair value, we evaluate and weigh
the results, as appropriate, considering the reasonableness of the range indicated by those results. A fair value measurement is
the point within that range that is most representative of fair value in the circumstances.
The selection of the valuation method(s) to apply considers the definition of an exit price and depends on the nature of the asset
or liability being valued. For assets and liabilities accounted for at fair value, we generally use valuation techniques consistent
with the market approach, and to a lesser extent, the income approach. We believe the market approach 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
121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 2 - Fair Values of Financial Instruments - Continued
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 2018, we have applied valuation approaches and techniques on a consistent basis to similar assets
and liabilities and consistent with those approaches and techniques used at year end 2017.
Fixed Maturity and Equity Securities
We use observable and unobservable inputs in measuring the fair value of our fixed maturity and equity securities. For securities
categorized as Level 1, fair values equal active Trade Reporting and Compliance Engine (TRACE) pricing or unadjusted broker
market maker prices. For securities categorized as Level 2 or Level 3, inputs that may be used in valuing each class of securities
at any given time period are disclosed below. Actual inputs used to determine fair values will vary for each reporting period
depending on the availability of inputs which may, at times, be affected by the lack of market liquidity.
Instrument
Level 2
Observable Inputs
Level 3
Unobservable Inputs
United States Government and Government Agencies and Authorities
Valuation Method
Principally the market approach
Not applicable
Valuation
Techniques / Inputs
Prices obtained from external pricing services
States, Municipalities, and Political Subdivisions
Valuation Method
Principally the market approach
Principally the market approach
Valuation
Techniques / Inputs
Prices obtained from external pricing services
Relevant reports issued by analysts and rating
agencies
Audited financial statements
Analysis of similar bonds, adjusted for
comparability
Non-binding broker quotes
Security and issuer level spreads
Foreign Governments
Valuation Method
Valuation
Techniques / Inputs
Public Utilities
Principally the market approach
Principally the market approach
Prices obtained from external pricing services
Non-binding broker quotes
Call provisions
Analysis of similar bonds, adjusted for
comparability
Non-binding broker quotes
Security and issuer level spreads
Valuation Method
Principally the market and income approaches
Principally the market and income approaches
Valuation
Techniques / Inputs
TRACE pricing
Change in benchmark reference
122
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 2 - Fair Values of Financial Instruments - Continued
Instrument
Public Utilities - Continued
Level 2
Observable Inputs
Level 3
Unobservable Inputs
Analysis of similar bonds, adjusted for
comparability
Discount for size - illiquidity
Non-binding broker quotes
Lack of marketability
Security and issuer level spreads
Volatility of credit
Matrix pricing
Prices obtained from external pricing services
Non-binding broker quotes
Benchmark yields
Transactional data for new issuances and
secondary trades
Security cash flows and structures
Recent issuance / supply
Matrix pricing
Security and issuer level spreads
Security creditor ratings/maturity/capital
structure/optionality
Public covenants
Comparative bond analysis
Relevant reports issued by analysts and rating
agencies
Audited financial statements
Mortgage/Asset-Backed Securities
Valuation Method
Principally the market and income approaches
Principally the market approach
Valuation
Techniques / Inputs
Prices obtained from external pricing services
Non-binding broker quotes
Analysis of similar bonds, adjusted for
comparability
Non-binding broker quotes
Security cash flows and structures
Security and issuer level spreads
Underlying collateral
Prepayment speeds/loan performance/
delinquencies
Relevant reports issued by analysts and rating
agencies
Audited financial statements
All Other Corporate Bonds
Valuation Method
Principally the market and income approaches
Principally the market and income approaches
Valuation
Techniques / Inputs
TRACE pricing
Prices obtained from external pricing services
Non-binding broker quotes
Benchmark yields
Transactional data for new issuances and
secondary trades
Security cash flows and structures
Recent issuance / supply
Matrix pricing
123
Change in benchmark reference
Analysis of similar bonds, adjusted for
comparability
Discount for size - illiquidity
Non-binding broker quotes
Lack of marketability
Security and issuer level spreads
Volatility of credit
Matrix pricing
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 2 - Fair Values of Financial Instruments - Continued
Instrument
All Other Corporate Bonds - Continued
Level 2
Observable Inputs
Level 3
Unobservable Inputs
Security and issuer level spreads
Security creditor ratings/maturity/capital
structure/optionality
Public covenants
Comparative bond analysis
Relevant reports issued by analysts and rating
agencies
Audited financial statements
Redeemable Preferred Stocks
Valuation Method
Principally the market approach
Principally the market approach
Valuation
Techniques / Inputs
Non-binding broker quotes
Non-binding broker quotes
Benchmark yields
Comparative bond analysis
Call provisions
Relevant reports issued by analysts and rating
agencies
Audited financial statements
Equity Securities
Valuation Method
Principally the market approach
Principally the market and income approaches
Valuation
Techniques / Inputs
Prices obtained from external pricing services
Financial statement analysis
Non-binding broker quotes
Non-binding broker quotes
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.
124
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 2 - Fair Values of Financial Instruments - Continued
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.
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.
At December 31, 2018, approximately 11.7 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 remaining 88.3 percent of our fixed maturity securities were valued based on non-binding quotes or other observable and
unobservable inputs, as discussed below:
•
•
•
75.0 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.
3.6 percent of our fixed maturity securities were valued based on one or more non-binding broker quotes, 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.
9.7 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.
Derivatives
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.
We consider transactions in inactive markets to be less representative of fair value. We use all available observable inputs when
measuring fair value, but when significant unobservable inputs are used, we classify these assets or liabilities as Level 3.
125
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 2 - Fair Values of Financial Instruments - Continued
Private Equity Partnerships
Our private equity partnerships represent funds that are primarily invested in private credit, private equity, and real assets, as
described below. Distributions received from the funds arise from income generated by the underlying investments as well as
the liquidation of the underlying investments. There is generally not a public market for these investments.
The following table presents additional information about our private equity partnerships as of December 31, 2018, including
commitments for additional investments which may or may not be funded:
Investment Category
Fair Value
(in millions of dollars)
Redemption Term /
Redemption Notice
Unfunded Commitments
(in millions of dollars)
Private Credit
(a) $
168.6 Not redeemable
$
Total Private Credit
Private Equity
Real Assets
Total Real Assets
(b)
(c)
Initial 2 year lock on each
new investment / Quarterly
after 2 year lock with 90
days notice
25.7
194.3
128.3 Not redeemable
131.0 Not redeemable
30.2 Quarterly / 90 days notice
161.2
Total Partnerships
$
483.8
$
99.5
10.3
109.8
169.5
106.0
—
106.0
385.3
(a) Private Credit - The limited partnerships described in this category employ various investment strategies, generally
providing direct lending or other forms of debt financing including first-lien, second-lien, mezzanine, and subordinated
loans. The limited partnerships have credit exposure to corporates, physical assets, and/or financial assets within a
variety of industries (including manufacturing, healthcare, energy, business services, technology, materials, and retail)
in North America and, to a lesser extent, outside of North America. As of December 31, 2018, the estimated remaining
life of the investments that do not allow for redemptions is approximately 20 percent in the next 3 years, 46 percent
during the period from 3 to 5 years, 30 percent during the period from 5 to 10 years, and 4 percent after the period of 15
years.
(b) Private Equity - The limited partnerships described in this category employ various strategies generally investing in
controlling or minority control equity positions directly in companies and/or assets across various industries (including
manufacturing, healthcare, energy, business services, technology, materials, and retail), primarily in private markets
within North America and, to a lesser extent, outside of North America. As of December 31, 2018, the estimated
remaining life of the investments that do not allow for redemptions is approximately 40 percent in the next 3 years, 9
percent during the period from 3 to 5 years, 49 percent during the period from 5 to 10 years, 1 percent during the period
from 10 to 15 years, and 1 percent after the period of 15 years.
(c) Real Assets - The limited partnerships described in this category employ various strategies, which include investing in
the equity and/or debt financing of physical assets, including infrastructure (energy, power, water/wastewater,
communications), transportation (including airports, ports, toll roads, aircraft, railcars) and real estate in North America,
Europe, South America, and Asia. As of December 31, 2018, the estimated remaining life of the investments that do not
allow for redemptions is approximately 2 percent in the next 3 years, 19 percent during period from 3 to 5 years, 75
percent during the period from 5 to 10 years, and 4 percent during the period from 10 to 15 years.
126
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 2 - Fair Values of Financial Instruments - Continued
The following tables present information about financial instruments measured at fair value on a recurring basis by fair value
level, based on the observability of the inputs used:
Level 1
Level 2
December 31, 2018
Level 3
(in millions of dollars)
NAV
Total
$
513.4
$
1,301.0
$
— $
— $
1,814.4
—
—
286.4
—
4,232.1
—
5,031.9
—
—
—
—
—
2,424.2
952.3
7,041.7
1,582.7
23,026.1
18.8
36,346.8
30.4
0.5
24.6
—
55.5
—
31.4
84.7
—
1,495.8
21.1
1,633.0
—
—
4.6
—
4.6
—
—
—
—
—
—
—
—
—
—
483.8
483.8
2,424.2
983.7
7,412.8
1,582.7
28,754.0
39.9
43,011.7
30.4
0.5
29.2
483.8
543.9
$
5,031.9
$
36,402.3
$
1,637.6
$
483.8
$
43,555.6
Assets
Fixed Maturity Securities
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
Other Long-term Investments
Derivatives
Foreign Exchange Contracts
Credit Default Swaps
Equity Securities
Private Equity Partnerships
Total Other Long-term Investments
Total Financial Instrument Assets Carried at
Fair Value
Liabilities
Other Liabilities
Derivatives
Interest Rate Swaps
Foreign Exchange Contracts
Embedded Derivative in Modified
Coinsurance Arrangement
Total Derivatives
$
— $
—
—
—
$
5.2
32.8
—
38.0
— $
—
31.1
31.1
— $
—
—
—
Total Financial Instrument Liabilities Carried
at Fair Value
$
— $
38.0
$
31.1
$
— $
5.2
32.8
31.1
69.1
69.1
127
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 2 - Fair Values of Financial Instruments - Continued
Level 1
Level 2
December 31, 2017
Level 3
(in millions of dollars)
NAV
Total
$
460.1
$
1,022.4
$
— $
— $
1,482.5
—
—
154.2
—
3,556.1
—
4,170.4
—
0.2
—
0.2
2,336.9
863.9
7,874.6
1,973.6
25,816.2
19.2
39,906.8
19.5
10.4
—
29.9
—
—
207.7
—
1,150.1
22.8
1,380.6
—
1.1
—
1.1
—
—
—
—
—
—
—
—
—
407.2
407.2
2,336.9
863.9
8,236.5
1,973.6
30,522.4
42.0
45,457.8
19.5
11.7
407.2
438.4
$
4,170.6
$
39,936.7
$
1,381.7
$
407.2
$
45,896.2
Assets
Fixed Maturity Securities
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
Other Long-term Investments
Derivatives
Foreign Exchange Contracts
Equity Securities
Private Equity Partnerships
Total Other Long-term Investments
Total Financial Instrument Assets Carried at
Fair Value
Liabilities
Other Liabilities
Derivatives
$
Interest Rate Swaps
Foreign Exchange Contracts
Credit Default Swaps
Embedded Derivative in Modified
Coinsurance Arrangement
Total Derivatives
Total Financial Instrument Liabilities Carried
at Fair Value
$
— $
—
—
—
—
$
5.1
46.9
0.2
—
52.2
— $
—
—
15.9
15.9
— $
—
—
—
—
— $
52.2
$
15.9
$
— $
5.1
46.9
0.2
15.9
68.1
68.1
128
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 2 - Fair Values of Financial Instruments - Continued
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, 2018
Total Realized and
Unrealized Investment
Gains (Losses) Included in
Fair Value
Beginning
of Year
Earnings
Other
Comprehensive
Income or Loss Purchases
Sales
Into
Out of
Level 3 Transfers
Fair
Value
End of
Year
(in millions of dollars)
Fixed Maturity Securities
Foreign Governments
Public Utilities
All Other Corporate
Bonds
Redeemable Preferred
Stocks
Total Fixed
Maturity Securities
Equity Securities
Embedded Derivative in
Modified Coinsurance
Arrangement
Fixed Maturity Securities
States, Municipalities,
and Political
Subdivisions
Public Utilities
All Other Corporate
Bonds
Redeemable Preferred
Stocks
Total Fixed
Maturity Securities
$
— $
207.7
1,150.1
22.8
1,380.6
1.1
5.8
—
5.8
—
(15.9)
(15.2)
— $
—
(1.4) $
(2.3)
— $ — $
—
—
32.8
39.0
$
— $
(159.7)
31.4
84.7
(118.1)
95.1
(148.7)
968.6
(457.0) 1,495.8
(1.7)
—
—
—
—
21.1
(123.5)
95.1
(148.7) 1,040.4
(616.7) 1,633.0
—
—
3.5
—
—
—
—
—
—
—
4.6
(31.1)
Year Ended December 31, 2017
Total Realized and
Unrealized Investment
Gains (Losses) Included in
Fair Value
Beginning
of Year
Earnings
Other
Comprehensive
Income or Loss Purchases
Sales
Into
Out of
Level 3 Transfers
Fair
Value
End of
Year
(in millions of dollars)
$
$
89.5
265.3
— $
—
— $
0.3
— $ — $ — $ (89.5) $ —
207.7
8.0
(186.3)
125.2
(4.8)
1,459.7
(0.6)
2.8
118.9
(149.2)
524.7
(806.2) 1,150.1
23.2
—
(0.4)
—
—
—
—
22.8
1,837.7
(0.6)
2.7
126.9
(154.0)
649.9
(1,082.0) 1,380.6
Equity Securities
Embedded Derivative in
Modified Coinsurance
Arrangement
1.2
—
(46.7)
30.8
—
—
—
—
—
—
—
—
(0.1)
1.1
—
(15.9)
129
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 2 - Fair Values of Financial Instruments - Continued
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 (losses) which are included in earnings and are attributable to the change in fair value of assets or
liabilities valued using significant unobservable inputs and still held at each year end were $(15.2) million and $30.8 million for
the years ended December 31, 2018 and 2017, respectively. These amounts relate entirely to the change in fair value of an
embedded derivative in a modified coinsurance arrangement and are reported as a component of realized investment gains and
losses.
The table below provides quantitative information regarding the significant unobservable inputs used in Level 3 fair value
measurements derived from internal models. Certain securities classified as Level 3 are excluded from the table below due to
limitations in our ability to obtain the underlying inputs used by external pricing sources.
Fair Value Valuation Method
December 31, 2018
Unobservable Input
(in millions of dollars)
Range/Weighted Average
Fixed Maturity Securities
All Other Corporate Bonds -
Private
$
148.5 Market Approach
Lack of Marketability
Volatility of Credit
Market Convention
(b)
(c)
(d)
0.25% - 0.25% / 0.25%
0.25% - 10.99% / 1.0%
Priced at Par
Equity Securities - Private
4.6 Market Approach Market Convention
Embedded Derivative in
Modified Coinsurance
Arrangement
(31.1)
Discounted Cash
Flows
Projected Liability Cash
Flows
(d) Priced at Cost or Owner's
Equity
(e) Actuarial Assumptions
Fair Value Valuation Method
December 31, 2017
Unobservable Input
(in millions of dollars)
Range/Weighted Average
Fixed Maturity Securities
All Other Corporate Bonds -
Private
$
244.4 Market Approach
Comparability Adjustment
Lack of Marketability
Volatility of Credit
Market Convention
(a)
(b)
(c)
(d)
0.20% - 0.20% / 0.20%
0.25% - 0.25% / 0.25%
0.12% - 6.25% / 0.50%
Priced at Par
Equity Securities - Private
1.1 Market Approach Market Convention
Embedded Derivative in
Modified Coinsurance
Arrangement
(15.9)
Discounted Cash
Flows
Projected Liability Cash
Flows
(d) Priced at Cost or Owner's
Equity
(e) Actuarial Assumptions
(a)
(b)
(c)
(d)
(e)
Represents basis point adjustments for changes in benchmark spreads associated with various industry sectors
Represents basis point adjustments to apply a discount due to the illiquidity of an investment
Represents basis point adjustments for credit-specific factors
Represents a decision to price based on par value, cost, or owner's equity when limited data is available
Represents various actuarial assumptions required to derive the liability cash flows including incidence, termination, and lapse
rates
130
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 2 - Fair Values of Financial Instruments - Continued
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.
Fair Value Measurements for Financial Instruments Not Carried at Fair Value
The methods and assumptions used to estimate fair values of financial instruments not carried at fair value are discussed as
follows:
Mortgage Loans: Fair values are estimated using discounted cash flow analyses and interest rates currently being offered for
similar loans to borrowers with similar credit ratings and maturities. Loans with similar characteristics are aggregated for
purposes of the calculations.
Policy Loans: Fair values for policy loans, net of reinsurance ceded, are estimated using discounted cash flow analyses and
interest rates currently being offered to policyholders with similar policies. Carrying amounts for ceded policy loans, which
equal $3,449.3 million and $3,307.5 million as of December 31, 2018 and 2017, 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.
Miscellaneous Long-term Investments: Carrying amounts for tax credit partnerships equal the unamortized balance of our
contractual commitments and approximate fair value. Our shares of FHLB common stock are carried at cost, which
approximates fair value.
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.
FHLB Funding Agreements: Funding agreements with the FHLB represent cash advances used for the purpose of investing in
fixed maturity securities. Carrying amounts approximate fair value.
Unfunded Commitments to Investment Partnerships: Unfunded equity commitments represent amounts that we have committed
to fund certain investment partnerships. These commitments are legally binding, subject to the partnerships meeting specified
conditions. Carrying amounts of these financial instruments approximate fair value.
131
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 2 - Fair Values of Financial Instruments - Continued
The following table presents the carrying amounts and estimated fair values of our financial instruments not measured at fair
value and indicates the level in the fair value hierarchy of the estimated fair value measurement based on the observability of the
inputs used:
December 31, 2018
Estimated Fair Value
Level 1
Level 2
Level 3
(in millions of dollars)
Total
Carrying
Value
— $
—
$
2,317.4
—
— $
3,831.1
$
2,317.4
3,831.1
2,295.0
3,729.9
—
24.1
91.5
115.6
115.6
— $
2,341.5
$
3,922.6
$
6,264.1
$
6,140.5
1,429.8
$
1,639.4
$
— $
3,069.2
$
2,971.3
$
$
$
—
—
104.0
2.3
—
—
104.0
104.0
2.3
2.3
$
1,429.8
$
1,745.7
$
— $
3,175.5
$
3,077.6
Assets
Mortgage Loans
Policy Loans
Other Long-term Investments
Miscellaneous Long-term Investments
Total Financial Instrument Assets Not
Carried at Fair Value
Liabilities
Long-term Debt
Payables for Collateral on Investments
Federal Home Loan Bank (FHLB)
Funding Agreements
Other Liabilities
Unfunded Commitments
Total Financial Instrument Liabilities Not
Carried at Fair Value
132
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 2 - Fair Values of Financial Instruments - Continued
December 31, 2017
Estimated Fair Value
Level 1
Level 2
Level 3
(in millions of dollars)
Total
Carrying
Value
— $
—
$
2,306.2
—
— $
3,677.5
$
2,306.2
3,677.5
2,213.2
3,571.1
—
34.1
128.2
162.3
162.3
— $
2,340.3
$
3,805.7
$
6,146.0
$
5,946.6
1,171.8
$
1,876.9
$
— $
3,048.7
$
2,738.4
$
$
$
—
—
350.0
3.7
—
—
350.0
350.0
3.7
3.7
$
1,171.8
$
2,230.6
$
— $
3,402.4
$
3,092.1
Assets
Mortgage Loans
Policy Loans
Other Long-term Investments
Miscellaneous Long-term Investments
Total Financial Instrument Assets Not
Carried at Fair Value
Liabilities
Long-term Debt
Payables for Collateral on Investments
Federal Home Loan Bank (FHLB)
Funding Agreements
Other Liabilities
Unfunded Commitments
Total Financial Instrument Liabilities Not
Carried at Fair Value
The carrying values of financial instruments such as short-term investments, cash and bank deposits, accounts and premiums
receivable, accrued investment income, securities lending agreements, 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 above chart.
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.
133
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 3 - Investments
Fixed Maturity Securities
At December 31, 2018 and 2017, 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:
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
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
Amortized
Cost
December 31, 2018
Gross
Gross
Unrealized
Unrealized
Gain
Loss
(in millions of dollars)
$
$
$
$
1,702.1
2,121.5
825.8
6,626.2
1,523.8
27,436.8
39.0
40,275.2
Amortized
Cost
1,311.1
1,942.8
673.0
6,952.7
1,873.2
26,988.7
39.0
39,780.5
$
$
$
$
123.2
307.1
162.7
850.0
67.2
1,981.6
1.1
3,492.9
$
$
10.9
4.4
4.8
63.4
8.3
664.4
0.2
756.4
December 31, 2017
Gross
Gross
Unrealized
Unrealized
Loss
Gain
(in millions of dollars)
176.1
395.4
191.3
1,296.4
105.1
3,633.5
3.0
5,800.8
$
$
4.7
1.3
0.4
12.6
4.7
99.8
—
123.5
$
$
$
$
Fair
Value
1,814.4
2,424.2
983.7
7,412.8
1,582.7
28,754.0
39.9
43,011.7
Fair
Value
1,482.5
2,336.9
863.9
8,236.5
1,973.6
30,522.4
42.0
45,457.8
134
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 3 - Investments - Continued
The following charts indicate the length of time our fixed maturity securities have been in a gross unrealized loss position.
December 31, 2018
Less Than 12 Months
Gross
Unrealized
Loss
(in millions of dollars)
Fair
Value
Fair
Value
12 Months or Greater
Gross
Unrealized
Loss
68.8
183.2
58.4
740.1
81.5
9,240.2
18.8
10,391.0
$
$
1.7
2.1
3.8
31.3
1.2
462.2
0.2
502.5
$
$
212.5
65.0
12.0
325.7
201.6
1,704.9
—
2,521.7
$
$
9.2
2.3
1.0
32.1
7.1
202.2
—
253.9
December 31, 2017
Less Than 12 Months
Gross
Unrealized
Loss
(in millions of dollars)
Fair
Value
Fair
Value
12 Months or Greater
Gross
Unrealized
Loss
157.9
45.7
13.2
213.2
252.5
1,355.1
2,037.6
$
$
3.0
0.5
0.4
7.9
1.4
26.8
40.0
$
$
58.8
22.3
—
133.5
144.7
785.2
1,144.5
$
$
1.8
0.7
—
4.7
3.3
73.0
83.5
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
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
Total Fixed Maturity Securities
$
$
$
$
135
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 3 - Investments - Continued
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.
December 31, 2018
Total
Amortized
Cost
Unrealized Gain Position
Unrealized Loss Position
Gross Gain
Fair Value
Gross Loss
Fair Value
(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 Fixed Maturity Securities
1 year or less
Over 1 year through 5 years
Over 5 years through 10 years
Over 10 years
Mortgage/Asset-Backed Securities
Total Fixed Maturity Securities
$
$
$
$
1,073.3
6,267.5
12,573.4
18,837.2
38,751.4
1,523.8
40,275.2
Total
Amortized
Cost
1,625.1
5,579.9
12,091.1
18,611.2
37,907.3
1,873.2
39,780.5
$
$
$
$
14.5
300.6
795.0
2,315.6
3,425.7
67.2
3,492.9
30.9
453.6
1,169.8
4,041.4
5,695.7
105.1
5,800.8
1,020.1
5,186.9
6,812.7
15,779.7
28,799.4
1,299.6
30,099.0
1,638.8
5,810.9
11,916.5
21,333.1
40,699.3
1,576.4
42,275.7
$
$
$
$
December 31, 2017
Unrealized Gain Position
Unrealized Loss Position
Gross Gain
Fair Value
Gross Loss
Fair Value
(in millions of dollars)
$
$
8.4
80.2
303.9
355.6
748.1
8.3
756.4
$
$
59.3
1,301.0
6,251.8
5,017.5
12,629.6
283.1
12,912.7
3.1
18.5
53.2
44.0
118.8
4.7
123.5
$
$
14.1
204.1
1,291.2
1,275.5
2,784.9
397.2
3,182.1
The following chart depicts an analysis of our fixed maturity security portfolio between investment-grade and below-investment-
grade categories as of December 31, 2018:
Investment-Grade
Below-Investment-Grade
Total Fixed Maturity Securities
$
$
39,973.1
3,038.6
43,011.7
$
Fair Value
Gross
Unrealized
Gain
(in millions of dollars)
$
$
3,464.2
28.7
3,492.9
$
Gross Unrealized Loss
Percent of Total
Gross
Unrealized Loss
Amount
529.5
226.9
756.4
70.0%
30.0
100.0%
The 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. Below-investment-grade fixed
maturity securities are generally more likely to develop credit concerns than investment-grade securities. At December 31, 2018,
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, 2018, we held 552 individual investment-grade fixed maturity securities and 135 individual below-
investment-grade fixed maturity securities that were in an unrealized loss position, of which 204 investment-grade fixed maturity
136
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 3 - Investments - Continued
securities and 32 below-investment-grade fixed maturity securities had been in an unrealized loss position continuously for over
one year.
In determining when a decline in fair value below amortized cost of a fixed maturity security is other than temporary, we
evaluate the following factors:
• Whether we expect to recover the entire amortized cost basis of the security
• Whether we intend to sell the security or will be required to sell the security before the recovery of its amortized cost
basis
• Whether the security is current as to principal and interest payments
• The significance of the decline in value
• The time period during which there has been a significant decline in value
• Current and future business prospects and trends of earnings
• The valuation of the security's underlying collateral
• Relevant industry conditions and trends relative to their historical cycles
• Market conditions
• Rating agency and governmental actions
• Bid and offering prices and the level of trading activity
• Adverse changes in estimated cash flows for securitized investments
• Changes in fair value subsequent to the balance sheet date
• Any other key measures for the related security
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 as of December 31, 2018 and 2017, for which a portion of an other-than-temporary
impairment was recognized in accumulated other comprehensive income.
At December 31, 2018, we had commitments of $117.3 million to fund private placement fixed maturity securities, the amount
of which may or may not be funded.
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, 2018, the carrying amount of our variable interest entity investments that are not consolidated in our
financial statements was $575.3 million, comprised of $91.5 million of tax credit partnerships and $483.8 million of private
equity partnerships. At December 31, 2017, the carrying amount of our variable interest entity investments that are not
consolidated in our financial statements was $535.4 million, comprised of $128.2 million of tax credit partnerships and $407.2
million of private equity partnerships. These variable interest entity investments are reported as other long-term investments in
our consolidated balance sheets.
137
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 3 - Investments - Continued
The Company invests in tax credit partnerships primarily for the receipt of income tax credits and tax benefits derived from
passive losses on the investments. Amounts recognized in the consolidated statements of income are as follows:
Income Tax Credits
Amortization, Net of Tax
Income Tax Benefit
2018
$
$
41.4
(28.1)
13.3
$
Year Ended December 31
2017
(in millions of dollars)
$
$
41.8
(23.2)
18.6
$
2016
41.8
(23.2)
18.6
Contractually, we are a limited partner in these tax credit partnerships, and our maximum exposure to loss is limited to
the carrying value of our investment, which includes $2.3 million of unfunded unconditional commitments at December 31,
2018. See Note 2 for commitments to fund private equity partnerships.
We are the sole beneficiary of a special purpose entity which is consolidated in our financial statements. This entity is a
securitized asset trust containing a highly rated bond for principal protection which we contributed into the trust at the time it
was established. There are no restrictions on the asset held in this trust, and the trust is free to dispose of the asset at any time.
The fair values of the bond were $156.7 million and $154.1 million as of December 31, 2018 and 2017, respectively. The bond
is reported as a component of fixed maturity securities in our consolidated balance sheets. At December 31, 2016, the trust also
contained a private equity partnership which we contributed into the trust at the time it was established with a fair value of $1.0
million. During 2017, we received the final distribution from the private equity partnership and recorded a loss of $0.2
million on the disposal. The loss is reported as a component of net realized investments gains and losses in our consolidated
statements of income.
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.
138
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 3 - Investments - Continued
Mortgage loans by property type and geographic region are presented below.
December 31
2018
2017
(in millions of dollars)
Carrying
Amount
Percent of
Total
Carrying
Amount
Percent of
Total
Property Type
Apartment
Industrial
Office
Retail
Other
Total
Region
New England
Mid-Atlantic
East North Central
West North Central
South Atlantic
East South Central
West South Central
Mountain
Pacific
Total
$
$
$
$
491.0
635.6
604.2
519.5
44.7
2,295.0
45.9
160.6
354.4
190.3
485.2
105.5
240.6
242.7
469.8
2,295.0
21.4% $
27.7
26.3
22.6
2.0
100.0% $
2.0% $
7.0
15.4
8.3
21.1
4.6
10.5
10.6
20.5
100.0% $
360.0
601.2
692.3
527.6
32.1
2,213.2
56.1
155.5
282.0
210.1
494.4
88.8
247.4
251.2
427.7
2,213.2
16.3%
27.2
31.3
23.8
1.4
100.0%
2.5%
7.0
12.8
9.5
22.3
4.0
11.2
11.4
19.3
100.0%
We evaluate each of our mortgage loans individually for impairment and assign an internal credit quality rating based on a
comprehensive rating system used to evaluate the credit risk of the loan. The factors we use to derive our internal credit ratings
may include the following:
Property location, including regional economics, trends and demographics
• Loan-to-value ratio
• Debt service coverage ratio based on current operating income
•
• 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.
139
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 3 - Investments - Continued
Mortgage loans, sorted by the applicable credit quality indicators, are as follows:
Internal Rating
Aa
A
Baa
Ba
Total
Loan-to-Value Ratio
<= 65%
> 65% <= 75%
> 75% <= 85%
> 85%
Total
December 31
2018
2017
(in millions of dollars)
— $
477.5
1,814.1
3.4
2,295.0
1,204.8
1,049.1
11.8
29.3
2,295.0
$
$
$
0.4
445.7
1,753.0
14.1
2,213.2
1,101.7
1,041.6
49.3
20.6
2,213.2
$
$
$
$
At December 31, 2018, we held one mortgage loan that was greater than 90 days past due regarding principal and/or interest
payments which was modified in a troubled debt restructuring during the second quarter of 2018. The loan had a principal
balance of $3.6 million prior to the restructuring, wherein the terms of the loan were modified to reduce monthly payments to
interest-only at the current note rate and to permit a discounted payoff by September 2018. At the time of restructuring in the
second quarter of 2018, we recorded an allowance for credit losses and recognized an impairment loss of $0.2 million resulting
in a net realizable value for the loan of $3.4 million. The payoff of the loan did not occur in September 2018 and therefore, the
loan was considered impaired as of December 31, 2018. At December 31, 2017, we held no mortgage loans that were greater
than 90 days past due regarding principal and/or interest payments.
There were no troubled debt restructurings during 2017. During 2016, we foreclosed on a mortgage loan with a carrying value
of $5.4 million. We did not recognize a loss at foreclosure as the value of the underlying property exceeded the carrying value of
the loan. We had no realized losses on loan foreclosures for the years ended December 31, 2018, 2017, and 2016 other than any
initial impairment loss recognized prior to foreclosure.
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. There was no activity in the allowance for credit losses for the years ended
December 31, 2018, 2017 or 2016 other than previously mentioned impairment loss of $0.2 million.
Our average investment in impaired mortgage loans was $2.3 million and $2.2 million for the years ended December 31, 2018
and 2016, respectively. We did not hold any impaired mortgage loans for the year ended December 31, 2017. We did not
recognize any interest income during 2018, 2017 or 2016 on mortgage loans subsequent to impairment.
At December 31, 2018, we had commitments of $13.0 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.
140
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 3 - Investments - Continued
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. We may
receive cash and/or securities as collateral under these agreements. Cash received as collateral is typically reinvested in short-
term investments. If securities are received as collateral, we are not permitted to sell or re-post them.
As of December 31, 2018, the carrying amount of fixed maturity securities loaned to third parties under our securities lending
program was $164.1 million, for which we received collateral in the form of cash and securities of $0.1 million and $171.4
million, respectively. As of December 31, 2017, the carrying amount of fixed maturity securities loaned to third parties under
our securities lending program was $159.2 million, for which we received collateral in the form of cash and securities of $30.5
million and $135.6 million, respectively. We had no outstanding repurchase agreements at December 31, 2018 or 2017.
The remaining contractual maturities of our securities lending agreements disaggregated by class of collateral pledged are as
follows:
United States Government and Government Agencies and Authorities
Public Utilities
All Other Corporate Bonds
Total Borrowings
Gross Amount of Recognized Liability for Securities Lending Transactions
Amounts Related to Agreements Not Included in Offsetting Disclosure Contained
Herein
$
$
December 31
2018
2017
Overnight and Continuous
(in millions of dollars)
— $
—
0.1
0.1
0.1
— $
0.2
0.5
29.8
30.5
30.5
—
Certain of our U.S. insurance subsidiaries are members of regional FHLBs. Membership, which requires that we purchase a
minimum amount of FHLB common stock on which we receive dividends, provides access to low-cost funding. Advances
received from the FHLB are used for the purchase of fixed maturity securities. Additional common stock purchases may be
required, based on the amount of funds we borrow from the FHLBs. The carrying value of common stock owned, collateral
posted, and advances received are as follows:
Carrying Value of FHLB Common Stock
Advances from FHLB
Carrying Value of Collateral Posted to FHLB
Fixed Maturity Securities
Commercial Mortgage Loans
Total Carrying Value of Collateral Posted to FHLB
Offsetting of Financial Instruments
December 31, 2018 December 31, 2017
(in millions of dollars)
$
$
$
$
24.1
104.0
219.8
179.9
399.7
$
$
$
$
34.1
350.0
213.3
331.5
544.8
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.
141
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 3 - Investments - Continued
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.
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, 2018
Gross Amount
of Recognized
Financial
Instruments
Gross Amount
Offset in
Balance Sheet
Gross Amount Not
Offset in Balance Sheet
Financial
Instruments
Cash
Collateral
Net Amount
Presented in
Balance Sheet
(in millions of dollars)
Net
Amount
Financial Assets:
Derivatives
Securities Lending
Total
Financial Liabilities:
Derivatives
Securities Lending
Total
Financial Assets:
Derivatives
Securities Lending
Total
Financial Liabilities:
Derivatives
Securities Lending
Total
$
$
$
$
$
$
$
$
30.9
164.1
195.0
38.0
0.1
38.1
$
$
$
$
— $
—
— $
— $
—
— $
30.9
164.1
195.0
38.0
0.1
38.1
$
$
$
$
(6.9) $
(164.0)
(170.9) $
(24.0) $
(0.1)
(24.1) $
(33.2) $
(0.1)
(33.3) $
— $
—
— $
—
—
—
4.8
—
4.8
December 31, 2017
Gross Amount
of Recognized
Financial
Instruments
Gross Amount
Offset in
Balance Sheet
Gross Amount Not
Offset in Balance Sheet
Financial
Instruments
Cash
Collateral
Net Amount
Presented in
Balance Sheet
(in millions of dollars)
Net
Amount
19.5
159.2
178.7
52.2
30.5
82.7
$
$
$
$
— $
—
— $
— $
—
— $
19.5
159.2
178.7
52.2
30.5
82.7
$
$
$
$
(4.2) $
(128.7)
(132.9) $
(15.3) $
(30.5)
(45.8) $
(42.9) $
(30.5)
(73.4) $
— $
—
— $
—
—
—
9.3
—
9.3
142
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 3 - Investments - Continued
Net Investment Income
Net investment income reported in our consolidated statements of income is as follows:
Fixed Maturity Securities
Derivatives
Mortgage Loans
Policy Loans
Other Long-term Investments
Equity Securities1
Private Equity Partnerships2
Other
Short-term Investments
Gross Investment Income
Less Investment Expenses
Less Investment Income on Participation Fund Account Assets
Net Investment Income
$
$
2018
Year Ended December 31
2017
(in millions of dollars)
$
$
2,239.7
66.1
110.1
18.6
2,271.8
56.4
104.2
17.9
(0.2)
36.0
8.4
23.7
2,502.4
35.2
13.5
2,453.7
$
1.5
25.5
10.0
11.3
2,498.6
32.8
14.1
2,451.7
$
2016
2,293.9
49.8
114.0
17.3
1.2
11.4
10.0
7.5
2,505.1
31.9
14.2
2,459.0
1 The net unrealized loss recognized in net investment income for the year ended December 31, 2018 related to equity securities
still held at December 31, 2018 was $3.9 million.
2 The net unrealized gain recognized in net investment income for the year ended December 31, 2018 related to private equity
partnerships still held at December 31, 2018 was $7.1 million.
Realized Investment Gain and Loss
Realized investment gains and losses are as follows:
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
All Other Derivatives
Foreign Currency Transactions
Net Realized Investment Gain (Loss)
2018
Year Ended December 31
2017
(in millions of dollars)
2016
$
$
$
9.7
(15.2)
(17.5)
0.5
—
(1.4)
(15.2)
0.3
(0.7)
(39.5) $
13.8
(4.4)
(8.1)
9.4
(0.2)
(0.9)
30.8
(0.1)
—
40.3
$
$
34.3
(17.2)
(30.5)
5.5
(0.7)
(5.7)
40.9
(1.5)
(0.9)
24.2
143
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
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, 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.
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 either cash flow or fair value hedges and used to reduce our exposure to foreign currency risk are as
follows:
• Foreign currency interest rate swaps are used to hedge the currency risk of certain foreign currency-denominated fixed
maturity securities owned for portfolio diversification. Under these swap agreements, 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.
Derivatives not designated as hedging instruments and used to reduce our exposure to foreign currency risk, credit losses on
securities owned, and interest rate risk are as follows:
• Foreign currency interest rate swaps previously designated as hedges were used to hedge the currency risk of certain
foreign currency-denominated fixed maturity securities owned for portfolio diversification. These derivatives were
effective hedges prior to novation to a new counterparty. In conjunction with the novation, these derivatives were de-
designated as hedges. 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. We hold
offsetting swaps wherein we agree to pay fixed rate principal and interest payments in the functional currency of the
operating segment in exchange for fixed rate foreign currency-denominated payments.
144
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 4 - Derivative Financial Instruments - Continued
• 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.
•
Interest rate swap was used to effectively convert certain of our floating rate, long-term debt into fixed rate long-term
debt. Under this swap agreement, we received a variable rate of interest and paid a fixed rate of interest.
Derivative Risks
The basic types of risks associated with derivatives are market risk (that the value of the derivative will be adversely impacted by
changes in the market, primarily the change in interest and exchange rates) and credit risk (that the counterparty will not perform
according to the terms of the contract). The market risk of the derivatives should generally offset the market risk associated with
the hedged financial instrument or liability. To help limit the credit exposure of the derivatives, we enter into master netting
agreements with our counterparties whereby contracts in a gain position can be offset against contracts in a loss position. We
also typically enter into bilateral, cross-collateralization agreements with our counterparties to help limit the credit exposure of
the derivatives. These agreements require the counterparty in a loss position to submit acceptable collateral with the other
counterparty in the event the net loss position meets or exceeds an agreed upon amount. Our 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 $0.9 million at December 31, 2018. As of December 31, 2017 we did not have any credit exposure on derivatives. The
table below summarizes the nature and amount of collateral received from and posted to our derivative counterparties.
Carrying Value of Collateral Received from Counterparties
Cash
Carrying Value of Collateral Posted to Counterparties
Fixed Maturity Securities
See Note 3 for further discussion of our master netting agreements.
December 31, 2018
December 31, 2017
(in millions of dollars)
$
$
24.0
33.4
$
$
15.7
46.4
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 $38.0 million and $52.2
million at December 31, 2018 and 2017, respectively.
145
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 4 - Derivative Financial Instruments - Continued
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.
Swaps
Receive
Variable/Pay
Fixed
Receive
Fixed/Pay
Fixed
Receive
Fixed/Pay
Variable
Credit
Default
Forwards
Total
Balance at December 31, 2015
$
Additions
Terminations
Balance at December 31, 2016
Additions
Terminations
Balance at December 31, 2017
Additions
Terminations
$
150.0
3.5
48.0
105.5
—
57.5
48.0
—
48.0
Balance at December 31, 2018
$
— $
650.3
—
33.8
616.5
26.4
106.4
536.5
78.1
76.4
538.2
Cash Flow Hedges
(in millions of dollars)
$
$
600.0
—
350.0
250.0
—
—
250.0
—
—
250.0
$
$
70.0
—
—
70.0
—
—
70.0
11.0
70.0
11.0
$
— $
30.0
20.0
10.0
65.7
75.7
—
47.4
47.4
$
— $
1,470.3
33.5
451.8
1,052.0
92.1
239.6
904.5
136.5
241.8
799.2
As of December 31, 2018 and 2017, we had $286.4 million and $343.9 million, respectively, notional amount of receive fixed,
pay fixed, open current and forward foreign currency interest rate swaps to hedge fixed income foreign currency-denominated
securities.
As of December 31, 2018, we expect to amortize approximately $70.0 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. Additional amounts that may 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, 2018, we are hedging the variability of future cash flows associated with forecasted transactions through the
year 2038.
Fair Value Hedges
As of December 31, 2017, we had $48.0 million of notional amount of receive variable, pay fixed interest rate swaps to hedge
the changes in fair value of certain fixed rate securities held which matured in 2018 along with the hedged securities. These
swaps effectively converted the associated fixed rate securities into floating rate securities, which were used to fund our floating
rate long-term debt. During 2016, we terminated $24.0 million notional amount of receive variable, pay fixed interest rate swaps
in connection with the sale of the hedged securities and recorded a loss on the swap terminations of $1.2 million in our
consolidated statements of income as a component of net realized investment gains and losses.
As of December 31, 2018, we had $78.1 million notional amount of receive fixed, pay fixed, open current and forward foreign
currency interest rate swaps to hedge fixed income foreign currency-denominated securities.
As of December 31, 2018 and 2017, we had 250.0 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. During 2016, $350.0 million notional amount of receive
146
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 4 - Derivative Financial Instruments - Continued
fixed, pay variable interest rate swaps matured in conjunction with the maturity of the $350.0 million hedged fixed rate debt.
See Note 8.
The following table summarizes the carrying amount of hedged assets and liabilities and the related cumulative basis
adjustments related to our fair value hedges:
Carrying Amount of Hedged Assets (Liabilities)
Cumulative Amount of Fair Value Hedging
Adjustment Included in the Carrying Amount of
the Hedged Assets (Liabilities)
December 31, 2018
December 31, 2017
December 31, 2018
December 31, 2017
(in millions of dollars)
Fixed maturity securities:
Receive variable interest
rate, pay fixed interest
rate
Receive fixed functional
currency interest, pay
fixed foreign currency
interest
Long-term Debt
$
$
$
— $
48.5
$
— $
56.2
$
— $
(244.4) $
(244.8) $
(2.7) $
5.1
$
0.6
—
4.5
For the year ended December 31, 2018, $2.5 million of the derivative instruments' gain was excluded from the assessment of
hedge effectiveness. For the year ended December 31, 2017, no component of the derivative instruments' gain or loss was
excluded from the assessment of hedge effectiveness. There were no instances wherein we discontinued fair value hedge
accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.
Derivatives not Designated as Hedging Instruments
As of December 31, 2018 and 2017, we held $173.7 million and $192.6 million, respectively, notional amount of receive fixed,
pay fixed, foreign currency interest rate swaps. These derivatives are not designated as hedges, and as such, changes in fair
value related to these derivatives are reported in earnings as a component of net realized investment gain or loss.
As of December 31, 2018 and 2017, we held $11.0 million and $70.0 million, respectively, 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.
As of December 31, 2016, we held $3.5 million notional amount of a receive variable, pay fixed interest rate swap acquired
through our purchase of Starmount during 2016. This swap effectively converted Starmount's floating rate long-term debt into
fixed rate debt. During 2017, we purchased and retired the debt and terminated the interest rate swap. We recorded a loss
of $0.1 million on the swap termination in our consolidated statements of income as a component of net realized investment
gains and losses. See Note 8.
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.
147
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 4 - Derivative Financial Instruments - Continued
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.
December 31, 2018
Derivative Assets
Derivative Liabilities
Balance Sheet
Location
Fair
Value
(in millions of dollars)
Balance Sheet
Location
Fair
Value
Designated as Hedging Instruments
Cash Flow Hedges
Foreign Exchange Contracts
Other L-T Investments
$
25.0 Other Liabilities
$
7.9
Fair Value Hedges
Interest Rate Swaps
Foreign Exchange Contracts
Total Fair Value Hedges
Total Designated as Hedging Instruments
Not Designated as Hedging Instruments
Credit Default Swaps
Foreign Exchange Contracts
Embedded Derivative in Modified
Coinsurance Arrangement
Total Not Designated as Hedging
Instruments
Other L-T Investments
Other L-T Investments
Other L-T Investments
Other L-T Investments
Other L-T Investments
— Other Liabilities
5.4 Other Liabilities
5.4
30.4
0.5 Other Liabilities
— Other Liabilities
— Other Liabilities
0.5
December 31, 2017
$
$
$
5.2
0.4
5.6
13.5
—
24.5
31.1
55.6
$
$
$
Derivative Assets
Derivative Liabilities
Balance Sheet
Location
Fair
Value
(in millions of dollars)
Balance Sheet
Location
Fair
Value
Designated as Hedging Instruments
Cash Flow Hedges
Foreign Exchange Contracts
Other L-T Investments
$
19.5 Other Liabilities
$
19.4
Fair Value Hedges
Interest Rate Swaps
Other L-T Investments
— Other Liabilities
Total Designated as Hedging Instruments
$
19.5
Not Designated as Hedging Instruments
Credit Default Swaps
Foreign Exchange Contracts
Embedded Derivative in Modified
Coinsurance Arrangement
Total Not Designated as Hedging
Instruments
Other Liabilities
Other Liabilities
Other Liabilities
148
5.1
24.5
0.2
27.5
15.9
43.6
$
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 4 - Derivative Financial Instruments - Continued
The following tables summarize the location of gains and losses of derivative financial instruments designated as hedging
instruments, as reported in our consolidated statements of income.
Total Income and Expense Presented in the Consolidated Statements
of Income of Which Hedged Items are Recorded
$
2,453.7
$
(39.5) $
167.3
Year Ended December 31, 2018
Net Investment
Income
Net Realized
Investment
Gain (Loss)
(in millions of dollars)
Interest and
Debt Expense
Gain (Loss) on Cash Flow Hedging Relationships
Interest Rate Swaps:
Hedged items
Derivatives Designated as Hedging Instruments
Foreign Exchange Contracts:
Hedged items
Derivatives Designated as Hedging Instruments
Gain (Loss) on Fair Value Hedging Relationships
Interest Rate Swaps:
Hedged items
Derivatives Designated as Hedging Instruments
Foreign Exchange Contracts
Hedged items
Derivatives Designated as Hedging Instruments
310.3
67.1
18.1
(0.9)
1.0
(0.5)
0.6
0.5
0.1
(0.3)
1.5
(1.5)
0.1
(0.1)
(2.7)
2.7
38.4
2.3
—
—
14.3
1.8
—
—
149
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 4 - Derivative Financial Instruments - Continued
Total Income and Expense Presented in the Consolidated Statements
of Income of Which Hedged Items are Recorded
$
2,451.7
$
40.3
$
159.9
Year Ended December 31, 2017
Net Investment
Income
Net Realized
Investment
Gain (Loss)
(in millions of dollars)
Interest and
Debt Expense
Gain (Loss) on Cash Flow Hedging Relationships
Interest Rate Swaps:
Hedged items
Derivatives Designated as Hedging Instruments
Foreign Exchange Contracts:
Hedged items
Derivatives Designated as Hedging Instruments
Gain (Loss) on Fair Value Hedging Relationships
Interest Rate Swaps:
Hedged items
Derivatives Designated as Hedging Instruments
321.1
60.4
21.7
(1.2)
4.8
(3.2)
2.5
0.2
8.9
(9.2)
(1.7)
1.7
44.9
2.2
—
—
14.3
(0.6)
Year Ended December 31, 2016
Net Investment
Income
Net Realized
Investment
Gain (Loss)
(in millions of dollars)
Interest and
Debt Expense
Total Income and Expense Presented in the Consolidated Statements
of Income of Which Hedged Items are Recorded
$
2,459.0
$
24.2
$
166.0
Gain (Loss) on Cash Flow Hedging Relationships
Interest Rate Swaps:
Hedged items
Derivatives Designated as Hedging Instruments
Foreign Exchange Contracts:
Hedged items
Derivatives Designated as Hedging Instruments
Gain (Loss) on Fair Value Hedging Relationships
Interest Rate Swaps:
Hedged items
Derivatives Designated as Hedging Instruments
337.7
55.7
23.1
(0.6)
7.1
(5.3)
7.2
3.4
1.5
(1.4)
(3.1)
3.1
44.9
2.1
—
—
39.7
(4.7)
150
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 4 - Derivative Financial Instruments - Continued
The following table summarizes the location of gains and losses of derivative financial instruments designated as cash flow
hedging instruments, as reported in our consolidated statements of comprehensive income (loss).
Gain (Loss) Recognized in Other Comprehensive Income (Loss) on
Derivatives
Interest Rate Swaps and Forwards
Foreign Exchange Contracts
Total
$
$
(0.1) $
16.9
16.8
$
(0.1) $
(23.0)
(23.1) $
(0.1)
(22.2)
(22.3)
2018
Year Ended December 31
2017
(in millions of dollars)
2016
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.
Net Realized Investment Gain (Loss)
Credit Default Swaps
Interest Rate Swaps
Foreign Exchange Contracts
Embedded Derivative in Modified Coinsurance Arrangement
Total
2018
Year Ended December 31
2017
(in millions of dollars)
2016
$
$
(0.3) $
(0.3)
0.9
(15.2)
(14.9) $
(0.4) $
(0.1)
0.4
30.8
30.7
$
(0.9)
0.4
0.2
40.9
40.6
151
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 5 - Accumulated Other Comprehensive Income (Loss)
Components of our accumulated other comprehensive income (loss), after tax, and related changes are as follows:
Net
Unrealized
Gain (Loss)
on Securities
Net Gain on
Hedges
Foreign
Currency
Translation
Adjustment
Unrecognized
Pension and
Postretirement
Benefit Costs
Total
(in millions of dollars)
Balance at December 31, 2015
$
204.3
$
378.0
$
(173.6) $
(392.6) $
16.1
Other Comprehensive Income (Loss)
Before Reclassifications
Amounts Reclassified from Accumulated
Other Comprehensive Income or Loss
Net Other Comprehensive Income (Loss)
Balance at December 31, 2016
Other Comprehensive Income (Loss)
Before Reclassifications
Amounts Reclassified from Accumulated
Other Comprehensive Income or Loss
Net Other Comprehensive Income (Loss)
Balance at December 31, 2017
Adjustment to Adopt Accounting Standard
Update - Note 1
Other Comprehensive Income (Loss)
Before Reclassifications
226.5
9.8
236.3
440.6
176.7
(9.5)
167.2
607.8
(17.5)
(920.3)
(15.8)
(180.4)
(82.8)
(34.7)
(50.5)
327.5
(14.7)
(30.5)
(45.2)
282.3
—
16.8
—
(180.4)
(354.0)
10.3
(72.5)
(465.1)
—
99.5
(254.5)
—
(50.7)
12.9
(43.0)
(508.1)
—
43.6
Amounts Reclassified from Accumulated
Other Comprehensive Income or Loss
Net Other Comprehensive Income (Loss)
Balance at December 31, 2018
$
17.6
(902.7)
(312.4) $
(48.5)
(31.7)
250.6
$
—
(50.7)
(305.2) $
17.3
60.9
(447.2) $
The net unrealized gain (loss) on securities consists of the following components:
(52.5)
(14.6)
(67.1)
(51.0)
(27.1)
178.5
127.5
(17.5)
(910.6)
(13.6)
(924.2)
(814.2)
99.5
(55.9)
205.6
December 31
January 1
2018
2017
December 31
2016
2015
(in millions of dollars)
Change for the Year Ended
December 31
2017
2016
2018
Fixed Maturity
Securities
Other Investments
Deferred Acquisition
Costs
Reserves for Future
Policy and Contract
Benefits
Reinsurance
Recoverable
Income Tax
Total
$
2,736.5
—
$ 5,665.2
—
$ 5,677.3
14.4
$ 4,664.6
(22.7)
$ 3,695.7
(33.7)
$(2,928.7) $ 1,012.7
37.1
—
$
968.9
11.0
(27.9)
(51.4)
(51.4)
(38.9)
(29.4)
23.5
(12.5)
(9.5)
(3,220.3)
(5,094.7)
(5,094.7)
(4,253.2)
(3,578.4)
1,874.4
(841.5)
(674.8)
261.4
(62.1)
(312.4) $
375.8
(304.6)
590.3
$
375.8
(313.6)
607.8
$
321.3
(230.5)
440.6
$
263.2
(113.1)
204.3
(114.4)
242.5
$ (902.7) $
54.5
(83.1)
167.2
$
58.1
(117.4)
236.3
$
152
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 5 - Accumulated Other Comprehensive Income (Loss) - Continued
Amounts reclassified from accumulated other comprehensive income (loss) were recognized in our consolidated statements of
income as follows:
Net Unrealized Gain (Loss) on Securities
Net Realized Investment Gain (Loss)
Gain (Loss) on Sales of Securities and Other Invested Assets
Other-Than-Temporary Impairment Loss
Income Tax Expense (Benefit)
Total
Net Gain on 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
Income Tax Benefit
Total
2018
Year Ended December 31
2017
(in millions of dollars)
2016
$
$
$
$
$
$
(4.8) $
(17.5)
(22.3)
(4.7)
(17.6) $
$
65.9
(1.1)
0.2
(1.5)
(2.1)
61.4
12.9
48.5
$
(22.3) $
0.2
(22.1)
(4.8)
(17.3) $
22.7
(8.1)
14.6
5.1
9.5
59.0
(1.2)
0.2
(9.2)
(2.0)
46.8
16.3
30.5
$
$
$
$
(20.3) $
0.7
(19.6)
(6.7)
(12.9) $
15.3
(30.5)
(15.2)
(5.4)
(9.8)
54.5
(1.1)
3.2
(1.4)
(1.9)
53.3
18.6
34.7
(16.3)
0.5
(15.8)
(5.5)
(10.3)
153
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 6 - Liability for Unpaid Claims and Claim Adjustment Expenses
Changes in the liability for unpaid claims and claim adjustment expenses are as follows:
2018
Balance at January 1
Less Reinsurance Recoverable
Net Balance at January 1
$
23,222.0
2,182.0
21,040.0
23,249.5
2,163.6
21,085.9
2017
(in millions of dollars)
$
$
2016
23,796.1
2,064.6
21,731.5
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
5,832.3
5,422.9
5,243.0
1,049.8
(106.2)
(110.7)
6,665.2
1,089.7
(158.2)
167.5
6,521.9
1,136.7
(198.3)
(340.2)
5,841.2
(2,354.7)
(4,428.8)
(6,783.5)
(2,156.9)
(4,410.9)
(6,567.8)
(2,035.4)
(4,451.4)
(6,486.8)
20,921.7
2,227.3
23,149.0
$
21,040.0
2,182.0
23,222.0
$
21,085.9
2,163.6
23,249.5
$
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 of the year’s claim payments relative to prior years at our average reserve discount rate for the
respective periods.
"Incurred Related to Prior Years - All Other Incurred" shown in the preceding chart includes the reserve adjustments as discussed
in the following paragraphs, which impact the comparability between the years presented. Excluding those adjustments, the
variability exhibited year over year is primarily caused 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.
2018 Long-term Care Reserve Increase
Policy reserves for our long-term care block of business are determined using the gross premium valuation method and, prior to
the third quarter of 2018, were valued based on assumptions established as of December 31, 2014, the date of our last
assumption update under loss recognition. Gross premium valuation assumptions do not change after the date of loss recognition
unless reserves are again determined to be deficient. We undertake a review of policy reserve adequacy annually during the
fourth quarter of each year, or more frequently if appropriate, using best estimate assumptions as of the date of the review.
During the third quarter of 2018, we completed our annual review of policy reserve adequacy, which incorporated our most
recent experience and included a review of all assumptions, including active policy terminations, claims incidence, claim
terminations, morbidity, premium rate increases, and new money yield rates. The review utilized internal and external data and
outside consulting firms for quality assurance and industry benchmarking. Based on our analysis, during the third quarter of
2018, we updated our reserve assumptions and determined that our policy and claim reserves should be increased by $750.8
million, or $593.1 million after tax, to reflect our current estimate of future benefit obligations. This increase was primarily
154
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 6 - Liability for Unpaid Claims and Claim Adjustment Expenses - Continued
driven by the update to our liability and interest rate assumptions, particularly claims incidence and claim termination rates,
which resulted in an increase to reserves of approximately $2.2 billion. Partially offsetting the increase was the update to our
assumptions for premium rate increases which decreased reserves approximately $1.4 billion, resulting in the net increase to
reserves of $750.8 million. Of this amount, approximately $236.0 million was related to our liability for unpaid claims and
claims adjustment expenses, which can be primarily attributed to prior year incurred claims, thereby impacting the results shown
in the preceding chart.
2017 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 2013, we completed our assessment of benefits which we estimated would be paid under this initiative, and as such,
established additional reserves 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. In the fourth quarter of 2017, we started
the process to reach a Global Resolution Agreement with the third party regarding settlement of the examination, which we
finalized in January of 2018. During the fourth quarter of 2017, we established reserves which reflect our estimate of the
liability expected to be paid as we execute on the terms of the settlement. Claim reserves were increased $18.5 million for
Unum US group life, $8.1 million for Unum US voluntary life, and $12.4 million for Colonial Life voluntary life, for a total
reserve increase of $39.0 million before tax. The reserves established were attributed to prior years 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:
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
Adjustment Related to Unrealized Investment Gains and Losses
Liability for Unpaid Claims and Claim Adjustment Expenses
$
$
December 31
2017
(in millions of dollars)
$
$
1,605.2
45,601.6
47,206.8
2018
1,695.7
44,841.9
46,537.6
8,330.9
11,837.4
3,220.3
23,149.0
$
8,231.3
10,658.8
5,094.7
23,222.0
$
2016
1,507.9
44,245.9
45,753.8
8,078.2
10,172.9
4,253.2
23,249.5
The adjustment related to unrealized investment gains and losses reflects the changes that would be necessary to policyholder
liabilities if the unrealized investment gains and losses related to the corresponding available-for-sale securities had been
realized. Changes in this adjustment are reported as a component of other comprehensive income or loss.
155
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 7 - Income Tax
Total income tax expense (benefit) is allocated as follows:
2018
Net Income
Stockholders' Equity - Additional Paid-in Capital
Stock-Based Compensation
Stockholders' Equity - Accumulated Other Comprehensive Income (Loss)
Change in Net Unrealized Gain on Securities Before Adjustment
Change in Adjustment to Deferred Acquisition Costs and Reserves for
Future Policy and Contract Benefits, Net of Reinsurance
Change in Net Gain on Hedges
Change in Foreign Currency Translation Adjustment
Change in Unrecognized Pension and Postretirement Benefit Costs
Total
$
$
Year Ended December 31
2017
(in millions of dollars)
$
409.8
$
104.4
2016
416.3
—
—
(0.3)
(614.2)
328.1
371.7
(8.2)
(0.6)
17.0
(129.9) $
(245.0)
(24.4)
—
(8.3)
460.2
$
318.0
(200.6)
(25.4)
—
(34.2)
473.8
A reconciliation of the income tax provision at the U.S. federal statutory rate to the income tax rate as reported in our
consolidated statements of income is as follows. Certain prior year amounts have been reclassified to conform to current year
reporting.
Statutory Income Tax
Foreign Rate Differential, Inclusive of Foreign Rate Changes
U.S. Deferred Tax Liability Remeasurement
Deemed Repatriation Tax on Foreign Earnings and Profit (E&P)
Tax Exempt Income
Tax Credits
Policyholder Reserves
Other Items, Net
Effective Tax
Year Ended December 31
2017
2016
2018
21.0%
(0.3)
—
1.8
(1.3)
(2.4)
(2.4)
0.2
16.6%
35.0%
(1.1)
(7.0)
4.7
(0.8)
(1.5)
—
(0.1)
29.2%
35.0%
(2.2)
—
—
(0.8)
(1.6)
—
0.5
30.9%
156
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 7 - Income Tax - Continued
Our net deferred tax (asset) liability consists of the following:
Deferred Tax Liability
Deferred Acquisition Costs
Fixed Assets
Invested Assets
Intangible Assets
Other
Gross Deferred Tax Liability
Deferred Tax Asset
Reserves
Employee Benefits
Other
Gross Deferred Tax Asset
Less: Valuation Allowance
Net Deferred Tax Asset
Net Deferred Tax (Asset) Liability
December 31
2018
2017
(in millions of dollars)
$
129.7
56.2
493.4
24.0
34.1
737.4
668.5
179.5
17.7
865.7
18.4
847.3
(109.9) $
118.6
52.8
1,074.0
6.5
35.8
1,287.7
908.0
188.7
12.3
1,109.0
20.3
1,088.7
199.0
$
$
Our consolidated statements of income include amounts subject to both domestic and foreign taxation. The income and
related tax expense (benefit) are as follows. The federal statutory rates used were 21 percent for 2018 and 35 percent for 2017
and 2016:
Income Before Tax
Domestic
Foreign
Total
Current Tax Expense (Benefit)
Federal
State and Local
Foreign
Total
Deferred Tax Expense (Benefit)
Federal
State and Local
Foreign
Total
2018
Year Ended December 31
2017
(in millions of dollars)
2016
$
$
$
$
$
$
492.6
135.2
627.8
194.6
(0.6)
33.4
227.4
(114.6)
(0.2)
(8.2)
(123.0)
$
$
$
1,289.0
115.0
1,404.0
374.9
0.4
26.0
401.3
14.2
(0.3)
(5.4)
8.5
1,215.8
131.9
1,347.7
414.8
0.3
(29.4)
385.7
(14.6)
(2.1)
47.3
30.6
Total Tax Expense
$
104.4
$
409.8
$
416.3
157
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 7 - Income Tax - Continued
On December 22, 2017, the U.S. Federal government enacted the TCJA, which reduced the federal corporate tax rate from 35
percent to 21 percent effective January 1, 2018. Although the TCJA's 21 percent corporate tax rate became effective on January
1, 2018, we are required to adjust deferred tax assets and liabilities through continuing operations on the date of enactment. As a
result, in 2017 we recorded an income tax benefit of $97.9 million for the TCJA's corporate tax rate reduction and an income tax
expense of $66.4 million for the deemed repatriation transition tax on accumulated foreign E&P.
TCJA brought a large number of complex changes to many areas of the tax code. The Securities and Exchange Commission
issued Staff Accounting Bulletin No. 118 (SAB 118) allowing a one-year measurement period after the enactment date of TCJA
to finalize the calculation and record the related tax impacts. We finalized and recorded adjustments to our initial estimates
during 2018. As a result of guidance from the IRS, we recorded additional deemed repatriation transition tax on accumulated
foreign E&P of $11.5 million, for a total of $77.9 million. We recorded no other material changes to our calculations of the
impact of the TCJA during the one-year measurement period after the enactment period as allowed by SAB 118.
Effective January 1, 2018, the TCJA created a U.S. shareholder tax on certain foreign subsidiary income above a routine equity
return on tangible depreciable business assets, or a tax on Global Intangible Low-taxed Income (GILTI). The FASB has
provided additional guidance to address the accounting effects of GILTI, requiring companies to elect to either recognize
deferred taxes related to GILTI or include in tax expense in the period incurred. We have elected to treat GILTI as a period cost.
Under the TCJA, a modified territorial tax system was adopted that required a one-time deemed repatriation tax on accumulated
foreign E&P. Future repatriation of foreign E&P subject to the one-time deemed repatriation tax will not be subject to further
U.S. taxation other than tax on foreign currency translation gain or loss. As of December 31, 2018, our plans for the future
repatriations of cash from our foreign subsidiaries include only the amount of capital above that which is required by Solvency
II. The remainder of our investment in our foreign subsidiaries is indefinitely reinvested and we have not recorded any deferred
taxes on the approximately $0.7 billion of the excess of the U.S. GAAP carrying values over the tax basis of investments in our
foreign subsidiaries.
Our consolidated statements of income include the following changes in unrecognized tax benefits. Certain prior year amounts
have been reclassified to conform to current year reporting.
2018
December 31
2017
(in millions of dollars)
$
$
Balance at Beginning of Year
Additions for Tax Positions Related to Prior Years
Additions for Tax Positions Related to Current Year
Settlements with Tax Authorities
Lapse of the Applicable Statute of Limitations
Balance at End of Year
Less Tax Attributable to Temporary Items Included Above
$
1.4
261.5
—
—
(0.7)
262.2
(148.2)
1.5
0.3
—
—
(0.4)
1.4
—
Total Unrecognized Tax Benefits That if Recognized Would Affect the
Effective Tax Rate
$
114.0
$
1.4
$
2016
0.8
0.7
—
—
—
1.5
—
1.5
During 2018 we recorded $261.1 million gross unrecognized tax benefits for a policyholder reserves position taken on our 2017
federal tax return, which if recognized, would decrease our tax expense by $112.9 million. Included in the balance at
December 31, 2018, is $148.2 million of unrecognized tax benefits for which the ultimate deductibility is highly certain but for
which there is uncertainty about the timing of such deductibility. It is reasonably possible that this item could reverse in the next
12 months following review by the Internal Revenue Service (IRS).
We recognize interest expense and penalties, if applicable, related to unrecognized tax benefits in tax expense. We recognized a
de minimis amount of interest expense related to unrecognized tax benefits during 2018, 2017 and 2016. We held a de minimis
liability in our consolidated balance sheets for accrued interest related to unrecognized tax benefits at December 31, 2018, 2017
and 2016.
158
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 7 - Income Tax - Continued
We file federal and state income tax returns in the United States and in foreign jurisdictions. Tax years subsequent to 2014
remain subject to examination by the IRS. All other major foreign jurisdictions remain subject to examination for tax years
subsequent to 2016 with the exception of Poland for which tax years subsequent to 2013 remain subject to examination. 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.
We file state income tax returns in nearly every state in the United States. Tax years subsequent to 2013 remain subject to
examination depending on the statute of limitation established by the various states, which is generally three to four years. Tax
years subsequent to 2010 remain subject to examination in California.
We have an accumulated federal net operating loss carryforward of $6.5 million as of December 31, 2018 and had none as of
December 31, 2017. Current year net operating losses relate to subsidiaries not yet included in the consolidated U.S. federal tax
return and are not expected to expire unused. Our federal capital loss carryforward, also related to subsidiaries not included in
the consolidated U.S. federal return, was $0.7 million at both December 31, 2018 and 2017 and is expected to be utilized by the
time it expires in 2022. We have net operating loss carryforwards for state and local income tax of approximately $195 million
most of which is expected to expire unused between 2019 and 2038.
We record valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. Our
valuation allowance was $18.4 million and $20.3 million at December 31, 2018 and 2017, the majority of which related to our
cumulative deferred state income tax benefits. The de minimis remaining amount of our valuation allowance relates to
unrealized tax losses on buildings which we own and occupy in the U.K.
Total income taxes paid net of refunds during 2018, 2017, and 2016 were $139.7 million, $377.0 million, and $384.3 million,
respectively.
159
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 8 - Debt
Debt consists of the following:
Long-term Debt
Outstanding Principal
Senior Secured Notes issued 2007
Senior Notes issued 1998
Senior Notes issued 2002
Senior Notes issued 2010
Senior Notes issued 2012 and 2016
Senior Notes issued 2014
Senior Notes issued 2015
Senior Notes issued 2016
Medium-term Notes issued 1990 - 1996
Junior Subordinated Debt Securities issued 1998
Junior Subordinated Debt Securities issued 2018
Fair Value Hedge Adjustment
Less:
Unamortized Net Premium
Unamortized Debt Issuance Costs
Total Long-term Debt
Short-term Debt
Outstanding Principal
Senior Notes issued 1998
Less Unamortized Debt Issuance Costs
Total Short-term Debt
Interest Rates
Maturities
December 31
2017
2018
(in millions of dollars)
$
Variable
6.750 - 7.250%
7.375%
5.625%
5.750%
4.000%
3.875%
3.000%
7.000 - 7.190%
7.405%
6.250%
2037
2028
2032
2020
2042
2024
2025
2021
2023 - 2028
2038
2058
7.000%
2018
$
140.0
365.8
39.5
400.0
500.0
350.0
275.0
350.0
50.8
226.5
300.0
(5.1)
200.0
365.8
39.5
400.0
500.0
350.0
275.0
350.0
50.8
226.5
—
(4.5)
9.6
(30.8)
2,971.3
9.7
(24.4)
2,738.4
—
—
—
200.0
(0.1)
199.9
Total Debt
$
2,971.3
$
2,938.3
Collateralized debt is comprised of our senior secured notes and ranks highest in priority, followed by unsecured notes, which
consist of senior notes and medium-term notes, followed by junior subordinated debt securities. The medium-term notes are
non-callable and the junior subordinated debt securities are callable under limited, specified circumstances. The remaining debt
is callable and may be redeemed, in whole or in part, at any time.
The aggregate contractual principal maturities are $400.0 million in 2020, $350.0 million in 2021, $2.0 million in 2023, and
$2,245.6 million 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 (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
160
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 8 - Debt - Continued
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, 2018, the amount in the DSCA was
$73.8 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 2018 and 2017, and $64.0 million in 2016.
In 2017, we purchased and retired the remaining $3.4 million of principal on our senior secured floating rate notes acquired
through our purchase of Starmount Life Insurance Company. In conjunction with this retirement, we also terminated the interest
rate swap associated with the hedge of these notes and recorded a $0.1 million loss in our consolidated statements of income as a
component of net realized investment gains and losses. See Note 4 for further discussion on the interest rate swap.
Unsecured Notes
In July 2018, our $200.0 million 7.00% senior unsecured notes matured.
In September 2016, our $350.0 million 7.125% senior unsecured notes matured.
In May 2016, we issued a total of $600.0 million aggregate principal amount of senior notes: (i) $350.0 million aggregate
principal amount of senior notes due in 2021 with an annual coupon rate of 3.00%, and (ii) $250.0 million aggregate principal
amount of senior notes due in 2042 with an annual coupon rate of 5.75%, pursuant to a reopening of the $250.0 million
aggregate principal amount outstanding of our 5.75% senior notes due 2042 issued in 2012. Both issuances are callable at or
above par and rank equally in the right of payment with all of our other unsecured and unsubordinated debt.
Fair Value Hedges
As of December 31, 2018 and 2017, we had $250.0 million notional amount of an interest rate swap which effectively converts
certain of our unsecured senior notes into floating rate debt. Under this agreement, we receive a fixed rate of interest and pay a
variable rate of interest, based off of three-month LIBOR. See Note 4 for further information on the interest rate swap.
Junior Subordinated Debt Securities
In May 2018, we issued $300.0 million of 6.25% junior subordinated notes due 2058. The notes are redeemable at or above par
on or after June 15, 2023 and rank equally in the right of payment with our other 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 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
161
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 8 - Debt - Continued
capital securities offering. The debentures mature in 2038. The sole assets of the trust are the junior subordinated debt
securities.
Interest Paid
Interest paid on long-term and short-term debt and related securities during 2018, 2017, and 2016 was $167.3 million, $154.4
million, and $153.6 million, respectively.
Credit Facility
In March 2016, we amended the terms of our five-year, $400.0 million unsecured revolving credit facility, which was previously
set to expire in 2018, to extend through March 2021. 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 borrowing at an interest
rate based either on the prime rate or LIBOR. In addition, the credit facility provides for the issuance of letters of credit subject
to certain terms and limitations. At December 31, 2018 and 2017, letters of credit totaling $2.1 million had been issued from the
credit facility, but there were no borrowed amounts outstanding.
Note 9 - Employee Benefit Plans
Defined Benefit Pension and Other Postretirement Benefit (OPEB) Plans
We sponsor several defined benefit pension and 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, the OPEB plan was closed to new entrants on December 31, 2012, and
the U.K. plan was closed to new entrants on December 31, 2002.
Amendments to Pension Plan
In 2017, we amended our U.S. qualified defined benefit pension plan by modifying the qualified pre-retirement survivor annuity
form of payment for married participants from a 67 percent joint and survivor annuity to a 100 percent joint and survivor benefit
to the participant's spousal beneficiary in the event a participant pre-deceased prior to reaching pension eligibility and
affirmatively electing a form of benefit. This amendment became effective January 1, 2018. As a result of this amendment, we
recognized an increase in the net pension liability of $7.6 million, with a corresponding prior service cost included in
accumulated other comprehensive income.
Amendment to OPEB Plan
Effective August 1, 2016, we amended the retiree medical benefits portion of our OPEB plan to transition a majority of
participants to a private exchange for their health insurance coverage. Prior to the plan amendment, participants paid a
subsidized premium for their health insurance coverage, but if they elect to continue participation in the plan they will now
purchase coverage on a private exchange and will subsequently be reimbursed through a Health Reimbursement Account (HRA)
for an amount equivalent to the subsidy that was previously provided. Participants who continued in the plan received a one-
time subsidy to minimize the initial out-of-pocket cost of purchasing health insurance. The amendment did not materially
change the benefit obligation of the plan.
Amortization Period of Actuarial Gain or Loss and Prior Service Cost or Credit
Because all participants in the U.S. and U.K. pension plans are considered inactive, we amortize the net actuarial loss and prior
service credit for these plans over the average remaining life expectancy of the plans. As of December 31, 2018, the estimate of
the average remaining life expectancy of the plans was approximately 24 years for the U.S. plan and 31 years for U.K. plan.
162
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 9 - Employee Benefit Plans - Continued
The following table provides the changes in the benefit obligation and fair value of plan assets and the funded status of the plans.
Pension Benefits
U.S. Plans
U.K. Plan
OPEB
2018
2017
2018
2017
2018
2017
(in millions of dollars)
Change in Benefit Obligation
Benefit Obligation at Beginning of Year
Service Cost
Interest Cost
Plan Participant Contributions
Actuarial (Gain) Loss
Benefits and Expenses Paid
Plan Amendment
Change in Foreign Exchange Rates
Benefit Obligation at End of Year
$ 2,136.9
9.1
79.8
—
(210.3)
(82.2)
—
—
$ 1,933.3
$ 1,955.3
7.9
84.5
—
159.3
(77.7)
7.6
—
$ 2,136.9
Accumulated Benefit Obligation at December 31
$ 1,933.3
$ 2,136.9
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
Fair Value of Plan Assets at End of Year
$ 1,582.6
(53.6)
8.1
—
(82.2)
—
$ 1,454.9
$ 1,454.1
198.5
7.7
—
(77.7)
—
$ 1,582.6
Underfunded (Overfunded) Status
$
478.4
$
554.3
$
$
$
$
$
$
243.8
—
5.9
—
(18.9)
(7.3)
0.3
(12.8)
211.0
205.0
253.5
(16.0)
—
—
(7.3)
(13.2)
217.0
$
$
$
$
$
223.0
—
6.2
—
1.7
(8.3)
—
21.2
243.8
$
$
139.5
—
4.9
0.2
(7.6)
(11.1)
—
—
125.9
234.3
N/A
228.4
11.6
—
—
(8.3)
21.8
253.5
$
$
10.5
0.1
10.4
0.2
(11.1)
—
10.1
(6.0) $
(9.7) $
115.8
$
$
$
$
$
147.9
—
5.9
0.2
(4.2)
(10.3)
—
—
139.5
N/A
10.8
0.1
9.7
0.2
(10.3)
—
10.5
129.0
163
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 9 - Employee Benefit Plans - Continued
The amounts recognized in our consolidated balance sheets for our pension and OPEB plans at December 31, 2018 and 2017 are
as follows.
Pension Benefits
U.S. Plans
U.K. Plan
OPEB
2018
2017
2018
2017
2018
2017
Current Liability
Noncurrent Liability
Noncurrent Asset
Underfunded (Overfunded) Status
$
7.3
471.1
—
$ 478.4
$
7.2
547.1
—
$ 554.3
(in millions of dollars)
— $
$
—
(6.0)
(6.0) $
1.6
— $
114.2
—
(9.7)
—
(9.7) $ 115.8
$
$
1.2
127.8
—
$ 129.0
Unrecognized Pension and Postretirement Benefit Costs
Net Actuarial Gain (Loss)
Prior Service Credit (Cost)
Income Tax
Total Included in Accumulated Other Comprehensive
Income (Loss)
$ (672.6) $ (746.4) $
(0.7)
(673.3)
236.0
(0.7)
(747.1)
251.8
(48.9) $
(0.3)
(49.2)
11.9
(46.3) $
—
(46.3)
11.6
20.9
3.3
24.2
3.2
$
13.7
3.5
17.2
4.7
$ (437.3) $ (495.3) $
(37.3) $
(34.7) $
27.4
$
21.9
The following table provides the changes recognized in other comprehensive income for the years ended December 31, 2018 and
2017.
Pension Benefits
U.S. Plans
2018
2017
U.K. Plan
2018
2017
(in millions of dollars)
OPEB
2018
2017
$
(495.3) $
(451.3) $
(34.7) $
(33.1) $
21.9
$
19.3
21.7
52.1
—
—
(15.8)
19.6
(63.9)
(0.3)
(7.6)
8.2
0.6
(3.2)
—
(0.3)
0.3
0.7
(3.0)
—
—
0.7
—
7.2
(0.2)
—
(1.5)
—
3.6
(0.4)
—
(0.6)
$
(437.3) $
(495.3) $
(37.3) $
(34.7) $
27.4
$
21.9
Accumulated Other Comprehensive Income
(Loss) at Beginning of Year
Net Actuarial Gain (Loss)
Amortization
All Other Changes
Prior Service Credit (Cost)
Amortization
Plan Amendment
Change in Income Tax
Accumulated Other Comprehensive Income
(Loss) at End of Year
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.
Our U.S. qualified defined benefit pension plan assets include a diversified blend of domestic, international, global, and
emerging market equity securities, fixed income securities, opportunistic credit securities, real estate investments, alternative
investments, and cash equivalents. Equity securities are comprised of funds and individual securities that are benchmarked
against the respective indices specified below. International and global equity funds may allocate a certain percentage of assets
to forward currency contracts. Fixed income securities include U.S. government and agency asset-backed securities, corporate
investment-grade bonds, private placement securities, and bonds issued by states or other municipalities. Opportunistic credits
consist of investments in funds that hold varied fixed income investments purchased at depressed values with the intention to
164
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 9 - Employee Benefit Plans - Continued
later sell those investments for a gain. Real estate investments consist primarily of funds that hold commercial real estate
investments. 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. Prohibited
investments include, but are not limited to, unlisted securities, futures contracts, options, short sales, and investments in
securities issued by Unum Group or its affiliates. The invested asset classes, asset types, and benchmark indices for our U.S.
qualified defined benefit pension plan is as follows. We target approximately 36 percent to equity securities, 40 percent to fixed
income securities, and 24 percent to opportunistic credits, alternative, and real estate investments.
Asset Class
Asset Type
Benchmark Indices
Equity Securities
Collective funds;
Individual holdings
Standard & Poor's 500; Russell 2000 Value and Growth; MSCI Europe
Australasia Far East Small Cap; MSCI Emerging Markets; MSCI World and
World Minimum Volatility; FTSE RAFI All-World Low Volatility
Fixed Income
Individual holdings Bloomberg Barclays Long Government/Corporate Index
Opportunistic Credits
Collective fund
Custom Index
Real Estate
Collective fund
Alternative Investments
(Hedge and Private
Equity)
Fund of funds;
Direct investments
National Council of Real Estate Investment Fund Open-end Diversified Core
Equity Index
Hedge Fund Research Institute Fund of Funds; Russell 2000
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 and gilt 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 65 percent diversified growth assets
and 35 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 the OPEB plan are invested in life insurance contracts issued by one of our insurance subsidiaries. The assets support
life insurance benefits payable to certain former retirees covered under the OPEB plan. 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 undue risk concentrations in any one
category.
165
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 9 - Employee Benefit Plans - Continued
The categorization of fair value measurements by input level for the invested assets in our U.S. pension plans is shown below.
The carrying values of investment-related receivables and payables approximate fair value due to the short-term nature of the
securities and are not included in the following chart. Investments valued using net asset value (NAV) as a practical expedient
are not required to be categorized by input level, but these investments are included as follows to reconcile to total invested
assets.
December 31, 2018
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
NAV as a
Practical
Expedient
Total
(in millions of dollars)
$
— $
Invested Assets
Equity Securities:
U.S. Large Cap
U.S. Small Cap
Global
International
Emerging Markets
Fixed Income Securities:
U.S. Government and Agencies
Corporate
State and Municipal Securities
Opportunistic Credits
Real Estate
Alternative Investments:
Private Equity Direct Investments
Private Equity Funds of Funds
Hedge Funds of Funds
Cash Equivalents
Total Invested Assets
$
— $
—
—
—
—
—
311.2
5.7
—
—
—
—
—
—
316.9
$
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
83.0
—
290.3
24.6
44.1
—
—
—
192.0
102.8
53.5
34.0
0.1
—
824.4
$
$
83.0
18.9
290.3
24.6
44.1
257.4
311.2
5.7
192.0
102.8
53.5
34.0
0.1
39.2
1,456.8
18.9
—
—
—
257.4
—
—
—
—
—
—
—
39.2
315.5
$
166
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 9 - Employee Benefit Plans - Continued
December 31, 2017
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
NAV as a
Practical
Expedient
Total
(in millions of dollars)
Invested Assets
Equity Securities:
U.S. Large Cap
U.S. Small Cap
Global
International
Emerging Markets
Fixed Income Securities:
U.S. Government and Agencies
Corporate
State and Municipal Securities
Opportunistic Credits
Real Estate
Alternative Investments:
Private Equity Direct Investments
Private Equity Funds of Funds
Hedge Funds of Funds
Cash Equivalents
Total Invested Assets
$
$
— $
45.2
—
—
—
248.5
—
—
—
—
—
—
—
32.0
325.7
$
— $
—
—
—
—
11.9
335.5
6.3
—
—
—
—
—
—
353.7
$
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
103.3
—
325.9
35.7
61.5
—
—
—
193.3
96.1
45.1
34.5
0.2
—
895.6
$
$
103.3
45.2
325.9
35.7
61.5
260.4
335.5
6.3
193.3
96.1
45.1
34.5
0.2
32.0
1,575.0
Level 1 investments consist of individual holdings that are valued based on unadjusted quoted prices from active markets for
identical securities. Level 2 investments consist of individual holdings that are valued using observable inputs through market
corroborated pricing.
Certain equity, opportunistic credit, and real estate investments are valued based on the NAV of the underlying holdings. We
made no adjustments to the NAV for 2018 or 2017. These investments have no unfunded commitments and no specific
redemption restrictions.
Alternative investments are valued based on NAV 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 2018 or 2017. The
private equity direct investments and private equity funds of funds generally cannot be redeemed by investors. Distributions of
capital from the sale of underlying fund assets may occur at any time, but are generally concentrated between five and eight
years from the formation of the fund.
167
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 9 - Employee Benefit Plans - Continued
The categorization of fair value measurements by input level for the invested assets in our U.K. pension plan is shown below.
Investments valued using NAV as a practical expedient are not required to be categorized by input level, but these investments
are included as follows to reconcile to total invested assets.
December 31, 2018
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
NAV as a
Practical
Expedient
Total
(in millions of dollars)
Plan Assets
Diversified Growth Assets
Fixed Interest and Index-linked Securities
Cash Equivalents
Total Plan Assets
$
$
— $
81.3
2.7
84.0
$
— $
—
—
— $
— $
—
—
— $
133.0
—
—
133.0
$
$
133.0
81.3
2.7
217.0
December 31, 2017
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
NAV as a
Practical
Expedient
Total
(in millions of dollars)
Plan Assets
Diversified Growth Assets
Fixed Interest and Index-linked Securities
Cash Equivalents
Total Plan Assets
$
$
— $
98.4
0.4
98.8
$
— $
—
—
— $
— $
—
—
— $
154.7
—
—
154.7
$
$
154.7
98.4
0.4
253.5
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. Diversified growth assets are valued based on the NAV of the underlying holdings.
We made no adjustments to the NAV for 2018 or 2017. These investments have no unfunded commitments and no specific
redemption restrictions.
168
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 9 - Employee Benefit Plans - Continued
The categorization of fair value measurements by input level for the assets in our OPEB plan is as follows:
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
December 31, 2018
Significant Other
Observable
Inputs
(Level 2)
(in millions of dollars)
Significant
Unobservable
Inputs
(Level 3)
Total
Assets
Life Insurance Contracts
$
— $
— $
10.1
$
10.1
December 31, 2017
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
(in millions of dollars)
Significant
Unobservable
Inputs
(Level 3)
Total
Assets
Life Insurance Contracts
$
— $
— $
10.5
$
10.5
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, 2018 and 2017 are as follows:
Year Ended December 31, 2018
Beginning
of Year
Actual Return
on Plan Assets
Contributions
Net Benefits and
Expenses Paid
End of Year
(in millions of dollars)
Life Insurance Contracts
$
10.5
$
0.1
$
10.6
$
(11.1) $
10.1
Year Ended December 31, 2017
Beginning
of Year
Actual Return
on Plan Assets
Contributions
Net Benefits and
Expenses Paid
End of Year
(in millions of dollars)
Life Insurance Contracts
$
10.8
$
0.1
$
9.9
$
(10.3) $
10.5
For the years ended December 31, 2018 and 2017, 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 2018 or 2017.
169
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 9 - Employee Benefit Plans - Continued
Measurement Assumptions
We use a December 31 measurement date for each of our plans. The weighted average assumptions used in the measurement of
our benefit obligations as of December 31 and our net periodic benefit costs for the years ended December 31 are as follows:
Benefit Obligations
Discount Rate
Rate of Compensation Increase
Net Periodic Benefit Cost
Discount Rate
Expected Return on Plan Assets
Rate of Compensation Increase
Pension Benefits
U.S. Plans
U.K. Plan
OPEB
2018
2017
2018
2017
2018
2017
4.40%
N/A
3.80%
6.75%
N/A
3.80%
N/A
4.40%
7.25%
N/A
2.90%
3.70%
2.50%
3.90%
3.70%
2.50%
3.70%
2.70%
3.90%
3.80%
4.40%
N/A
3.70%
5.75%
N/A
3.70%
N/A
4.20%
5.75%
N/A
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 selected from a range of probable return outcomes from an analysis of
the asset portfolio. 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. The methodology underlying the return assumption includes 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 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.
Our mortality rate assumption reflects our best estimate, as of the measurement date, of the life expectancies of plan participants
in order to determine the expected length of time for benefit payments. We derive our assumptions from industry mortality
tables.
The expected return assumption for the life insurance reserve for our OPEB plan is based on full investment in fixed income
securities with an average book yield of 4.73 percent and 4.76 percent in 2018 and 2017, respectively.
The rate of compensation increase assumption for our U.K. pension plan is generally based on periodic studies of compensation
trends.
At December 31, 2018 and 2017, the annual rates of increase in the per capita cost of covered postretirement health care benefits
assumed for the next calendar year are 7.00 percent for benefits payable to both retirees prior to Medicare eligibility as well as
Medicare eligible retirees. The rates are assumed to change gradually to 5.00 percent by 2024 for measurement at December 31,
2018 and remain at that level thereafter. The annual rates of increase in the per capita cost of covered postretirement health
benefits do not apply to retirees whose postretirement health care benefits are provided through an exchange.
170
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 9 - Employee Benefit Plans - Continued
Net Periodic Benefit Cost
The following table provides the components of the net periodic benefit cost (credit) for the years ended December 31.
Pension Benefits
Service Cost
Interest Cost
Expected Return on Plan Assets
Amortization of:
Net Actuarial Loss
Prior Service Credit
Plan Amendment
Total Net Periodic Benefit Cost
U.S. Plans
2017
2018
2016
$
9.1
79.8
(104.5)
$
7.9
84.5
(103.1)
$
7.0
85.2
(102.8)
21.7
—
—
6.1
19.6
(0.3)
—
8.6
$
16.2
(0.3)
—
5.3
$
$
2018
U.K. Plan
2017
(in millions of dollars)
2016
OPEB
2017
2018
2016
$ — $ — $ — $ — $ — $ —
7.2
(0.6)
7.0
(10.0)
5.9
(0.6)
4.9
(0.6)
6.2
(8.8)
5.9
(8.9)
0.6
—
—
0.7
—
—
$ (2.4) $ (1.9) $ (2.9) $
0.1
—
—
—
(0.2)
—
4.1
$
—
(0.4)
—
4.9
$
—
(0.2)
0.9
7.3
The service cost component of net periodic pension and postretirement benefit cost is included as a component of compensation
expense in our consolidated statements of income. All other components of net periodic pension and postretirement benefit cost
are included in other expenses.
A one percent increase or decrease in the assumed health care cost trend rate at December 31, 2018 would have increased
(decreased) the service cost and interest cost by a de minimis amount, respectively, and the postretirement benefit obligation by
$0.6 million and $(0.5) million, respectively.
The unrecognized net actuarial loss and the prior service credit included in accumulated other comprehensive income and
expected to be amortized and included in net periodic pension cost during 2019 is $18.4 million and $0.2 million before tax,
respectively.
Benefit Payments
The following table provides expected benefit payments, which reflect expected future service, as appropriate.
OPEB
Subsidy
Payments
(in millions of dollars)
Gross
$
$
12.1
11.7
11.2
10.7
10.1
43.7
Net
$
0.2
0.2
0.1
0.2
0.1
0.4
11.9
11.5
11.1
10.5
10.0
43.3
Pension Benefits
U.S. Plans
U.K. Plan
Year
2019
2020
2021
2022
2023
2024-2028
$
$
77.1
80.2
83.8
87.2
90.9
513.7
5.3
5.3
5.6
5.9
6.4
39.4
171
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 9 - Employee Benefit Plans - Continued
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 2018 and made a de minimis amount of voluntary contributions during 2018. We do not expect to make any
contributions in 2019. 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 plan because such contributions are determined under the minimum
funding requirements as set forth in ERISA.
We made no contributions to our U.K. plan during 2018, nor do we expect to make any contributions in 2019, either voluntary or
those required 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.
Defined Contribution Plans
We offer a 401(k) plan to all eligible U.S. employees under which a portion of employee contributions is matched. We match
dollar-for-dollar up to 5.0 percent of base salary and any recognized sales and performance-based incentive compensation for
employee contributions into the plan. We also make an additional non-elective contribution of 4.5 percent of earnings for all
eligible employees and a separate transition contribution for eligible employees who met certain age and years of service criteria
as of December 31, 2013. The 401(k) plan remains in compliance with ERISA guidelines and continues 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. We match two pounds for every one pound on the first 1.0 percent of employee contributions into the plan and match
additional employee contributions pound-for-pound up to 5.0 percent of base salary. We also make an additional non-elective
contribution of 6.0 percent of base salary for all eligible employees who met certain age and years of service criteria as of March
31, 2016.
During the years ended December 31, 2018, 2017, and 2016, we recognized costs of $72.7 million, $78.4 million, and $72.2
million, respectively, for our U.S. defined contribution plan. We recognized costs of $4.2 million in both 2018 and 2017, and
$4.9 million in 2016 for our U.K. defined contribution plan.
172
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 10 - Stockholders' Equity and Earnings Per Common Share
Earnings Per Common Share
Net income per common share is determined as follows:
Numerator
Net Income
Denominator (000s)
Year Ended December 31
2018
2016
2017
(in millions of dollars, except share data)
$
523.4
$
994.2
$
931.4
Weighted Average Common Shares - Basic
Dilution for Assumed Exercises of Stock Options and Nonvested Stock
Awards
Weighted Average Common Shares - Assuming Dilution
219,635.6
226,492.4
235,445.7
423.0
220,058.6
842.8
227,335.2
533.5
235,979.2
Net Income Per Common Share
Basic
Assuming Dilution
$
$
2.38
2.38
$
$
4.39
4.37
$
$
3.96
3.95
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 $23.35
to $26.29; the nonvested restricted stock units have grant prices ranging from $27.85 to $55.26; and the nonvested performance
share units have grant prices ranging from $27.85 to $49.86. 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 the
impact would be antidilutive, based on then current market prices, approximated 0.6 million, 0.3 million, and 0.4 million for the
years ended December 31, 2018, 2017, and 2016, respectively.
Common Stock
Our board of directors has authorized the repurchase of Unum Group's common stock under the following repurchase programs:
Authorized Repurchase Amount
Remaining Repurchase Amount at Year End 2018
$
$
Share Repurchase Program Authorized During
May 2016
May 2017
May 2018
(in millions of dollars)
$
— $
750.0
500.0
750.0
$
$
750.0
—
The May 2018 share repurchase program has an expiration date of November 24, 2019.
173
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 10 - Stockholders' Equity and Earnings Per Common Share - Continued
Common stock repurchases, which are accounted for using the cost method and classified as treasury stock until otherwise
retired, were as follows:
Shares Repurchased
Cost of Shares Repurchased (1)
2018
Year Ended December 31
2017
(in millions)
2016
8.7
350.7
$
8.2
400.4
$
11.9
403.3
$
(1) Includes commissions of $0.7 million, $0.3 million, and $0.2 million for the years ended December 31, 2018, 2017, and
2016, respectively.
Preferred Stock
Unum Group has 25.0 million shares of preferred stock authorized with a par value of $0.10 per share. No preferred stock has
been issued to date.
Note 11 - Stock-Based Compensation
Description of Stock Plans
Under the Stock Incentive Plan of 2017 (the 2017 Plan), up to 17 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 fully vest after three years. At December 31, 2018, approximately 15.7 million shares
were available for future grants under the 2017 Plan.
Under the Stock Incentive Plan of 2012 (the 2012 Plan), which was terminated in May 2017 for the purposes of any further
grants, up to 20 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 1.76 shares. Awards granted before the termination of the 2012 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 fully vest after three years.
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 fully vest after three years.
We issue new shares of common stock for all of our stock plan vestings and exercises.
174
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 11 - Stock-Based Compensation - Continued
Performance Share Units (PSUs)
Activity for PSUs classified as equity is as follows:
Outstanding at December 31, 2017
Granted
Vested
Forfeited
Outstanding at December 31, 2018
Shares
(000s)
Weighted Average
Grant Date
Fair Value
$
331
255
(301)
(2)
283
37.62
44.19
30.18
46.79
51.33
During 2018, 2017, and 2016, we issued PSUs with a weighted average grant date fair value per share of $44.19, $51.37, and
$28.41, respectively. 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 board-approved peer group during the
three-year period. Actual performance, including modification for relative total shareholder return, may result in the ultimate
award of 40 to 180 percent of the initial number of PSUs issued, with the potential for no award if company performance goals
are not achieved during the three-year period. Forfeitable dividend equivalents on PSUs are accrued in the form of additional
PSUs.
PSU shares in the preceding table represent aggregate initial target awards and accrued dividend equivalents and do not reflect
potential increases or decreases resulting from the application of the performance factor determined after the end of the
performance periods. At December 31, 2018, the three-year performance period for the 2016 PSU grant was completed and the
related shares vested, but the performance factor had not yet been applied. The performance factor will be applied during the
first quarter of 2019, with distribution of the stock thereafter. Granted and vested amounts in the preceding table also include the
additional shares awarded as a result of the application of the performance factor to the 2015 PSU grant, which occurred during
the first quarter of 2018.
At December 31, 2018, we had approximately $5.9 million of unrecognized compensation cost related to PSUs that will be
recognized over a weighted average period of 1.6 years. The estimated compensation expense is adjusted for actual performance
experience and is recognized ratably during the service period, or remaining service period, if and when it becomes probable that
the performance conditions will be satisfied. Compensation cost for PSUs subject to accelerated vesting at the date of retirement
eligibility is recognized over the implicit service period.
The fair value of PSUs is estimated on the date of initial grant using the Monte-Carlo simulation model. Key assumptions used
to value PSUs granted during the years shown are as follows:
Year Ended December 31
2017
2018
2016
Expected Volatility (based on our and our peer group historical daily stock prices)
Expected Life (equals the performance period)
Risk Free Interest Rate (based on U.S. Treasury yields at the date of grant)
24%
3.0 years
2.32%
24%
3.0 years
1.52%
22%
3.0 years
0.88%
175
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 11 - Stock-Based Compensation - Continued
Restricted Stock Units (RSUs)
Activity for RSUs classified as equity is as follows:
Outstanding at December 31, 2017
Granted
Vested
Forfeited
Outstanding at December 31, 2018
Shares
(000s)
Weighted Average
Grant Date
Fair Value
$
871
496
(486)
(54)
827
38.75
47.76
37.32
44.65
44.62
During 2018, 2017, and 2016, we issued RSUs with a weighted average grant date fair value per share of $47.76, $48.92, and
$28.80, 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 at the date of retirement eligibility is recognized
over the implicit service period.
The total fair value of shares vested during 2018, 2017, and 2016 was $18.1 million, $13.3 million, and $18.3 million,
respectively. At December 31, 2018, we had $16.5 million of unrecognized compensation cost related to RSUs that will be
recognized over a weighted average period of 0.9 years.
Stock Options
Stock option activity is summarized as follows:
Shares
(000s)
Weighted Average
Exercise Price
Remaining
Contractual Term
(in years)
Intrinsic
Value
(in millions)
Outstanding at December 31, 2017
Exercised
Outstanding at December 31, 2018
Exercisable at December 31, 2018
$
124
(19)
105
105
$
23.86
20.78
24.41
24.41
1.4
1.4
$
$
0.5
0.5
All outstanding stock options at December 31, 2018 have vested. 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 at the date of retirement eligibility is recognized over the implicit service period. At
December 31, 2018, we had no unrecognized compensation cost related to stock options.
The intrinsic value of options exercised and fair value of options vested are as follows:
Total Intrinsic Value of Options Exercised
Total Fair Value of Options Vested
There were no stock options granted in the years 2016 through 2018.
176
2018
$
$
Year Ended December 31
2017
(in millions of dollars)
$
— $
$
0.7
— $
10.0
2016
3.4
0.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 11 - Stock-Based Compensation - Continued
Expense
Compensation expense for the stock plans, as reported in our consolidated statements of income, is as follows:
Performance Share Units
Restricted Stock Units
Other
Total Compensation Expense, Before Income Tax
Total Compensation Expense, Net of Income Tax
2018
$
$
$
6.8
19.0
0.5
26.3
20.9
$
$
Year Ended December 31
2017
(in millions of dollars)
$
$
2016
6.6
14.9
0.4
21.9
14.4
11.5
17.5
0.5
29.5
19.5
$
$
Cash received under all share-based payment arrangements for the years ended December 31, 2018, 2017, and 2016 was $4.6
million, $10.8 million, and $8.5 million, respectively.
Note 12 - Reinsurance
Thirteen major companies account for approximately 92 percent of our reinsurance recoverable at December 31, 2018, and all
are rated A or better by A.M. Best Company (AM Best) or are fully securitized by letters of credit or investment-grade fixed
maturity securities held in trust. Approximately seven percent of our reinsurance recoverable relates to business reinsured either
with companies rated A- or better by AM Best, with overseas entities with equivalent ratings or backed by letters of credit or
trust agreements, or through reinsurance arrangements wherein we retain the assets in our general account. The remaining one
percent of our reinsurance recoverable is held by companies either rated below A- by AM Best or not rated.
Reinsurance data is as follows:
Direct Premium Income
Reinsurance Assumed
Reinsurance Ceded
Net Premium Income
Ceded Benefits and Change in Reserves for Future Benefits
$
$
$
2018
Year Ended December 31
2017
(in millions of dollars)
$
$
9,171.1
142.6
(327.6)
8,986.1
$
$
8,677.2
230.0
(310.1)
8,597.1
$
$
667.2
655.4
2016
8,385.0
236.3
(263.6)
8,357.7
648.3
Effective October 1, 2016, we entered into a reinsurance agreement under which we ceded 30 percent of the risk for certain
blocks of Unum US individual disability policies, as well as some related claims development risk for a limited period of time.
The agreement is on a non-proportional modified coinsurance basis with a provision for experience refunds.
177
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 13 - Segment Information
We have three principal operating business segments: Unum US, Unum International, and Colonial Life. Our other segments are
Closed Block and Corporate.
The Unum US segment is comprised of group long-term disability, which includes our new medical stop-loss product, and short-
term disability insurance, group life and accidental death and dismemberment products, and supplemental and voluntary lines of
business. The supplemental and voluntary lines of business are comprised of individual disability, voluntary benefits, and dental
and vision products. These products are marketed through our field sales personnel who work in conjunction with independent
brokers and consultants.
In connection with our acquisition of Pramerica Zycie TUiR S.A., (which we have subsequently renamed Unum Zycie TUiR
S.A. and refer to as Unum Poland) in the fourth quarter of 2018, we changed the name of our Unum UK segment to Unum
International. The Unum International segment is now comprised of our Unum UK line of business and the newly acquired
Unum Poland line of business. See "Acquisitions of Business" below for further information. Unum UK's business includes
insurance for group long-term disability, group life, and supplemental lines of business which include dental, 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. Unum Poland's business primarily includes insurance for individual and
group life with accident and health riders. Unum Poland's products are sold only in Poland, primarily through a combination of
independent agents and field sales personnel. Unum Poland 's results are included within the supplemental product of the Unum
International segment in U.S. dollars.
The Colonial Life segment includes insurance for accident, sickness, and disability products, which includes our expanded dental
and vision products, life products, and cancer and critical illness products marketed to employees, on both a group and an
individual basis, 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. Individual disability 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.
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.
Acquisitions of Business
2018 Acquisitions
On November 1, 2018, we acquired 100 percent of the shares and voting interests in Jaimini Health, Inc. (Jaimini Health), a
dental health maintenance organization. The acquisition of Jaimini Health will broaden our employee benefit dental offerings in
the U.S., particularly in the state of California, and is reported in our Unum US segment.
On October 1, 2018, we acquired 100 percent of the shares and voting interests in Unum Poland, a financial protection benefits
provider in Poland. This acquisition will expand our European presence, which we believe to be an attractive market for
financial protection benefits.
On January 1, 2018, we acquired 100 percent of the shares and voting interests in Leavelogic, Inc (Leavelogic), a leave
management technology provider. The acquisition of Leavelogic will enhance our current leave management offerings by
providing tools for employers and employees to better manage the family leave process and is reported in our Unum US
segment.
Aggregate revenues for all three acquired entities totaled approximately $61 million in 2017. Aggregate assets were valued at
approximately $344 million as of the respective acquisition dates and were primarily comprised of bonds, short-term
178
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 13 - Segment Information - Continued
investments, and intangible assets attributable to the value of business acquired, the value of distribution networks, and licenses.
Aggregate liabilities were valued at approximately $206 million as of the respective acquisition dates and were primarily
comprised of outstanding claim liabilities, reserves for future claims, and income tax liabilities. The aggregate purchase price
for all three transactions was approximately $151 million and exceeded the fair value of the identifiable net assets by
approximately $13 million, which was identified as goodwill, primarily attributable to the value of adding individual and group
financial protection products in Poland to our current employee benefit offerings and the value of enhancing our technology
capabilities around our leave management offerings. The goodwill is not deductible for income tax purposes except upon
disposition of the acquired entities. These acquisitions, the results of which are included in our consolidated financial statements
for the periods subsequent to the respective dates of acquisition, did not have a material impact on revenue or results of
operations for 2018.
2016 Acquisition
In 2016, we acquired 100 percent of the shares and voting interests in H&J Capital, L.L.C., parent of Starmount Life Insurance
Company and AlwaysCare Benefits (Starmount), for a total cash purchase price of $140.3 million plus contingent cash
consideration of $10.0 million that was paid in two increments of $5.0 million each, at 18 and 24 months from the date of
acquisition upon satisfaction of certain conditions. Starmount Life Insurance Company is an independent provider of dental and
vision insurance in the U.S. workplace, and AlwaysCare Benefits is a nationally licensed, third-party administrator. The
acquisition of Starmount broadens our employee benefit offerings in the U.S. Starmount's dental and vision products and new
dental and vision products marketed by Unum US are reported in our Unum US segment within our supplemental and voluntary
product lines. Colonial Life dental and vision products were introduced in 2018 and are reported in our Colonial Life segment
within our accident, sickness, and disability product line.
Total assets were valued at $93.1 million as of the acquisition date and were primarily comprised of bonds, cash, accounts
receivable, and intangible assets attributable to the value of business acquired and the value of existing state licenses. Total
liabilities were valued at $55.7 million as of the acquisition date and were primarily comprised of outstanding claim liabilities
and reserves for future claims. The total purchase price exceeded the fair value of the identifiable net assets by $111.2
million and has been identified as goodwill, primarily attributable to the value of adding dental and vision to our current
employee benefit offerings. Goodwill was allocated to the reporting units expected to benefit from the acquisition.
Approximately 75 percent was allocated to our Unum US supplemental and voluntary product lines and approximately 25
percent to Colonial Life. The goodwill is not deductible for income tax purposes except upon disposition of the acquired entity.
179
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 13 - Segment Information - Continued
Segment information is as follows:
Premium Income
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
Voluntary Benefits
Dental and Vision
Unum International
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
2018
Year Ended December 31
2017
(in millions of dollars)
2016
$
1,766.2
706.3
$
1,749.6
639.8
$
1,726.6
626.1
1,583.7
156.3
425.4
895.7
202.8
5,736.4
358.9
110.8
99.1
568.8
929.3
328.4
346.1
1,603.8
420.8
648.3
8.0
1,077.1
1,467.5
147.5
420.2
849.4
169.5
5,443.5
340.3
103.1
69.6
513.0
884.2
300.4
326.8
1,511.4
471.8
648.7
8.7
1,129.2
1,410.0
140.3
480.3
796.5
61.1
5,240.9
355.2
105.7
68.4
529.3
830.0
273.8
313.3
1,417.1
521.9
643.9
4.6
1,170.4
Total Premium Income
$
8,986.1
$
8,597.1
$
8,357.7
180
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 13 - Segment Information - Continued
Unum US
Unum
International
Colonial
Life
Closed
Block
(in millions of dollars)
Corporate
Total
— $
29.5
2.7
32.2
8,986.1
2,453.7
198.2
$ 11,638.0
(171.1) $
$
160.4
$
1.0
1,418.1
167.3
673.8
— $
21.4
2.9
24.3
8,597.1
2,451.7
197.7
$ 11,246.5
(146.8) $
$
153.2
$
0.9
1,423.3
159.9
636.1
— $
18.5
4.9
23.4
8,357.7
2,459.0
205.6
$ 11,022.3
(163.0) $
$
159.1
$
1.0
1,323.5
166.0
600.2
Year Ended December 31, 2018
Premium Income
Net Investment Income
Other Income
Adjusted Operating Revenue
Adjusted Operating Income (Loss)
Interest and Debt Expense
Depreciation and Amortization
Year Ended December 31, 2017
Premium Income
Net Investment Income
Other Income
Adjusted Operating Revenue
Adjusted Operating Income (Loss)
Interest and Debt Expense
Depreciation and Amortization
Year Ended December 31, 2016
Premium Income
Net Investment Income
Other Income
Adjusted Operating Revenue
Adjusted Operating Income (Loss)
Interest and Debt Expense
Depreciation and Amortization
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
5,736.4
778.7
118.5
6,633.6
$
$
568.8
117.2
0.4
686.4
$
$
1,603.8
151.2
1.2
1,756.2
$
$
1,077.1
1,377.1
75.4
2,529.6
1,014.6
$
— $
$
389.6
113.9
$
— $
$
17.6
335.2
$
— $
$
257.3
125.5
6.9
8.3
5,443.5
811.2
113.2
6,367.9
$
$
513.0
120.2
0.7
633.9
$
$
1,511.4
144.9
1.1
1,657.4
$
$
1,129.2
1,354.0
79.8
2,563.0
1,009.5
$
— $
$
371.3
111.7
$
— $
$
17.3
325.0
$
— $
$
239.9
123.9
6.7
6.7
5,240.9
828.7
113.3
6,182.9
$
$
529.3
118.1
0.2
647.6
$
$
1,417.1
141.5
1.2
1,559.8
$
$
1,170.4
1,352.2
86.0
2,608.6
914.2
$
— $
$
353.0
314.2
$
— $
$
222.9
129.5
6.9
6.9
128.6
$
— $
$
16.4
181
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 13 - Segment Information - Continued
Deferred Acquisition Costs
Year Ended December 31, 2018
Beginning of Year
Capitalization
Amortization
Adjustment Related to Unrealized Investment Gains and
Losses
Foreign Currency
End of Year
Year Ended December 31, 2017
Beginning of Year
Capitalization
Amortization
Adjustment Related to Unrealized Investment Gains and
Losses
Foreign Currency
End of Year
Year Ended December 31, 2016
Beginning of Year
Capitalization
Amortization
Adjustment Related to Unrealized Investment Gains and
Losses
Foreign Currency
End of Year
$
$
$
$
$
$
Assets
Unum US
Unum International
Colonial Life
Closed Block
Corporate
Total Assets
Unum US
Unum
International
Colonial
Life
(in millions of dollars)
Total
1,205.4
344.0
(315.1)
5.1
—
1,239.4
$
$
21.3
8.1
(8.2)
—
(1.2)
20.0
$
$
957.9
315.9
(242.2)
18.4
—
1,050.0
$
$
2,184.6
668.0
(565.5)
23.5
(1.2)
2,309.4
1,176.5
$
21.4
$
896.3
$
2,094.2
325.5
(293.6)
(3.0)
—
1,205.4
1,136.4
314.1
(275.2)
1.2
—
1,176.5
$
$
$
7.0
(9.1)
—
2.0
21.3
27.1
8.2
(9.7)
—
(4.2)
21.4
$
$
$
295.5
(224.4)
(9.5)
—
957.9
845.0
270.1
(208.1)
(10.7)
—
896.3
$
$
$
628.0
(527.1)
(12.5)
2.0
2,184.6
2,008.5
592.4
(493.0)
(9.5)
(4.2)
2,094.2
December 31
2018
2017
(in millions of dollars)
$
$
17,510.9
3,426.8
4,237.9
34,527.6
2,172.4
61,875.6
$
$
18,109.1
3,428.1
4,184.1
35,051.2
3,240.6
64,013.1
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 International segment.
182
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 13 - Segment Information - Continued
We report goodwill in our Unum US, Unum International, and Colonial Life segments, which are the segments expected to
benefit from the originating business combinations. At December 31, 2018 and 2017 goodwill was $350.3 million and $338.6
million, respectively, with $280.0 million and $271.1 million, respectively, attributable to Unum US, $42.6 million and $39.8
million, respectively, attributable to Unum International, and $27.7 million attributable to Colonial Life in each year.
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.
We measure and analyze our segment performance on the basis of "adjusted operating revenue" and "adjusted operating income"
or "adjusted operating loss", which 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 and certain other items specified in the
reconciliations below. We believe adjusted operating revenue and adjusted operating income or loss are better performance
measures and better indicators of the revenue and profitability and underlying trends in our business. These performance
measures are in accordance with GAAP guidance for segment reporting, but they should not be viewed as a substitute for total
revenue, income before income tax, or net income.
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.
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.
See "Executive Summary" contained herein in Item 7 and Notes 6, 7, and 14 of the "Notes to Consolidated Financial Statements"
contained herein in Item 8 for further discussion regarding the impacts of the long-term care reserve increase, the TCJA, the
unclaimed death benefit reserve increase, and the loss from a guaranty fund assessment, respectively.
A reconciliation of total revenue to "adjusted operating revenue" and income before income tax to "adjusted operating income" is
as follows:
Total Revenue
Excluding:
Net Realized Investment Gain (Loss)
Adjusted Operating Revenue
Income Before Income Tax
Excluding:
Net Realized Investment Gain (Loss)
Loss from Guaranty Fund Assessment
Unclaimed Death Benefit Reserve Increase
Long-term Care Reserve Increase
Adjusted Operating Income
$
$
$
$
183
2018
Year Ended December 31
2017
(in millions of dollars)
$
11,286.8
$
11,598.5
(39.5)
11,638.0
627.8
(39.5)
—
—
(750.8)
1,418.1
$
$
$
40.3
11,246.5
1,404.0
40.3
(20.6)
(39.0)
—
1,423.3
$
$
$
2016
11,046.5
24.2
11,022.3
1,347.7
24.2
—
—
—
1,323.5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 14 - Commitments and Contingent Liabilities
Commitments
We have noncancelable lease obligations on certain office space and equipment. As of December 31, 2018, the aggregate net
minimum lease payments were $157.7 million payable as follows: $30.4 million in 2019, $26.3 million in 2020, $22.2 million
in 2021, $18.2 million in 2022, $12.3 million in 2023, and $48.3 million thereafter. Rental expense for the years ended
December 31, 2018, 2017 and 2016 was $64.3 million, $54.2 million, and $51.4 million, respectively.
At December 31, 2018, we had unfunded commitments of $515.6 million for certain of our investments, the amount of which
may or may not be funded.
Contingent Liabilities
We are a defendant in a number of litigation matters that 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.
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.
184
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 14 - Commitments and Contingent Liabilities - Continued
Miscellaneous Matters
Similar to other insurers, we were the subject of 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 cooperated fully with this
examination and in the fourth quarter of 2017, we started the process to reach a Global Resolution Agreement with the third
party regarding settlement of the examination, which we finalized in January of 2018. Under the terms of the agreement, the
third party acting on behalf of the signatory states compared insured data to the Social Security Administration's Death Master
File (SSDMF) to identify deceased insureds and contract holders where a valid claim has not been made. During the fourth
quarter of 2017, we established reserves which reflect our estimate of the liability expected to be paid as we execute on the terms
of the settlement. We also are cooperating with a Delaware Market Conduct examination involving the same issue, which is
currently inactive. The legal and regulatory environment around unclaimed death benefits continues to evolve. It is possible that
the current settlement and/or similar investigations by other state jurisdictions may result in 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.
In 2009, a Pennsylvania-based insurance company and its affiliates were ordered into rehabilitation, and the Pennsylvania
Insurance Commissioner, who was appointed as the Rehabilitator, filed petitions for liquidation with the Commonwealth Court
of Pennsylvania. Under Pennsylvania law, payment of covered claims and other related insurance obligations are provided,
within prescribed limits, by state guaranty associations. These guaranty associations assess fees to meet these obligations on
insurance companies that sell insurance within the state, which are generally based on a company's pro rata portion of average
premiums written or received for several years prior to the insolvency. In March 2017, a formal order of liquidation was issued,
and as such, we were subject to an assessment by those guaranty associations that are responsible for policyholder claims, and
accordingly accrued, in the first quarter of 2017, an estimated loss contingency. We continue to submit payment to satisfy this
assessment as requests for payment are received from the guaranty associations.
Securities Class Actions: Three alleged securities class action lawsuits have been filed against Unum Group and individual
defendants as follows:
• On June 13, 2018, an alleged securities class action lawsuit entitled Cynthia Pittman v. Unum Group, Richard
McKenney, John McGarry, and Daniel Waxenberg was filed in the United States District Court for the Eastern District
of Tennessee. The plaintiff seeks to represent purchasers of Unum Group publicly traded securities between January
31, 2018 and May 2, 2018. The plaintiff alleges the Company caused its shares to trade at artificially high levels by
failing to disclose information about the rate of long-term care policy terminations and long-term care claim incidence
resulting in misleading statements about capital management plans and long-term care reserves. The complaint asserts
claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and seeks
compensatory damages in an amount to be proven at trial. The Company strongly denies these allegations and will
vigorously defend the litigation.
• On July 13, 2018, an alleged securities class action lawsuit entitled Scott Cunningham v. Unum Group, Richard
McKenney, John McGarry, and Daniel Waxenberg was filed in the United States District Court for the Eastern District
of Tennessee. The allegations, class period, and damages claimed mirror those in the Pittman matter. The Company
strongly denies these allegations and will vigorously defend the litigation.
• On July 25, 2018, an alleged securities class action lawsuit entitled City of Taylor Police and Fire Retirement System v.
Unum Group, Richard McKenney, John McGarry, Steve Zabel, and Daniel Waxenberg was filed in the United States
District Court for the Eastern District of Tennessee. The plaintiff seeks to represent purchasers of Unum Group publicly
traded securities between October 27, 2016 and May 1, 2018. The allegations and damages claimed mirror those in the
Pittman matter. The Company strongly denies these allegations and will vigorously defend the litigation.
On November 9, 2018, the court consolidated the Pittman, Cunningham, and City of Taylor Police and Fire Retirement System
cases into one matter entitled In re Unum Group Securities Litigation, appointed a lead plaintiff and lead plaintiff’s counsel, and
directed the plaintiff to file a consolidated amended complaint. On January 15, 2019, the plaintiff filed a consolidated amended
complaint asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder
185
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 14 - Commitments and Contingent Liabilities - Continued
and seeks compensatory damages in an amount to be proven at trial as well as costs, expenses, and attorney’s fees. The
Company strongly denies these allegations and will vigorously defend the litigation.
These lawsuits are in a very preliminary stage, the outcome is uncertain, and the Company is unable to estimate a range of
reasonably possible losses. Reserves have not been established for these matters. Although we believe these claims lack merit,
an adverse outcome in one or more of these actions could, depending on the nature, scope, and amount of the ruling, materially
adversely affect our consolidated results of operations in a period.
Shareholder Derivative Actions: Three alleged derivative lawsuits have been filed against individual defendants and Unum
Group, as nominal defendant, as follows:
• On September 27, 2018, a purported shareholder derivative lawsuit entitled Vladimir Gusinsky Revocable Trust,
Derivatively on Behalf of Unum Group v. Richard P. McKenney, John F. McGarry, Daniel J. Waxenberg, Steve Zabel,
Kevin T. Kabat, E. Michael Caulfield, Gloria C. Larson, Timothy F. Keaney, Theodore H. Bunting, Jr., Cynthia L. Egan,
Ronald P. O'Hanley, Francis L. Shammo, Joseph J. Echevarria, Thomas R. Watjen, Pamela H. Godwin, Edward J. Muhl,
and Unum Group as nominal defendant was filed in the United States District Court for the District of Delaware. The
complaint purports to assert claims on behalf of the Company against certain current and past members of our Board of
Directors and Mr. McKenney for alleged misleading statements about the Company's long-term care business in the
Company's proxy statement filed with the Securities and Exchange Commission on April 13, 2017 in violation of
Section 14(a) of the Securities Exchange Act of 1934. The complaint also purports to assert claims on behalf of the
Company against all individual defendants arising out of the Company's long-term care business for breach of fiduciary
duties, waste of corporate assets and unjust enrichment. The complaint seeks compensatory damages in an amount to
be proven at trial, changes to corporate governance and internal procedures, equitable and injunctive relief, restitution,
costs, expenses, and attorney's fees. The Company strongly denies these allegations and will vigorously defend the
litigation.
• On October 23, 2018, a purported shareholder derivative lawsuit entitled Steven Jenkins, Derivatively on Behalf of
Unum Group v. Richard P. McKenney, John F. McGarry, Daniel J. Waxenberg, Steve Zabel, Kevin T. Kabat, E. Michael
Caulfield, Gloria C. Larson, Timothy F. Keaney, Theodore H. Bunting, Jr., Cynthia L. Egan, Ronald P. O'Hanley,
Francis J. Shammo, Joseph J. Echevarria, Thomas R. Watjen, Pamela H. Godwin, Edward J. Muhl, and Unum Group as
nominal defendant was filed in the United States District Court for the District of Delaware. The defendants,
allegations, and damages claimed mirror those in the Gusinsky matter. The Company strongly denies these allegations
and will vigorously defend the litigation.
• On November 1, 2018, a purported shareholder derivative lawsuit entitled Julie Nguyen, Derivatively on Behalf of
Unum Group v. Richard P. McKenney, John F. McGarry, Daniel J. Waxenberg, Steve Zabel, Kevin T. Kabat, E. Michael
Caulfield, Gloria C. Larson, Timothy F. Keaney, Theodore H. Bunting, Jr., Cynthia L. Egan, Ronald P. O'Hanley,
Francis J. Shammo, Joseph J. Echevarria, Thomas R. Watjen, Pamela H. Godwin, Edward J. Muhl, and Unum Group as
nominal defendant was filed in the United States District Court for the District of Delaware. The defendants,
allegations, and damages claimed mirror those in the Gusinsky matter. The Company strongly denies these allegations
and will vigorously defend the litigation.
On December 10, 2018, the court consolidated the Gusinsky, Jenkins, and Nguyen cases into one matter entitled In re Unum
Group Stockholder Derivative Litigation, appointed co-lead counsel and liaison counsel for plaintiffs and directed the parties to
propose a schedule of proceedings for the consolidated matter.
These lawsuits are in a very preliminary stage, the outcome is uncertain, and the Company is unable to estimate a range of
reasonably possible losses. Reserves have not been established for these matters. Although we believe these claims lack merit,
an adverse outcome in one or more of these actions could, depending on the nature, scope, and amount of the ruling, materially
adversely affect our consolidated results of operations in a period.
186
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 15 - Statutory Financial Information
Statutory Net Income, Capital and Surplus, and Dividends
Statutory net income for U.S. life insurance companies is reported in conformity with statutory accounting principles prescribed
by the National Association of Insurance Commissioners (NAIC) and adopted by applicable domiciliary state laws. The
commissioners of the states of domicile have the right to permit other specific practices that may deviate from prescribed
practices. 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 and Fairwind Insurance
Company (Fairwind), both of which are affiliated captive reinsurance subsidiaries (captive reinsurers) domiciled in the United
States, 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.
Fairwind, which is domiciled in the state of Vermont, is required to follow GAAP in accordance with Vermont reporting
requirements for pure captive insurance companies, unless the commissioner permits the use of some other basis of accounting.
Fairwind 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 Fairwind of approximately $137 million and $142
million as of December 31, 2018 and 2017 respectively. Included in the 2018 results for Fairwind was the assumed portion of
the statutory impact of the long-term care reserve increase from Unum America. Included in the 2017 results for Fairwind was
the revaluation of the deferred tax asset at the new corporate rate of 21 percent resulting from the enactment of TCJA.
Northwind Re has no material state prescribed accounting practices that differ from statutory accounting principles prescribed by
the NAIC.
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.
Combined Net Income (Loss)
Traditional U.S. Life Insurance Subsidiaries
Captive Reinsurers
Combined Net Gain (Loss) from Operations
Traditional U.S. Life Insurance Subsidiaries
Captive Reinsurers
Combined Capital and Surplus
Traditional U.S. Life Insurance Subsidiaries
Captive Reinsurers
2018
Year Ended December 31
2017
(in millions of dollars)
2016
$
$
$
$
$
953.0
(109.6) $
$
807.4
(137.1) $
$
959.8
(110.9) $
$
812.4
(143.1) $
855.1
48.4
884.6
50.6
December 31
2018
2017
(in millions of dollars)
$
$
3,572.7
1,766.2
$
$
3,448.3
1,606.9
Solvency II, a European Union directive prescribes capital requirements and risk management standards for the European
insurance industry. As derived from the most recent annual financial statements based on Solvency II requirements, regulatory
187
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 15 - Statutory Financial Information - Continued
net income and own funds available of our United Kingdom insurance subsidiary, Unum Limited, were £78.7 million and £672.3
million, respectively.
Risk based capital (RBC) standards for U.S. life insurance companies are prescribed by the NAIC. The domiciliary states of our
U.S. insurance subsidiaries have all adopted a version of the RBC model formula of the NAIC, which prescribes a system for
assessing the adequacy of statutory capital and surplus for all life and health insurers. The basis of the system is a risk-based
formula that applies prescribed factors to the various risk elements in a life and health insurer's business to report a minimum
capital requirement proportional to the amount of risk assumed by the insurer. The life and health RBC formula is designed to
measure annually (i) the risk of loss from asset defaults and asset value fluctuations, (ii) the risk of loss from adverse mortality
and morbidity experience, (iii) the risk of loss from mismatching of asset and liability cash flow due to changing interest rates,
and (iv) business risks. The formula is used as an early warning tool to identify companies that are potentially inadequately
capitalized. State insurance laws grant insurance regulators the authority to require various actions by, or take various actions
against, insurers whose total adjusted capital does not meet or exceed certain RBC levels. The impacts of the TCJA, particularly
the decrease in the U.S. corporate tax rate, resulted in both the reduction of our admitted deferred tax assets and the increase of
RBC factors adopted by the NAIC, which has reduced our RBC ratios; however, the total adjusted capital of each of our U.S.
insurance subsidiaries at December 31, 2018 is in excess of those RBC levels.
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, $994.9 million is available, without prior approval by regulatory authorities, during
2019 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 our foreign subsidiaries, primarily in the U.K., for which the payment may be
subject to applicable insurance company regulations and capital guidance. We have £140.0 million available for the payment of
dividends from Unum Limited during 2019, subject to regulatory approval.
Deposits
Our U.S. insurance subsidiaries had on deposit with U.S. regulatory authorities securities with a book value of $155.7 million at
both December 31, 2018 and 2017, held for the protection of policyholders.
188
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Unum Group and Subsidiaries
Note 16 - Quarterly Results of Operations (Unaudited)
The following is a summary of our unaudited quarterly results of operations for 2018 and 2017:
Premium Income
Net Investment Income
Net Realized Investment Gain (Loss)
Total Revenue
Income (Loss) Before Income Tax
Net Income (Loss)
Net Income (Loss) Per Common Share
Basic
Assuming Dilution
Premium Income
Net Investment Income
Net Realized Investment Gain
Total Revenue
Income Before Income Tax
Net Income
Net Income Per Common Share
Basic
Assuming Dilution
$
$
2018
4th
3rd
2nd
1st
(in millions of dollars, except share data)
$
2,263.3
608.6
(41.4)
2,880.8
309.7
249.1
1.15
1.15
$
2,251.8
619.2
6.7
2,927.8
(377.8)
(284.7)
(1.30)
(1.30)
2017
$
2,221.0
623.6
(2.6)
2,890.3
354.8
285.5
1.29
1.29
2,250.0
602.3
(2.2)
2,899.6
341.1
273.5
1.23
1.23
4th
3rd
2nd
1st
(in millions of dollars, except share data)
$
2,158.4
619.8
11.4
2,839.2
345.3
266.9
1.19
1.19
$
2,153.6
609.0
9.8
2,819.1
366.8
252.3
1.12
1.12
$
2,142.2
620.5
8.1
2,822.0
361.6
245.1
1.08
1.07
2,142.9
602.4
11.0
2,806.5
330.3
229.9
1.00
1.00
Items affecting the comparability of our financial results are as follows:
• Third quarter of 2018 reserve increase of $750.8 million before tax and $593.1 million after tax related to long-term
•
•
•
care.
Fourth quarter of 2017 reserve increase of $39.0 million before tax and $25.4 million after tax related to unclaimed
death benefits.
Fourth quarter of 2017 net tax benefit of $31.5 million related to the TCJA.
First quarter of 2017 loss from a guaranty fund assessment related to an unaffiliated insurer that was declared insolvent
of $20.6 million before tax and $13.4 million after tax.
See Notes 6, 7, and 14 for further discussion of the above items.
189
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, we have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. We evaluated those controls
based on the 2013 Internal Control - Integrated Framework from the Committee of Sponsoring Organizations of the Treadway
Commission. Based on that evaluation, these officers concluded that our disclosure controls and procedures were effective as of
December 31, 2018.
There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities
Exchange Act of 1934, as amended, during the quarter ended December 31, 2018 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
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.
As permitted by the Securities and Exchange Commission, we have excluded from the scope of our assessment of internal
control over financial reporting the operations and related assets and stockholders' equity of the companies we acquired during
2018. At December 31, 2018, the combined total assets and total stockholders' equity for these companies constituted $364.8
million and $154.2 million of the Company's total assets and total stockholder's equity, respectively, while total combined
revenues and net loss constituted $19.5 million and $1.4 million of the Company's total revenues and net income, respectively,
for the period from the date of the respective acquisitions through December 31, 2018. See "Executive Summary" contained
herein in Item 7 for further information.
We assessed the effectiveness of our internal control over financial reporting, based on criteria established in the 2013 Internal
Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and
concluded that, as of December 31, 2018, we maintained effective internal control over financial reporting.
Attestation Report of the Company's Registered Public Accounting Firm
Ernst & Young LLP, the independent registered public accounting firm that audited our consolidated financial statements
included herein, audited the effectiveness of our internal control over financial reporting, as of December 31, 2018, and issued
the attestation report included as follows.
190
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Unum Group
Opinion on Internal Control over Financial Reporting
We have audited Unum Group and subsidiaries’ internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, Unum Group and subsidiaries (the Company) maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, 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,
2018, and the related notes and financial statement schedules listed in the Index at Item 15(a)(2) and our report dated February 19,
2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company's 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 are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ Ernst & Young LLP
Chattanooga, Tennessee
February 19, 2019
191
ITEM 9B. OTHER INFORMATION
None
192
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
PART III
The information required by this Item with respect to directors is included under the caption "Information About the Board of
Directors," sub-captions "Director Nominees" and "Additional Current Director - Retiring at the Annual Meeting," in our
definitive proxy statement for the 2019 Annual Meeting of Shareholders and is incorporated herein by reference.
The information required by this Item with respect to our executive officers is included under the caption "Executive Officers of
the Registrant" contained herein in Item 1 and is incorporated herein by reference.
Corporate Governance
Our internet website address is www.unum.com. We have adopted corporate governance guidelines, a code of conduct
applicable to all of our directors, officers and employees, and charters for the audit, human capital, governance, risk and finance
and regulatory compliance committees of our board of directors in accordance with the requirements of the New York Stock
Exchange (NYSE). In addition, our board of directors has adopted a code of ethics applicable to our chief executive officer and
certain senior financial officers in accordance with the requirements of the Securities and Exchange Commission. These
documents are available free of charge on our website and in print at the request of any shareholder from the Office of the
Corporate Secretary, Unum Group, 1 Fountain Square, Chattanooga, Tennessee, 37402, or by calling toll-free 1-800-718-8824.
We will post on our website amendments to or waivers from any provision of our code of conduct and our code of ethics, as
required by the rules and regulations of the Securities and Exchange Commission and the listing standards of the NYSE.
The information required by this Item with respect to compliance with Section 16(a) of the Exchange Act is included under the
caption "Ownership of Company Securities," sub-caption "Section 16(a) - Beneficial Ownership Reporting Compliance," in our
definitive proxy statement for the 2019 Annual Meeting of Shareholders and is incorporated herein by reference.
The information required by this Item with respect to a code of ethics for our chief executive officer and certain senior financial
officers is included under the caption "Board and Committee Governance," sub-caption "Codes of Conduct and Ethics," in our
definitive proxy statement for the 2019 Annual Meeting of Shareholders and is incorporated herein by reference.
The information required by this Item with respect to the audit committee and audit committee financial experts is included
under the caption "Board and Committee Governance," sub-captions "Committees of the Board" and "Audit Committee," in our
definitive proxy statement for the 2019 Annual Meeting of Shareholders and is incorporated herein by reference. In addition,
information relating to the procedures by which our shareholders may recommend nominees to our board of directors is included
under the caption "Corporate Governance," sub-caption "Process for Selecting and Nominating Directors," in our definitive
proxy statement for the 2019 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item with respect to executive compensation and compensation committee matters is included
under the caption "Information About the Board of Directors," sub-caption "Director Compensation," under the caption "Board
and Committee," sub-caption "Compensation Committee Interlocks and Insider Participation," and under the captions
"Compensation Discussion and Analysis," "Report of the Human Capital Committee," "Compensation Tables," and "Post-
Employment Payments" in our definitive proxy statement for the 2019 Annual Meeting of Shareholders and is incorporated
herein by reference.
193
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this Item with respect to security ownership of certain beneficial owners and management is
included under the captions "Ownership of Company Securities" and "Security Ownership of Certain Shareholders" in our
definitive proxy statement for the 2019 Annual Meeting of Shareholders and is incorporated herein by reference.
Equity Compensation Plan Information
The following table gives information as of December 31, 2018, about the common stock that may be issued under all our
existing equity compensation plans.
Plan Category
Equity Compensation Plans
Approved by Shareholders (1)
Equity Compensation Plans Not
Approved by Shareholders (2)
Total
(a)
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
1,554,878 (3)
60,992 (4)
1,615,870
(b)
Weighted average exercise
price of outstanding options,
warrants and rights (5)
(c)
Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a))
$24.41
N/A
N/A
16,529,869 (6)
21,129 (7)
16,550,998
(1) Our shareholders have approved the following plans: (a) Stock Incentive Plan of 2007, (b) Unum Group Employee
Stock Purchase Plan (ESPP), (c) Unum European Holding Company Limited Savings-Related Share Option Scheme
2011 (2011 SAYE), (d) Stock Incentive Plan of 2012, (e) Unum European Holding Company Limited Savings-Related
Share Option Scheme 2016 (2016 SAYE), and (f) Stock Incentive Plan of 2017.
(2) Our shareholders have not approved the Unum Group Non-Employee Director Compensation Plan of 2004.
(3) Includes 104,895 shares issuable upon the exercise of outstanding options, 914,550 performance-based restricted stock
units, 37,560 deferred share rights issuable pursuant to outstanding awards (including dividend equivalents accrued
thereon), and 896,171 performance share units assuming maximum achievement. The awards shown are issuable under
the 2007 Plan, the 2012 Plan, and the 2017 Plan.
(4) Consists of deferred share rights (each representing the right to one share of common stock), including dividend
equivalents accrued thereon, granted to non-employee directors under the Unum Group Non-Employee Director
Compensation Plan of 2004 in accordance with the deferral elections of such directors in respect of cash retainers and
meeting fees payable to them.
(5) RSUs, PSUs, and deferred share rights are not included in determining the weighted average exercise price in column
(b) because they have no exercise price.
(6) Includes 75,492 shares and 159,117 shares available for future issuance as dividend equivalents in respect of outstanding
awards under the 2007 Plan and the 2012 Plan, respectively, which were otherwise replaced by the 2017 Plan for
purposes of granting new awards; 15,742,207 shares remaining available for future issuance under the 2017 Plan;
248,338 shares remaining available for issuance under the ESPP; and 105,413 shares and 199,302 shares remaining
available for future issuance under the 2011 SAYE and the 2016 SAYE, respectively. Any award outstanding under the
2012 Plan as of the effective date of the 2017 Plan that after such date is not issued because the award is forfeited,
terminates, expires or otherwise lapses without being exercised, or is settled for cash, will be returned to the 2017 Plan.
Each PSU, RSU or other full-value award under the 2017 Plan is counted as 1.76 shares.
(7) Represents number of shares available for future issuance as dividend equivalents in respect of outstanding awards under
the Non-Employee Director Compensation Plan of 2004.
194
Below is a brief description of the equity compensation plans not approved by shareholders.
Unum Group Amended and Restated Non-Employee Director Compensation Plan of 2004
This plan provided for the payment of annual retainers and meeting fees (discontinued in May 2011) to the non-employee
directors who served on our Board of Directors. Under the plan, directors made an irrevocable election each year to receive
all or a portion of their retainers and meeting fees in either cash or deferred share rights. A deferred share right is a right to
receive one share of common stock on the earlier of (i) the director’s separation from service as a director of the company, or
(ii) another designated date at least three years after the date of the deferral election. The number of deferred share rights
granted is calculated as the number of whole shares equal to (i) the dollar amount of the annual retainer and/or fees that the
director elects to have paid in deferred share rights, divided by (ii) the fair market value per share on the grant date. The
aggregate number of shares which can be issued under the plan is 500,000. This plan terminated in May 2010 with respect to
new awards, though dividend equivalents remain available for future issuance in respect of awards that were outstanding at
that time. The plan is administered by the Human Capital Committee. The plan includes provisions restricting the
transferability of the deferred share rights, provisions for adjustments to the number of shares available for grants, and the
number of shares subject to outstanding grants in the event of recapitalization, reclassification, stock split, reverse stock split,
reorganization, merger, consolidation, or other similar corporate transaction.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item with respect to certain relationships and related transactions and director independence is
included under the caption "Information About the Board of Directors," sub-caption "Director Independence" and under the
caption "Board and Committee Governance, " sub-caption "Related Party Transactions and Policy," in our definitive proxy
statement for the 2019 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item with respect to fees paid to Ernst & Young LLP in 2018 and 2017 and our audit
committee's pre-approval policies and procedures is included under the caption "Items to Be Voted On," sub-captions
"Independent Auditor Fees" and "Policy for Pre-Approval of Audit and Non-Audit Services," in our definitive proxy statement
for the 2019 Annual Meeting of Shareholders and is incorporated herein by reference.
195
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a) List of Documents filed as part of this report:
Page
(1) Financial Statements
The following report and consolidated financial statements of Unum Group and Subsidiaries are included in
Item 8.
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2018 and 2017
Consolidated Statements of Income for the three years ended December 31, 2018
Consolidated Statements of Comprehensive Income for the three years ended December 31, 2018
Consolidated Statements of Stockholders' Equity for the three years ended December 31, 2018
Consolidated Statements of Cash Flows for the three years ended December 31, 2018
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Summary of Investments - Other than Investments in Related Parties
I.
II. Condensed Financial Information of Registrant
III. Supplementary Insurance Information
IV. Reinsurance
V. Valuation and Qualifying Accounts
Schedules not referred to have been omitted as inapplicable or because they are not required by Regulation
S-X.
(3) Exhibits
Index to Exhibits
97
98
100
101
102
103
104
197
198
203
205
206
207
196
SCHEDULE I--SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
as of December 31, 2018
Unum Group and Subsidiaries
Type of Investment
Fixed Maturity Securities:
Bonds
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
$
Mortgage Loans
Policy Loans
Other Long-term Investments
Derivatives
Equity Securities
Miscellaneous Long-term Investments
Short-term Investments
Cost or
Amortized
Cost (1)
Amount
shown on the
balance sheet
Fair Value
(in millions of dollars)
$
$
1,814.4
2,424.2
983.7
7,412.8
1,582.7
28,754.0
39.9
$ 43,011.7
1,702.1
2,121.5
825.8
6,626.2
1,523.8
27,436.8
39.0
40,275.2
2,295.0
3,729.9
—
32.6
613.4
968.1
1,814.4
2,424.2
983.7
7,412.8
1,582.7
28,754.0
39.9
43,011.7
2,295.0
3,729.9
30.9 (2)
29.2
642.8 (3)
968.1
Total Investments
$
47,914.2
$
50,707.6
(1)
The amortized cost for fixed maturity securities and mortgage loans represents original cost reduced by repayments,
write-downs from other-than-temporary declines in fair value, amortization of premiums, and/or accretion of discounts.
(2) Derivatives are carried at fair value.
(3)
The difference between amortized cost and carrying value primarily results from changes in the partnership owner's equity
since acquisition.
197
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Unum Group (Parent Company)
BALANCE SHEETS
Assets
Fixed Maturity Securities - at fair value (amortized cost: $139.0; $153.9)
Other Long-term Investments
Short-term Investments
Investment in Subsidiaries
Deferred Income Tax
Other Assets
Total Assets
Liabilities and Stockholders' Equity
Liabilities
Short-term Debt
Long-term Debt
Pension and Postretirement Benefits
Other Liabilities
Total Liabilities
Stockholders' Equity
Common Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Treasury Stock
Total Stockholders' Equity
$
$
$
December 31
2018
2017
(in millions of dollars)
135.9
38.8
285.2
11,383.6
116.7
446.9
12,407.1
$
$
154.1
16.8
477.8
12,157.1
121.5
455.4
13,382.7
— $
2,831.3
594.2
359.8
3,785.3
30.5
2,321.7
(814.2)
9,863.1
(2,779.3)
8,621.8
199.9
2,538.4
683.3
386.2
3,807.8
30.5
2,303.3
127.5
9,542.2
(2,428.6)
9,574.9
Total Liabilities and Stockholders' Equity
$
12,407.1
$
13,382.7
See notes to condensed financial information.
198
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Unum Group (Parent Company)
STATEMENTS OF OPERATIONS
2018
$
Cash Dividends from Subsidiaries
Other Income
Total Revenue
Interest and Debt Expense
Other Expenses
Total Expenses
Income of Parent Company Before Income Tax
Income Tax Expense (Benefit)
Income of Parent Company
Equity in Undistributed Earnings (Loss) of Subsidiaries
Net Income
Other Comprehensive Income (Loss), Net of Tax
Year Ended December 31
2017
(in millions of dollars)
$
$
1,135.4
66.6
1,202.0
830.2
66.6
896.8
161.4
53.4
214.8
987.2
(1.7)
988.9
(465.5)
523.4
(924.2)
154.2
37.1
191.3
705.5
115.3
590.2
404.0
994.2
178.5
2016
676.5
58.4
734.9
160.1
32.3
192.4
542.5
(20.2)
562.7
368.7
931.4
(67.1)
Comprehensive Income (Loss)
$
(400.8) $
1,172.7
$
864.3
See notes to condensed financial information.
199
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Unum Group (Parent Company)
STATEMENTS OF CASH FLOWS
2018
Year Ended December 31
2017
(in millions of dollars)
$
740.6
$
1,052.1
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
Cash Distributions to Subsidiaries
Net Purchases of Property and Equipment
Acquisition of Business
Other, Net
Cash Used by Investing Activities
Cash Flows from Financing Activities
Short-term Debt Repayment
Issuance of Long-term Debt
Long-term Debt Repayment
Issuance of Common Stock
Repurchase of Common Stock
Dividends Paid to Stockholders
Other, Net
Cash Used by Financing Activities
—
52.5
—
(47.9)
(22.3)
192.6
(530.8)
(73.2)
(146.1)
—
(575.2)
(200.0)
290.7
—
4.6
(356.2)
(215.6)
(9.3)
(485.8)
—
194.3
35.2
(121.2)
—
(99.9)
(79.5)
(83.3)
—
—
(154.4)
—
—
—
10.8
(401.8)
(196.0)
0.2
(586.8)
2016
685.4
2.6
111.2
0.4
(56.5)
(23.3)
(89.8)
(143.6)
(55.5)
(140.3)
0.2
(394.6)
—
609.1
(350.0)
8.5
(405.2)
(182.6)
(1.0)
(321.2)
Decrease in Cash
$
(8.9) $
(0.6) $
(30.4)
See notes to condensed financial information.
200
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Unum Group (Parent Company)
NOTES TO CONDENSED FINANCIAL INFORMATION
Note 1 - Basis of Presentation
The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and
notes thereto of Unum Group and subsidiaries.
Note 2 - Debt
Debt consists of the following:
Long-term Debt
Outstanding Principal
Senior Notes issued 1998
Senior Notes issued 2002
Senior Notes issued 2010
Senior Notes issued 2012 and 2016
Senior Notes issued 2014
Senior Notes issued 2015
Senior Notes issued 2016
Medium-term Notes issued 1990 - 1996
Junior Subordinated Debt Securities issued 1998
Junior Subordinated Debt Securities issued 2018
Fair Value Hedge Adjustment
Less:
Unamortized Net Premium
Unamortized Debt Issuance Costs
Total Long-term Debt
Short-term Debt
Outstanding Principal
Senior Notes issued 1998
Less Unamortized Debt Issuance Costs
Total Short-term Debt
Interest Rates
Maturities
$
6.750 - 7.250%
7.375%
5.625%
5.750%
4.000%
3.875%
3.000%
7.000 - 7.190%
7.405%
6.250%
2028
2032
2020
2042
2024
2025
2021
2023 - 2028
2038
2058
7.000%
2018
December 31
2018
2017
(in millions of dollars)
$
365.8
39.5
400.0
500.0
350.0
275.0
350.0
50.8
226.5
300.0
(5.1)
365.8
39.5
400.0
500.0
350.0
275.0
350.0
50.8
226.5
—
(4.5)
9.6
(30.8)
2,831.3
9.7
(24.4)
2,538.4
—
—
—
200.0
(0.1)
199.9
Total Debt
$
2,831.3
$
2,738.3
The medium-term notes are non-callable. The junior subordinated debt securities are callable under limited, specified
circumstances. The remaining debt is callable and may be redeemed, in whole or in part, at any time. The aggregate contractual
principal maturities are $400.0 million in 2020, $350.0 million in 2021, $2.0 million in 2023, and $2,105.6 million thereafter.
201
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
Unum Group (Parent Company)
NOTES TO CONDENSED FINANCIAL INFORMATION - CONTINUED
Unsecured Notes
In July 2018, our $200.0 million 7.00% senior unsecured notes matured.
In September 2016, our $350.0 million 7.125% senior unsecured notes matured.
In May 2016, we issued a total of $600.0 million aggregate principal amount of senior notes: (i) $350.0 million aggregate
principal amount of senior notes due in 2021 with an annual coupon rate of 3.00%, and (ii) $250.0 million aggregate principal
amount of senior notes due in 2042 with an annual coupon rate of 5.75%, pursuant to a reopening of the $250.0 million
aggregate principal amount outstanding of our 5.75% senior notes due 2042 issued in 2012. Both issuances are callable at or
above par and rank equally in the right of payment with all of our other unsecured and unsubordinated debt.
Fair Value Hedges
As of December 31, 2018 and 2017, we had $250.0 million notional amount of an interest rate swap which effectively converts
certain of our unsecured senior notes into floating rate debt. Under this agreement, we receive a fixed rate of interest and pay a
variable rate of interest, based off of the three-month LIBOR.
Junior Subordinated Debt Securities
In May 2018, we issued $300.0 million of 6.25% junior subordinated notes due 2058. The notes are redeemable at or above par
on or after June 15, 2023 and rank equally in the right of payment with our other 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 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 Paid
Interest paid on debt and related securities during 2018, 2017, and 2016 was $161.4 million, $148.7 million, and $147.8 million,
respectively.
Credit Facility
In 2016, we amended the terms of our five-year, $400.0 million unsecured revolving credit facility, which was previously set to
expire in 2018, to extend through March 2021. 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 borrowing at an interest
rate based either on the prime rate or LIBOR. In addition, the credit facility provides for the issuance of letters of credit subject
to certain terms and limitations. At December 31, 2018 and 2017, letters of credit totaling $2.1 million had been issued from the
credit facility, but there were no borrowed amounts outstanding.
202
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
Unum Group and Subsidiaries
Segment
Deferred
Acquisition
Costs
Reserves for
Future Policy
Contract
Benefits
Unearned
Premiums
Policy and
Contract
Benefits
(in millions of dollars)
December 31, 2018
Unum US
Unum International
Colonial Life
Closed Block
Total
December 31, 2017
Unum US
Unum International
Colonial Life
Closed Block
Total
$
$
$
$
1,239.4
20.0
1,050.0
—
2,309.4
1,205.4
21.3
957.9
—
2,184.6
$
$
$
$
10,840.9
2,340.5
2,330.2
29,330.3
44,841.9
11,382.1
2,361.6
2,224.2
29,633.7
45,601.6
$
$
$
$
47.2
123.3
36.3
156.5
363.3
49.0
125.7
34.7
163.7
373.1
$
$
$
$
1,091.5
115.6
206.2
282.4
1,695.7
1,059.8
108.5
212.1
224.8
1,605.2
203
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
Unum Group and Subsidiaries
(continued from preceding page)
Segment
Premium
Income
Net
Investment
Income (1)
Benefits
and Change
in Reserves
for Future
Benefits (2)
Amortization
of Deferred
Acquisition
Costs
(in millions of dollars)
All Other
Expenses
(3)
Premiums
Written (4)
December 31, 2018
Unum US
Unum International
Colonial Life
Closed Block
Corporate
Total
December 31, 2017
Unum US
Unum International
Colonial Life
Closed Block
Corporate
Total
December 31, 2016
Unum US
Unum International
Colonial Life
Closed Block
Corporate
Total
$ 5,736.4
568.8
1,603.8
1,077.1
—
$ 8,986.1
$ 5,443.5
513.0
1,511.4
1,129.2
—
$ 8,597.1
$ 5,240.9
529.3
1,417.1
1,170.4
—
$ 8,357.7
$
$
$
$
$
$
778.7
117.2
151.2
1,377.1
29.5
2,453.7
811.2
120.2
144.9
1,354.0
21.4
2,451.7
828.7
118.1
141.5
1,352.2
18.5
2,459.0
$
$
$
$
$
$
3,856.5
419.8
824.9
2,919.2
—
8,020.4
3,693.4
381.9
788.6
2,191.8
—
7,055.7
3,624.3
367.4
726.4
2,223.7
—
6,941.8
$
$
$
$
$
$
315.1
8.2
242.2
—
—
565.5
293.6
9.1
224.4
—
—
527.1
275.2
9.7
208.1
—
—
493.0
$
$
$
$
$
$
1,447.4
144.5
353.9
235.7
203.3
2,384.8
1,398.0
131.2
331.8
247.3
191.7
2,300.0
1,369.2
141.9
311.1
255.4
186.4
2,264.0
$
$
$
3,873.0
455.5
1,277.3
1,065.7
—
3,701.3
404.2
1,210.6
1,109.8
—
3,564.4
435.4
1,145.0
1,161.8
—
(1) Net investment income is allocated based upon segmentation. Each segment has its own specifically identified assets and
receives the investment income generated by those assets.
(2)
(3)
Included in 2018 is a reserve charge of $750.8 million in the Closed Block segment related to our long-term care business.
Included in 2017 are unclaimed death benefits reserve increases of $26.6 million in Unum US and $12.4 million in
Colonial Life.
Includes commissions; interest and debt expense; deferral of acquisition costs; compensation expense; and other expenses.
Where not directly attributable to a segment, expenses are generally allocated based on activity levels, time information,
and usage statistics. Included in 2017 is a loss contingency accrual for a guaranty fund assessment of $20.6 million in
Corporate.
(4)
Excludes life insurance.
204
SCHEDULE IV--REINSURANCE
Unum Group and Subsidiaries
Gross
Amount
Ceded to
Other
Companies
Assumed
from Other
Companies
(in millions of dollars)
Percentage
Amount
Assumed to
Net
Net Amount
Year Ended December 31, 2018
Life Insurance in Force
$ 937,300.8
$
40,902.8
$
1,089.3
$ 897,487.3
0.1%
Premium Income:
Life Insurance
Accident, Health, and Other Insurance
Total
Year Ended December 31, 2017
$
$
2,442.1
6,729.0
9,171.1
$
$
138.2
189.4
327.6
$
$
8.7
133.9
142.6
$
$
2,312.6
6,673.5
8,986.1
0.4%
2.0%
1.6%
Life Insurance in Force
$ 887,857.2
$
36,545.0
$
1,045.8
$ 852,358.0
0.1%
Premium Income:
Life Insurance
Accident, Health, and Other Insurance
Total
Year Ended December 31, 2016
$
$
2,272.7
6,404.5
8,677.2
$
$
135.7
174.4
310.1
$
$
10.2
219.8
230.0
$
$
2,147.2
6,449.9
8,597.1
0.5%
3.4%
2.7%
Life Insurance in Force
$ 854,783.9
$
31,882.5
$
1,004.7
$ 823,906.1
0.1%
Premium Income:
Life Insurance
Accident, Health, and Other Insurance
Total
$
$
2,202.6
6,182.4
8,385.0
$
$
151.3
112.3
263.6
$
$
9.7
226.6
236.3
$
$
2,061.0
6,296.7
8,357.7
0.5%
3.6%
2.8%
205
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
Unum Group and Subsidiaries
Description
Year Ended December 31, 2018
Real Estate reserve (deducted from other long-term
investments)
Allowance for doubtful accounts (deducted from
accounts and premiums receivable)
Year Ended December 31, 2017
Real Estate reserve (deducted from other long-term
investments)
Allowance for doubtful accounts (deducted from
accounts and premiums receivable)
Year Ended December 31, 2016
Real Estate reserve (deducted from other long-term
investments)
Allowance for doubtful accounts (deducted from
accounts and premiums receivable)
Balance at
Beginning
of Year
Additions
Charged to
Costs and
Expenses
Additions
Charged to
Other
Accounts
(1)
(in millions of dollars)
Deductions
(2)
Balance at
End of
Year
$
$
$
$
$
$
4.2
$
0.6
$
— $
3.3
$
1.5
6.4
$
5.6
$
— $
2.1
$
9.9
4.2
$
— $
— $
— $
4.2
6.2
$
2.3
$
0.1
$
2.2
$
6.4
1.2
$
3.0
$
— $
— $
4.2
6.2
$
3.1
$
— $
3.1
$
6.2
(1) Additions charged to other accounts are comprised of amounts related to fluctuations in the foreign currency exchange
rate.
(2) Deductions include amounts deemed to reduce exposure of probable losses, amounts deemed uncollectible, and amounts
related to fluctuations in the foreign currency exchange rate.
See Notes 3 and 7 of the "Notes to Consolidated Financial Statements" contained herein in Item 8 for a discussion of the
mortgage loan allowance for credit losses and the deferred tax asset valuation allowance not included in the amounts reported
above.
206
INDEX TO EXHIBITS
With regard to applicable cross-references in this report, our current, quarterly and annual reports dated on or after May 1, 2003
are filed with the Securities and Exchange Commission under File No. 1-11294 and such reports dated prior to May 1, 2003 are
filed with the Securities and Exchange Commission under File No. 1-11834, except as otherwise noted below. Our registration
statements have the file numbers noted wherever such statements are identified below.
(3.1)
(3.2)
(4.1)
(4.2)
(4.3)
(4.4)
(4.5)
(4.6)
(4.7)
(4.8)
(4.9)
Amended and Restated Certificate of Incorporation of Unum Group, effective May 24, 2018 (incorporated by
reference to Exhibit 3.1 of our Form 8-K filed on May 25, 2018).
Amended and Restated Bylaws of Unum Group, effective May 24, 2018 (incorporated by reference to Exhibit 3.2 of
Unum Group's Form 8-K filed on May 25, 2018).
Indenture for Senior Debt Securities dated as of March 9, 2001 (incorporated by reference to Exhibit 4.1 of our
Registration Statement on Form S-3 (Registration No. 333-100953) filed on November 1, 2002).
Second Supplemental Indenture, dated as of June 18, 2002, between Unum Group and JPMorgan Chase Bank, as
Trustee (incorporated by reference to Exhibit 4.2 of our Form 8-K filed on June 21, 2002).
Indenture for Senior Debt Securities between Unum Group and The Bank of New York Mellon Trust Company, N.A.
as Trustee dated as of September 30, 2009 (incorporated by reference to Exhibit 4.2 of our Form 8-K filed on
September 30, 2009).
Form of 5.625% Senior Note due 2020 (incorporated by reference to Exhibit 4.1 of our Form 8-K filed on September
15, 2010).
Indenture for Senior Debt Securities, dated as of August 23, 2012, between Unum Group and The Bank of New York
Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.2 of our Form 8-K filed on August
23, 2012).
Form of 5.75% Senior Note due 2042 (incorporated by reference to Exhibit 4.1 of our Form 8-K filed on August 23,
2012).
Form of 4.000% Senior Note due 2024 (incorporated by reference to Exhibit 4.1 of our Form 8-K filed on March 14,
2014).
Form of 3.875% Senior Note due 2025 (incorporated by reference to Exhibit 4.1 of our Form 8-K filed on November
5, 2015).
Form of 3.00% Senior Notes due 2021 (incorporated by reference to Exhibit 4.1 of our Form 8-K filed on May 9,
2016).
(4.10)
Indenture for Subordinated Debt Securities, dated as of May 29, 2018, between Unum Group and The Bank of New
York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.2 of Unum Group’s Form 8-K
filed on May 29, 2018).
(4.11)
Form of 6.250% Junior Subordinated Notes due 2058 (incorporated by reference to Exhibit 4.1 of Unum Group's
Form 8-K filed on May 29, 2018).
Certain instruments defining the rights of holders of long-term debt securities of our company and our subsidiaries are omitted
pursuant to Item 601(b)(4)(iii) of Regulation S-K. We hereby undertake to furnish to the Securities and Exchange Commission,
upon request, copies of any such instruments.
(10.1)
Agreement between Provident Companies, Inc. and certain subsidiaries and American General Corporation and
certain subsidiaries dated as of December 8, 1997 (incorporated by reference to Exhibit 10.18 of Provident
Companies Inc.'s Form 10-Q for fiscal quarter ended September 30, 1998).
(10.2)
Form of Change in Control Severance Agreement, as amended (incorporated by reference to Exhibit 10.8 of our
Form 10-K for the fiscal year ended December 31, 2008). *
(10.3)
(10.4)
Form of Change in Control Severance Agreement, effective April 25, 2011 (incorporated by reference to Exhibit 10.3
of our Form 10-K for the fiscal year ended December 31, 2014). *
Form of Change in Control Severance Agreement, effective January 1, 2015 (incorporated by reference to Exhibit
10.4 of our Form 10-K for the fiscal year ended December 31, 2014). *
(10.5)
Form of Change in Control Severance Agreement, effective August 14, 2018. *
(10.6)
Unum Group Supplemental Pension Plan, as amended and restated effective January 1, 2010 (incorporated by
reference to Exhibit 10.6 of our Form 10-K for the fiscal year ended December 31, 2013). *
207
(10.7)
(10.8)
(10.9)
First Amendment to the Unum Group Supplemental Pension Plan, effective as of June 17, 2013 (incorporated by
reference to Exhibit 10.7 of our Form 10-K for the fiscal year ended December 31, 2013). *
Second Amendment to the Unum Group Supplemental Pension Plan, effective as of December 31, 2013
(incorporated by reference to Exhibit 10.8 of our Form 10-K for the fiscal year ended December 31, 2013). *
Third Amendment to the Unum Group Supplemental Pension Plan, effective as of January 1, 2013 (incorporated by
reference to Exhibit 10.8 of our Form 10-K for the fiscal year ended December 31, 2015). *
(10.10) Administrative Reinsurance Agreement between Provident Life and Accident Insurance Company and Reassure
America Life Insurance Company dated to be effective July 1, 2000 (incorporated by reference to Exhibit 10.1 of our
Form 8-K filed on March 2, 2001).
(10.11) Unum Group Amended and Restated Non-Employee Director Compensation Plan of 2004, as amended (incorporated
by reference to Exhibit 10.19 of our Form 10-K for the fiscal year ended December 31, 2008). *
(10.12) California Settlement Agreement (incorporated by reference to Exhibit 10.1 of our Form 8-K filed on October 3,
2005).
(10.13) Amendment to Regulatory Settlement Agreement (incorporated by reference to Exhibit 10.2 of our Form 8 K filed on
October 3, 2005).
(10.14) Unum Group Stock Incentive Plan of 2007, as amended (incorporated by reference to Exhibit 10.26 of our Form 10-
K for the fiscal year ended December 31, 2008). *
(10.15) Severance Pay Plan for Executive Vice Presidents (EVPs) (incorporated by reference to Exhibit 10.35 of our Form
10-K for the fiscal year ended December 31, 2008). *
(10.16) Unum Group Stock Incentive Plan of 2012 (incorporated by reference to Appendix A of our Definitive Proxy
Statement on Schedule 14A filed on April 12, 2012). *
(10.17) Form of Restricted Stock Unit Agreement with Employee for awards in 2016 under the Unum Group Stock Incentive
Plan of 2012 (incorporated by reference to Exhibit 10.2 of our Form 10-Q filed on April 28, 2016). *
(10.18) Form of Nonqualified Stock Option Agreement for awards under the Unum Group Stock Incentive Plan of 2012
(incorporated by reference to Exhibit 10.3 of our Form 10-Q filed on May 2, 2013). *
(10.19) Form of Performance Share Unit Agreement with Employee for awards in 2016 under the Unum Group Stock
Incentive Plan of 2012 (incorporated by reference to Exhibit 10.3 of our Form 10-Q filed on April 28, 2016). *
(10.20) Unum Group Non-Qualified Defined Contribution Retirement Plan, effective January 1, 2014 (incorporated by
reference to Exhibit 10.31 of our Form 10-K for the fiscal year ended December 31, 2013). *
(10.21) Credit Agreement, dated as of August 29, 2013, among Unum Group, as Borrower, Wells Fargo Bank, National
Association, as Administrative Agent, L/C Agent, Fronting Bank and Swingline Lender, JPMorgan Chase Bank, N.A.
and SunTrust Bank, as Co-Syndication Agents, and the other lenders named therein (incorporated by reference to
Exhibit 10.1 of our Form 8-K filed on August 30, 2013).
(10.22) First Amendment to Credit Agreement, dated as of January 15, 2015, among Unum Group, as Borrower, the lenders
party thereto, and Wells Fargo Bank, National Association, as Administrative Agent (incorporated by reference to
Exhibit 10.35 of our Form 10-K for the fiscal year ended December 31, 2014).
(10.23) Second Amendment to Credit Agreement, dated as of March 16, 2016, among Unum Group, as Borrower, the lenders
party thereto, and Wells Fargo Bank, National Association, as Administrative Agent (incorporated by reference to
Exhibit 10.1 of our Form 10-Q filed on April 28, 2016).
(10.24) Letter Agreement with Richard P. McKenney, dated January 30, 2015 (incorporated by reference to Exhibit 10.1 of
our Form 8-K filed on February 3, 2015). *
(10.25) Severance Agreement between Unum Group and Richard P. McKenney, dated effective as of April 1, 2015
(incorporated by reference to Exhibit 10.2 of our Form 8-K filed on February 3, 2015). *
(10.26) Amended and Restated Aircraft Time-Sharing Agreement between Unum Group and Richard P. McKenney, dated as
of March 8, 2018. (incorporated by reference to Exhibit 10.1 of our Form 10-Q filed on May 02, 2018).
(10.27) Form of Performance Share Unit Agreement with Employee for awards in 2017 under the Unum Group Stock
Incentive Plan of 2012 (incorporated by reference to Exhibit 10.38 of our Form 10-K for the fiscal year ended
December 31, 2016). *
208
(10.28) Form of Restricted Stock Unit Agreement with Employee for awards in 2017 under the Unum Group Stock Incentive
Plan of 2012 (incorporated by reference to Exhibit 10.39 of our Form 10-K for the fiscal year ended December 31,
2016). *
(10.29) Unum Group Stock Incentive Plan of 2017 (incorporated by reference to Exhibit A of Unum Group's definitive proxy
statement on Schedule 14A filed on April 13, 2017). *
(10.30) Form of Restricted Stock Unit Agreement with Non-Employee Director for awards under the Unum Group Stock
Incentive Plan of 2017 (incorporated by reference to Exhibit 10.2 of Unum Group's Form 8-K filed on May 25,
2017). *
(10.31) Form of Restricted Stock Unit Agreement with Employee for awards in 2017 under the Unum Group Stock Incentive
Plan of 2017 (incorporated by reference to Exhibit 10.3 of Unum Group's Form 8-K filed on May 25, 2017). *
(10.32) Form of Performance Share Unit Agreement with Employee for awards in 2017 under the Unum Group Stock
Incentive Plan of 2017 (incorporated by reference to Exhibit 10.4 of Unum Group's Form 8-K filed on May 25,
2017). *
(10.33) Form of Restricted Stock Unit Agreement with Employee in U.S. for awards in 2018 under the Unum Group Stock
Incentive Plan of 2017 (incorporated by reference to Exhibit 10.35 of Unum Group's Form 10-K for the fiscal year
ended December 31, 2017). *
(10.34) Form of Restricted Stock Unit Agreement with Employee in U.K. for awards in 2018 under the Unum Group Stock
Incentive Plan of 2017 (incorporated by reference to Exhibit 10.36 of Unum Group's Form 10-K for the fiscal year
ended December 31, 2017). *
(10.35) Form of Performance Share Unit Agreement with Employee in U.S. for awards in 2018 under the Unum Group Stock
Incentive Plan of 2017. (incorporated by reference to Exhibit 10.37 of Unum Group's Form 10-K for the fiscal year
ended December 31, 2017). *
(10.36) Form of Performance Share Unit Agreement with Employee in U.K. for awards in 2018 under the Unum Group
Stock Incentive Plan of 2017 (incorporated by reference to Exhibit 10.38 of Unum Group's Form 10-K for the fiscal
year ended December 31, 2017). *
(10.37) Form of Restricted Stock Unit Agreement with Employee in U.S. for awards in 2019 under the Unum Group Stock
Incentive Plan of 2017. *
(10.38) Form of Restricted Stock Unit Agreement with Employee in U.K. for awards in 2019 under the Unum Group Stock
Incentive Plan of 2017. *
(10.39) Form of Performance Share Unit Agreement with Employee in U.S. for awards in 2019 under the Unum Group Stock
Incentive Plan of 2017. *
(10.40) Form of Performance Share Unit Agreement with Employee in U.K. for awards in 2019 under the Unum Group
Stock Incentive Plan of 2017. *
(10.41) Annual Incentive Plan of Unum Group, as amended effective January 1, 2018 (incorporated by reference to Exhibit
209
(21)
(23)
(24)
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Power of Attorney.
(31.1)
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2)
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1)
(32.2)
(101)
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
The following financial statements from Unum Group's Annual Report on Form 10-K for the year ended
December 31, 2018, filed on February 19, 2019, formatted in XBRL: (i) Consolidated Balance Sheets, (ii)
Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated
Statements of Stockholders' Equity, (v) Consolidated Statements of Cash Flows, (vi) the Notes to Consolidated
Financial Statements, (vii) Financial Statement Schedules.
___________
*
Management contract or compensatory plan required to be filed as an exhibit to this form pursuant to Item 15(c) of
Form 10-K.
210
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Unum Group
(Registrant)
By:
/s/ Richard P. McKenney
Richard P. McKenney
President and Chief Executive Officer
Date:
February 19, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Richard P. McKenney
Richard P. McKenney
President and Chief Executive Officer
and a Director (principal executive officer)
February 19, 2019
/s/ John F. McGarry
John F. McGarry
/s/ Daniel J. Waxenberg
Daniel J. Waxenberg
Executive Vice President and Chief Financial Officer
February 19, 2019
(principal financial officer)
Senior Vice President, Chief Accounting Officer
February 19, 2019
(principal accounting officer)
211
Name
Title
Date
*
Director
February 19, 2019
Theodore H. Bunting, Jr.
*
Director
February 19, 2019
E. Michael Caulfield
Susan D. DeVore
*
*
Joseph J. Echevarria
Cynthia L. Egan
Kevin T. Kabat
Timothy F. Keaney
Gloria C. Larson
*
*
*
*
*
Ronald P. O'Hanley
Director
Director
Director
Director
Director
Director
Director
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
February 19, 2019
*
Director
February 19, 2019
Francis J. Shammo
* By: /s/ J. Paul Jullienne
J. Paul Jullienne
Attorney-in-Fact
February 19, 2019
212
EXHIBIT 31.1
CERTIFICATION
I, Richard P. McKenney, certify that:
1. I have reviewed this annual report on Form 10-K of Unum Group;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 19, 2019
/s/ Richard P. McKenney
Richard P. McKenney
President and Chief Executive Officer
A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been provided to
Unum Group and will be retained by Unum Group and furnished to the Securities and Exchange Commission or its staff upon
request.
EXHIBIT 31.2
CERTIFICATION
I, John F. McGarry, certify that:
1. I have reviewed this annual report on Form 10-K of Unum Group;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 19, 2019
/s/ John F. McGarry
John F. McGarry
Executive Vice President and Chief Financial Officer
A signed original of this written statement required by Section 302 of the Sarbanes-Oxley Act of 2002 has been provided to
Unum Group and will be retained by Unum Group and furnished to the Securities and Exchange Commission or its staff upon
request.
EXHIBIT 32.1
STATEMENT OF CHIEF EXECUTIVE OFFICER
OF UNUM GROUP
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
§ 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Unum Group (the Company) on Form 10-K for the period ended December 31, 2018
as filed with the Securities and Exchange Commission on the date hereof (the Report), the undersigned, Richard P. McKenney,
President and Chief Executive Officer of the Company, certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of
the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: February 19, 2019
/s/ Richard P. McKenney
Richard P. McKenney
President and Chief Executive Officer
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to
Unum Group and will be retained by Unum Group and furnished to the Securities and Exchange Commission or its staff upon
request.
EXHIBIT 32.2
STATEMENT OF CHIEF FINANCIAL OFFICER
OF UNUM GROUP
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
§ 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Unum Group (the Company) on Form 10-K for the period ended December 31, 2018
as filed with the Securities and Exchange Commission on the date hereof (the Report), the undersigned, John F. McGarry,
Executive Vice President and Chief Financial Officer of the Company, certifies, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: February 19, 2019
/s/ John F. McGarry
John F. McGarry
Executive Vice President and Chief Financial Officer
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to
Unum Group and will be retained by Unum Group and furnished to the Securities and Exchange Commission or its staff upon
request.
[This page intentionally left blank]
Corporate Directory (as of April 1, 2019)
Board of Directors
Theodore H. Bunting, Jr.
Retired Group President,
Utility Operations
Entergy Corporation
Joseph J. Echevarria
Retired Chief Executive Officer
Deloitte LLP
Gloria C. Larson
Retired President,
Bentley University
E. Michael Caulfield
Former President,
Mercer Human Resource Consulting
Cynthia L. Egan
Retired President,
Retirement Plan Services
T. Rowe Price Group, Inc.
Richard P. McKenney
President and Chief Executive Officer,
Unum Group
Susan L. Cross
Former Executive Vice President
and
XL Group Ltd
Global Chief Actuary,
Kevin T. Kabat
Chairman of the Board of Unum
Group
Fifth Third Bancorp
Retired Chief Executive Officer,
Ronald P. O’Hanley
President and Chief Executive
Officer,
State Street Corporation
Susan D. DeVore
President and Chief Executive
Officer
Premier, Inc.
Timothy F. Keaney
Former Vice Chairman,
The Bank of New York Mellon
Corporation
Francis J. Shammo
Retired Chief Financial Officer,
Verizon Communications, Inc.
Executive Officers
Richard P. McKenney
President and
Chief Executive Officer
Jack F. McGarry
Executive Vice President
and Chief Financial Officer
Lisa G. Iglesias
Executive Vice President,
General Counsel
Michael Q. Simonds
President and Chief Executive Officer,
Unum US
Liz Ahmed
Executive Vice President,
People and Communications
Timothy G. Arnold
President and Chief Executive Officer,
Colonial Life
Puneet Bhasin
Executive Vice President,
Chief Information and Digital Officer
Peter G. O’Donnell
Chief Executive Officer,
Unum International
Breege A. Farrell
Executive Vice President,
Chief Investment Officer
Shareholder Information
Corporate Offices
Principal Subsidiaries
Contact Information
1 Fountain Square
Chattanooga, TN 37402
423 294 1011
Provident Life and
Accident Insurance Company
Chattanooga, Tennessee
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
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
Office of the Corporate Secretary
J. Paul Jullienne
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.
2018 Form 10-K
Our Form 10-K for the fiscal year ended December 31, 2018 is included in this Annual Report in its entirety with
the exception of certain exhibits. All of the exhibits may be obtained by accessing our filings with the U.S.
Securities and Exchange Commission, which are available on our investor relations website under the “SEC
Filings” heading at www.investors.unum.com. In addition, shareholders may request a free copy of any exhibit
by contacting the Office of the Corporate Secretary as referenced above.
Stock Performance
The accompanying graph
shows a five-year
comparison of the
cumulative total returns
on our common stock,
the S&P 500 Index, and
the S&P Life & Health
Index, assuming a
hypothetical
$100 investment in our
common stock and in
each index on December 31,
2013, including the
reinvestment of all dividends.
Past performance is not an
indication of future results.
$250
$200
$150
$100
$50
$‐
Unum Group
S&P 500
S&P Life and Health Index
Comparison of Five-Year Cumulative Total Return
2013
$100
$100
$100
2014
2015
2016
2017
2018
$101.27
$98.65
$133.31 $169.54
$92.86
$113.69 $115.26 $129.05 $157.22 $150.33
$101.95
$95.51
$119.26 $138.85 $110.01
Unum Group
1 Fountain Square
Chattanooga, TN 37402
www.unum.com