Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2012
¨
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
62-1598430
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1 Fountain Square
Chattanooga, Tennessee 37402
(Address of principal executive offices)
423.294.1011
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one): Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
275,122,712 shares of the registrant's common stock were outstanding as of October 26, 2012.
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 Quarterly Report on Form 10-Q (including certain statements in the consolidated financial statements and related notes and Management's Discussion and Analysis), or in any other written or oral statements made by us in communications with the financial community or contained in documents filed with the Securities and Exchange Commission (SEC), may be considered forward-looking statements within the meaning of the Act. Forward-looking statements are those not based on historical information, but rather relate to our outlook, future operations, strategies, financial results, or other developments. Forward-looking statements speak only as of the date made. We undertake no obligation to update these statements, even if made available on our website or otherwise. These statements may be made directly in this document or may be made part of this document by reference to other documents filed by us with the SEC, a practice which is known as "incorporation by reference." You can find many of these statements by looking for words such as "will," "may," "should," "could," "believes," "expects," "anticipates," "estimates," "intends," "projects," "goals," "objectives," or similar expressions in this document or in documents incorporated herein.
These forward-looking statements are subject to numerous assumptions, risks, and uncertainties, many of which are beyond our control. We caution readers that the following factors, in addition to other factors mentioned from time to time, may cause actual results to differ materially from those contemplated by the forward-looking statements:
•
Unfavorable economic or business conditions, both domestic and foreign.
•
Legislative, regulatory, or tax changes, both domestic and foreign, including the effect of potential legislation and increased regulation in the current political environment.
•
Sustained periods of low interest rates.
•
Changes in claim incidence, recovery rates, mortality rates, and offsets due to, among other factors, the rate of unemployment and consumer confidence, the emergence of new diseases, epidemics, or pandemics, new trends and developments in medical treatments, the effectiveness of claims management operations, and changes in government programs.
•
Fluctuation in insurance reserve liabilities.
•
Investment results, including, but not limited to, realized investment losses resulting from defaults, contractual terms of derivative contracts, and impairments that differ from our assumptions and historical experience.
•
The lack of appropriate investments in the market which can be acquired to match our liability cash flows and duration.
•
Changes in interest rates, credit spreads, and securities prices.
•
Increased competition from other insurers and financial services companies due to industry consolidation or other factors.
•
Changes in demand for our products due to, among other factors, changes in societal attitudes, the rate of unemployment, and consumer confidence.
•
Changes in accounting standards, practices, or policies.
•
Changes in our financial strength and credit ratings.
•
Rating agency actions, state insurance department market conduct examinations and other inquiries, other governmental investigations and actions, and negative media attention.
•
Effectiveness in managing our operating risks and the implementation of operational improvements and strategic growth initiatives.
•
Actual experience that deviates from our assumptions used in pricing, underwriting, and reserving.
•
Actual persistency and/or sales growth that is higher or lower than projected.
•
Effectiveness of our risk management program.
•
The level and results of litigation.
•
Currency exchange rates.
•
Ability of our subsidiaries to pay dividends as a result of regulatory restrictions or changes in reserving or capital requirements.
•
Ability and willingness of reinsurers to meet their obligations.
•
Changes in assumptions related to intangible assets such as deferred acquisition costs, value of business acquired, and goodwill.
•
Ability to recover our systems and information in the event of a disaster or unanticipated event and to protect our systems and information from unauthorized access and deliberate attacks.
•
Events or consequences relating to political instability, terrorism, or acts of war, both domestic and foreign.
For further discussion of risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see Part 1, Item 1A of our annual report on Form 10-K for the year ended December 31, 2011.
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
PART I
ITEM 1.
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Unum Group and Subsidiaries
September 30 2012
December 31 2011
(in millions of dollars)
As Adjusted
Assets
Investments
Fixed Maturity Securities - at fair value (amortized cost: $37,457.3; $36,640.7)
$
44,744.7
$
42,486.7
Mortgage Loans
1,665.2
1,612.3
Policy Loans
3,117.0
3,051.4
Other Long-term Investments
650.9
639.2
Short-term Investments
1,590.2
1,423.5
Total Investments
51,768.0
49,213.1
Other Assets
Cash and Bank Deposits
53.6
116.6
Accounts and Premiums Receivable
1,704.9
1,672.2
Reinsurance Recoverable
4,824.7
4,854.6
Accrued Investment Income
696.8
681.8
Deferred Acquisition Costs
1,728.3
1,677.1
Goodwill
201.6
201.2
Property and Equipment
497.7
493.3
Other Assets
644.0
645.3
Total Assets
$
62,119.6
$
59,555.2
See notes to consolidated financial statements.
2
CONSOLIDATED BALANCE SHEETS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30 2012
December 31 2011
(in millions of dollars)
As Adjusted
Liabilities and Stockholders' Equity
Liabilities
Policy and Contract Benefits
$
1,442.8
$
1,494.0
Reserves for Future Policy and Contract Benefits
44,537.7
43,051.9
Unearned Premiums
497.2
433.2
Other Policyholders' Funds
1,629.4
1,625.9
Income Tax Payable
47.5
38.2
Deferred Income Tax
347.2
44.7
Short-term Debt
458.3
312.3
Long-term Debt
2,781.5
2,570.2
Other Liabilities
1,704.7
1,815.1
Total Liabilities
53,446.3
51,385.5
Commitments and Contingent Liabilities - Note 9
Stockholders' Equity
Common Stock, $0.10 par
Authorized: 725,000,000 shares
Issued: 359,705,527 and 358,691,567 shares
36.0
35.9
Additional Paid-in Capital
2,604.2
2,591.1
Accumulated Other Comprehensive Income (Loss)
Net Unrealized Gain on Securities Not Other-Than-Temporarily Impaired
892.2
614.8
Net Gain on Cash Flow Hedges
400.3
408.7
Foreign Currency Translation Adjustment
(78.6
)
(117.6
)
Unrecognized Pension and Postretirement Benefit Costs
(423.6
)
(444.1
)
Retained Earnings
7,173.4
6,611.0
Treasury Stock - at cost: 84,620,240 and 65,975,613 shares
(1,930.6
)
(1,530.1
)
Total Stockholders' Equity
8,673.3
8,169.7
Total Liabilities and Stockholders' Equity
$
62,119.6
$
59,555.2
See notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Unum Group and Subsidiaries
Three Months Ended September 30
Nine Months Ended September 30
2012
2011
2012
2011
(in millions of dollars, except share data)
As Adjusted
As Adjusted
Revenue
Premium Income
$
1,929.4
$
1,881.2
$
5,778.9
$
5,625.7
Net Investment Income
619.2
629.2
1,872.2
1,885.0
Realized Investment Gain (Loss)
Other-Than-Temporary Impairment Loss on Fixed Maturity Securities
—
(1.2
)
—
(4.2
)
Other Net Realized Investment Gain (Loss)
21.3
(22.7
)
31.6
(8.1
)
Net Realized Investment Gain (Loss)
21.3
(23.9
)
31.6
(12.3
)
Other Income
58.1
59.1
174.5
174.8
Total Revenue
2,628.0
2,545.6
7,857.2
7,673.2
Benefits and Expenses
Benefits and Change in Reserves for Future Benefits
1,686.9
1,635.6
5,033.0
4,828.0
Commissions
227.7
220.5
690.8
662.7
Interest and Debt Expense
36.6
35.1
107.3
108.1
Deferral of Acquisition Costs
(111.0
)
(110.1
)
(347.6
)
(334.7
)
Amortization of Deferred Acquisition Costs
87.0
84.3
285.6
273.9
Compensation Expense
187.0
198.3
589.3
598.9
Other Expenses
193.4
193.2
572.0
585.7
Total Benefits and Expenses
2,307.6
2,256.9
6,930.4
6,722.6
Income Before Income Tax
320.4
288.7
926.8
950.6
Income Tax
Current
85.5
54.4
126.4
210.7
Deferred
4.7
32.3
139.9
86.7
Total Income Tax
90.2
86.7
266.3
297.4
Net Income
$
230.2
$
202.0
$
660.5
$
653.2
Net Income Per Common Share
Basic
$
0.83
$
0.68
$
2.33
$
2.14
Assuming Dilution
$
0.83
$
0.68
$
2.32
$
2.13
See notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Unum Group and Subsidiaries
Three Months Ended September 30
Nine Months Ended September 30
2012
2011
2012
2011
(in millions of dollars)
As Adjusted
As Adjusted
Net Income
$
230.2
$
202.0
$
660.5
$
653.2
Other Comprehensive Income (Loss)
Change in Net Unrealized Gain on Securities Before Reclassification Adjustment:
Change in Net Unrealized Gain on Securities Not Other-Than-Temporarily Impaired (net of tax expense of $303.1; $599.6; $496.5; $754.9)
596.8
1,124.5
965.0
1,419.0
Change in Net Unrealized Gain on Securities Other-Than-Temporarily Impaired (net of tax benefit of $ - ; $ - ; $ - ; $1.1)
—
—
—
(2.1
)
Total Change in Net Unrealized Gain on Securities Before Reclassification Adjustment (net of tax expense of $303.1; $599.6; $496.5; $753.8)
596.8
1,124.5
965.0
1,416.9
Reclassification Adjustment for Net Realized Investment Gain (net of tax expense of $1.4; $3.4; $2.0; $4.6)
(2.6
)
(5.3
)
(4.0
)
(7.7
)
Change in Net Gain on Cash Flow Hedges (net of tax expense (benefit) of $(6.0); $34.7; $(5.3); $32.0)
(10.3
)
65.2
(8.4
)
60.1
Change in Adjustment to Reserves for Future Policy and Contract Benefits, Net of Reinsurance and Other (net of tax benefit of $213.5; $377.6; $344.0; $498.8)
(430.1
)
(703.3
)
(683.6
)
(931.2
)
Change in Foreign Currency Translation Adjustment
29.4
(33.8
)
39.0
(6.0
)
Change in Unrecognized Pension and Postretirement Benefit Costs (net of tax expense of $3.5; $2.8; $11.0; $6.9)
6.6
5.2
20.5
15.0
Total Other Comprehensive Income
189.8
452.5
328.5
547.1
Comprehensive Income
$
420.0
$
654.5
$
989.0
$
1,200.3
See notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Unum Group and Subsidiaries
Nine Months Ended September 30
2012
2011
(in millions of dollars)
As Adjusted
Common Stock
Balance at Beginning of Year
$
35.9
$
36.5
Common Stock Activity
0.1
0.1
Retirement of Repurchased Common Shares
—
(0.8
)
Balance at End of Period
36.0
35.8
Additional Paid-in Capital
Balance at Beginning of Year
2,591.1
2,615.4
Common Stock Activity
13.1
20.7
Retirement of Repurchased Common Shares
—
(55.2
)
Balance at End of Period
2,604.2
2,580.9
Accumulated Other Comprehensive Income
Balance at Beginning of Year
461.8
351.4
Change During Period
328.5
547.1
Balance at End of Period
790.3
898.5
Retained Earnings
Balance at Beginning of Year
6,611.0
6,591.8
Net Income
660.5
653.2
Dividends to Stockholders (per common share: $0.34; $0.29)
(98.1
)
(90.3
)
Retirement of Repurchased Common Shares
—
(144.0
)
Balance at End of Period
7,173.4
7,010.7
Treasury Stock
Balance at Beginning of Year
(1,530.1
)
(1,110.2
)
Purchases of Treasury Stock
(400.5
)
(419.9
)
Balance at End of Period
(1,930.6
)
(1,530.1
)
Total Stockholders' Equity at End of Period
$
8,673.3
$
8,995.8
See notes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Unum Group and Subsidiaries
Nine Months Ended September 30
2012
2011
(in millions of dollars)
As Adjusted
Cash Flows from Operating Activities
Net Income
$
660.5
$
653.2
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Change in Receivables
9.0
(45.8
)
Change in Deferred Acquisition Costs
(62.0
)
(60.8
)
Change in Insurance Reserves and Liabilities
333.8
321.7
Change in Income Taxes
151.9
37.9
Change in Other Accrued Liabilities
(24.4
)
12.4
Non-cash Adjustments to Net Investment Income
(160.7
)
(206.6
)
Net Realized Investment (Gain) Loss
(31.6
)
12.3
Depreciation
63.5
60.2
Other, Net
13.8
4.2
Net Cash Provided by Operating Activities
953.8
788.7
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturity Securities
401.2
908.8
Proceeds from Maturities of Fixed Maturity Securities
1,583.6
1,235.0
Proceeds from Sales and Maturities of Other Investments
112.6
101.3
Purchase of Fixed Maturity Securities
(2,479.6
)
(2,162.2
)
Purchase of Other Investments
(219.4
)
(234.3
)
Net Sales (Purchases) of Short-term Investments
(194.6
)
86.3
Other, Net
(73.7
)
(75.9
)
Net Cash Used by Investing Activities
(869.9
)
(141.0
)
Cash Flows from Financing Activities
Net Short-term Debt Borrowings
146.0
117.3
Issuance of Long-term Debt
246.4
—
Long-term Debt Repayments
(45.6
)
(66.9
)
Issuance of Common Stock
4.2
7.6
Repurchase of Common Stock
(400.5
)
(619.9
)
Dividends Paid to Stockholders
(98.1
)
(90.3
)
Other, Net
0.7
3.2
Net Cash Used by Financing Activities
(146.9
)
(649.0
)
Effect of Foreign Exchange Rate Changes on Cash
—
(0.1
)
Net Decrease in Cash and Bank Deposits
(63.0
)
(1.4
)
Cash and Bank Deposits at Beginning of Year
116.6
53.6
Cash and Bank Deposits at End of Period
$
53.6
$
52.2
See notes to consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Unum Group and Subsidiaries
September 30, 2012
Note 1 - 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) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes included in our annual report on Form 10-K for the year ended December 31, 2011.
In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of full year performance.
In connection with our preparation of the consolidated financial statements, we evaluated events that occurred subsequent to September 30, 2012 for recognition or disclosure in our financial statements and notes to our financial statements.
In June 2011, the Financial Accounting Standards Board (FASB) issued an update related to the financial statement presentation of comprehensive income. This update requires that non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present net income and its components, followed consecutively by a second statement presenting total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. In December 2011, the FASB issued an update to indefinitely defer the effective date pertaining to the presentation of reclassification adjustments and reinstated the previous requirement to present reclassification adjustments either on the face of the statement or in financial statement footnotes. We adopted these updates effective January 1, 2012. The adoption of these updates modified our financial statement presentation but had no effect on our financial position or results of operations.
ASC 350 "Intangibles - Goodwill and Other"
In September 2011, the FASB issued an update which gives companies the option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity is not required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. We adopted this update effective January 1, 2012. The adoption of this update had no effect on our financial position or results of operations.
ASC 820 "Fair Value Measurements and Disclosures"
In May 2011, the FASB issued an update to require additional disclosures regarding fair value measurements and to provide clarifying guidance on the application of existing fair value measurement requirements. Specifically, the update requires additional information on Level 1 and Level 2 transfers within the fair value hierarchy; the categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position, but for which the fair value of such items is required to be disclosed; and information about the sensitivity of a fair value measurement in Level 3 of the fair value hierarchy to changes in unobservable inputs and any interrelationships between those unobservable inputs. We adopted this update effective January 1, 2012. The adoption of this update expanded our disclosures but had no effect on our financial position or results of operations.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2012
Note 2 - Accounting Developments - Continued
ASC 860 "Transfers and Servicing"
In April 2011, the FASB issued an update to revise the criteria for assessing effective control for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The determination of whether the transfer of a financial asset subject to a repurchase agreement is a sale is based, in part, on whether the entity maintains effective control over the financial asset. This update removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial asset on substantially the agreed terms, even in the event of default by the transferee, and the related requirement to demonstrate that the transferor possess adequate collateral to fund substantially all the cost of purchasing replacement financial assets. We adopted this update effective January 1, 2012. The adoption of this update had no effect on our financial position or results of operations.
ASC 944 "Financial Services - Insurance"
In October 2010, the FASB issued an update to address the diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify as deferred acquisition costs. The amendments in the update require that only incremental direct costs associated with the successful acquisition of a new or renewal insurance contract can be capitalized. All other costs are to be expensed as incurred. We adopted this update effective January 1, 2012 and applied the amendments retrospectively, adjusting all prior periods. The cumulative effect of the adoption as of January 1, 2011, was a decrease to stockholders' equity of $459.5 million. The following table summarizes the effects on our financial statements.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2012
Note 2 - Accounting Developments - Continued
Historical
Effect
Historical
Effect
Accounting
As
of
Accounting
As
of
Method
Adjusted
Change
Method
Adjusted
Change
(in millions of dollars, except share data)
Three Months Ended September 30, 2011
Nine Months Ended September 30, 2011
Consolidated Statements of Income
Deferral of Acquisition Costs
$
(155.6
)
$
(110.1
)
$
45.5
$
(472.1
)
$
(334.7
)
$
137.4
Amortization of Deferred Acquisition Costs
125.2
84.3
(40.9
)
400.4
273.9
(126.5
)
Income Tax - Deferred
33.3
32.3
(1.0
)
90.0
86.7
(3.3
)
Net Income
205.6
202.0
(3.6
)
660.8
653.2
(7.6
)
Net Income Per Common Share
Basic
0.69
0.68
(0.01
)
2.16
2.14
(0.02
)
Assuming Dilution
0.69
0.68
(0.01
)
2.15
2.13
(0.02
)
Consolidated Statements of Comprehensive Income
Net Income
$
205.6
$
202.0
$
(3.6
)
$
660.8
$
653.2
$
(7.6
)
Change in Adjustment to Reserves for Future Policy and Contract Benefits, Net of Reinsurance and Other
(705.3
)
(703.3
)
2.0
(934.0
)
(931.2
)
2.8
Change in Foreign Currency Translation Adjustment
(34.1
)
(33.8
)
0.3
(6.0
)
(6.0
)
—
Consolidated Statement of Cash Flows
Net Income
$
660.8
$
653.2
$
(7.6
)
Change in Deferred Acquisition Costs
(71.7
)
(60.8
)
10.9
Change in Income Taxes
41.2
37.9
(3.3
)
December 31, 2011
September 30, 2011
Consolidated Balance Sheets
Deferred Acquisition Costs
$
2,300.9
$
1,677.1
$
(623.8
)
$
2,572.4
$
1,860.6
$
(711.8
)
Deferred Income Tax
261.2
44.7
(216.5
)
795.3
547.8
(247.5
)
Net Unrealized Gain on Securities Not Other-Than-Temporarily Impaired
605.8
614.8
9.0
885.6
894.0
8.4
Foreign Currency Translation Adjustment
(121.5
)
(117.6
)
3.9
(116.9
)
(113.0
)
3.9
Retained Earnings
7,031.2
6,611.0
(420.2
)
7,487.3
7,010.7
(476.6
)
Accounting Updates Adopted in 2011:
ASC 310 “Receivables”
In January and April 2011, the FASB deferred the effective date of disclosures about troubled debt restructurings and issued updates providing additional clarification to help creditors in determining whether a creditor has granted a concession as well as whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. We adopted these updates effective July 1, 2011. The adoption of these updates expanded our disclosures but had no effect on our financial position or results of operations.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2012
Note 2 - Accounting Developments - Continued
Accounting Updates Outstanding:
ASC 210 "Balance Sheet - Disclosures about Offsetting Assets and Liabilities"
In December 2011, the FASB issued an update to require additional disclosures and information about financial instruments and derivative instruments that are either offset on the balance sheet or are subject to an enforceable master netting arrangement. These disclosures are intended to provide information that will enable users of financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. The amendments in this update are effective for interim and annual periods beginning on or after January 1, 2013. The adoption of this update will expand our disclosures but will have no effect on our financial position or results of operations.
Note 3 - Fair Values of Financial Instruments
Presented as follows are the carrying amounts and fair values of financial instruments. The carrying values of financial instruments such as short-term investments, cash and bank deposits, accounts and premiums receivable, accrued investment income, and short-term debt approximate fair value due to the short-term nature of the instruments. As such, these financial instruments are not included in the following chart. Certain prior year amounts have been reclassified to conform to current presentation.
September 30, 2012
December 31, 2011
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
(in millions of dollars)
Assets
Fixed Maturity Securities
$
44,744.7
$
44,744.7
$
42,486.7
$
42,486.7
Mortgage Loans
1,665.2
1,868.4
1,612.3
1,789.8
Policy Loans
3,117.0
3,199.6
3,051.4
3,124.4
Other Long-term Investments
Derivatives
108.2
108.2
137.7
137.7
Equity Securities
13.0
13.0
11.2
11.2
Miscellaneous Long-term Investments
460.3
460.3
436.4
436.4
Liabilities
Policyholders' Funds
Deferred Annuity Products
$
642.2
$
642.2
$
641.1
$
641.1
Supplementary Contracts without Life Contingencies
536.6
536.6
502.6
502.6
Long-term Debt
2,781.5
2,928.6
2,570.2
2,540.2
Other Liabilities
Derivatives
182.5
182.5
173.7
173.7
Embedded Derivative in Modified Coinsurance Arrangement
107.0
107.0
135.7
135.7
Unfunded Commitments to Investment Partnerships
112.2
112.2
160.6
160.6
The methods and assumptions used to estimate fair values of financial instruments are discussed as follows.
Fair Value Measurements for Financial Instruments Not Carried at Fair Value
Mortgage Loans: Fair values are estimated using discounted cash flow analyses and interest rates currently being offered for similar loans to borrowers with similar credit ratings and maturities. Loans with similar characteristics are aggregated for purposes of the calculations. These financial instruments are assigned a Level 2 within the fair value hierarchy.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2012
Note 3 - Fair Values of Financial Instruments - Continued
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 $2,897.5 million and $2,838.3 million as of September 30, 2012 and December 31, 2011, respectively, approximate fair value and are reported on a gross basis in our consolidated balance sheets. A change in interest rates for ceded policy loans will not impact our financial position because the benefits and risks are fully ceded to reinsuring counterparties. These financial instruments are assigned a Level 3 within the fair value hierarchy.
Miscellaneous Long-term Investments: Carrying amounts for tax credit partnerships equal the unamortized balance of our contractual commitments and approximate fair value. Fair values for private equity partnerships are primarily derived from valuations provided by the general partner in the partnerships' financial statements. These financial instruments are assigned a Level 3 within the fair value hierarchy.
Policyholders' Funds: Policyholders' funds are comprised primarily of deferred annuity products and supplementary contracts without life contingencies and represent customer deposits plus interest credited at contract rates. Carrying amounts approximate fair value. These financial instruments are assigned a Level 3 within the fair value hierarchy.
Fair values for insurance contracts other than investment contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in our overall management of interest rate risk, which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.
Long-term Debt: Fair values for long-term debt are obtained from independent pricing services or discounted cash flow analyses based on current incremental borrowing rates for similar types of borrowing arrangements. Debt instruments which are valued using active trades from independent pricing services for which there was current market activity in that specific debt instrument have a fair value of $472.7 million at September 30, 2012 and are assigned a Level 1 within the fair value hierarchy. Debt instruments which are valued based on prices from pricing services that generally use observable inputs for securities or comparable securities in active markets in their valuation techniques have a fair value of $2,455.9 million at September 30, 2012 and are assigned a Level 2.
Unfunded Commitments to Investment Partnerships: Unfunded equity commitments represent legally binding amounts that we have committed to certain investment partnerships subject to the partnerships meeting specified conditions. When these conditions are met, we are obligated to invest these amounts in the partnerships. Carrying amounts approximate fair value. These financial instruments are assigned a Level 2 within the fair value hierarchy.
Fair Value Measurements for Financial Instruments Carried at Fair Value
We report fixed maturity securities, derivative financial instruments, and equity securities at fair value in our consolidated balance sheets. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and less judgment utilized in measuring fair value. An active market for a financial instrument is a market in which transactions for an asset or a similar asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and should be used to measure fair value whenever available. Conversely, financial instruments rarely traded or not quoted have less observability and are measured at fair value using valuation techniques that require more judgment. Pricing observability is generally impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction, and overall market conditions.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2012
Note 3 - Fair Values of Financial Instruments - Continued
Valuation techniques used for assets and liabilities accounted for at fair value are generally categorized into three types. The market approach uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities. The income approach converts future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount. The cost approach is based upon the amount that currently would be required to replace the service capacity of an asset, or the current replacement cost.
We use valuation techniques that are appropriate in the circumstances and for which sufficient data are available that can be obtained without undue cost and effort. In some cases, a single valuation technique will be appropriate (for example, when valuing an asset or liability using quoted prices in an active market for identical assets or liabilities). In other cases, multiple valuation techniques will be appropriate. If we use multiple valuation techniques to measure fair value, we evaluate and weigh the results, as appropriate, considering the reasonableness of the range indicated by those results. A fair value measurement is the point within that range that is most representative of fair value in the circumstances.
The selection of the valuation method(s) to apply considers the definition of an exit price and depends on the nature of the asset or liability being valued. For assets and liabilities accounted for at fair value, we generally use valuation techniques consistent with the market approach, and to a lesser extent, the income approach. We believe the market approach valuation technique provides more observable data than the income approach, considering the type of investments we hold. Our fair value measurements could differ significantly based on the valuation technique and available inputs. When using a pricing service, we obtain the vendor's pricing documentation to ensure we understand their methodologies. We periodically review and approve the selection of our pricing vendors to ensure we are in agreement with their current methodologies. When markets are less active, brokers may rely more on models with inputs based on the information available only to the broker. Our internal investment management professionals, which include portfolio managers and analysts, monitor securities priced by brokers and evaluate their prices for reasonableness based on benchmarking to available primary and secondary market information. In weighing a broker quote as an input to fair value, we place less reliance on quotes that do not reflect the result of market transactions. We also consider the nature of the quote, particularly whether the quote is a binding offer. If prices in an inactive market do not reflect current prices for the same or similar assets, adjustments may be necessary to arrive at fair value. When relevant market data is unavailable, which may be the case during periods of market uncertainty, the income approach can, in suitable circumstances, provide a more appropriate fair value. During 2012, we have applied valuation techniques on a consistent basis to similar assets and liabilities and consistent with those techniques used at year end 2011.
We use observable and unobservable inputs in measuring the fair value of our financial instruments. Inputs that may be used include the following:
•
Broker market maker prices and price levels
•
Trade Reporting and Compliance Engine (TRACE) pricing
•
Prices obtained from external pricing services
•
Benchmark yields (Treasury and interest rate swap curves)
•
Transactional data for new issuance and secondary trades
Prepayment speeds/loan performance/delinquencies/weighted average life/seasoning
•
Public covenants
•
Comparative bond analysis
•
Derivative spreads
•
Relevant reports issued by analysts and rating agencies
•
Audited financial statements
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2012
Note 3 - Fair Values of Financial Instruments - Continued
We actively manage our investment portfolio, establish pricing policy, and review the reasonableness of sources and inputs used in developing pricing. We review all prices obtained to ensure they are consistent with a variety of observable market inputs and to verify the validity of a security's price. In the event we receive a vendor's market price that does not appear reasonable based on our market analysis, we may challenge the price and request further information about the assumptions and methodologies used by the vendor to price the security. We may change the vendor price based on a better data source such as an actual trade. We also review all price changes from the prior month which fall outside a predetermined corridor. The overall valuation process for determining fair values may include adjustments to valuations obtained from our pricing sources when they do not represent a valid exit price. These adjustments may be made when, in our judgment and considering our knowledge of the financial conditions and industry in which the issuer operates, certain features of the financial instrument require that an adjustment be made to the value originally obtained from our pricing sources. These features may include the complexity of the financial instrument, the market in which the financial instrument is traded, counterparty credit risk, credit structure, concentration, or liquidity. Additionally, an adjustment to the price derived from a model typically reflects our judgment of the inputs that other participants in the market for the financial instrument being measured at fair value would consider in pricing that same financial instrument. In the event an asset is sold, we test the validity of the fair value determined by our valuation techniques by comparing the selling price to the fair value determined for the asset in the immediately preceding month end reporting period closest to the transaction date.
The parameters and inputs used to validate a price on a security may be adjusted for assumptions about risk and current market conditions on a quarter to quarter basis, as certain features may be more significant drivers of valuation at the time of pricing. Changes to inputs in valuations are not changes to valuation methodologies; rather, the inputs are modified to reflect direct or indirect impacts on asset classes from changes in market conditions.
Fair values for derivatives other than embedded derivatives in modified coinsurance arrangements are based on market quotes or pricing models and represent the net amount of cash we would have paid or received if the contracts had been settled or closed as of the last day of the period. We analyze credit default swap spreads relative to the average credit spread embedded within the London Interbank Offered Rate (LIBOR) setting syndicate in determining the effect of credit risk on our derivatives' fair values. If net counterparty credit risk for a derivative asset is determined to be material and is not adequately reflected in the LIBOR-based fair value obtained from our pricing sources, we adjust the valuations obtained from our pricing sources. For purposes of valuing net counterparty risk, we measure the fair value of a group of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position or transfer a net short position for a particular risk exposure in an orderly transaction between market participants at the measurement date under current market conditions. In regard to our own credit risk component, we adjust the valuation of derivative liabilities wherein the counterparty is exposed to our credit risk when the LIBOR-based valuation of our derivatives obtained from pricing sources does not effectively include an adequate credit component for our own credit risk.
Fair values for our embedded derivative in a modified coinsurance arrangement are estimated using internal pricing models and represent the hypothetical value of the duration mismatch of assets and liabilities, interest rate risk, and third party credit risk embedded in the modified coinsurance arrangement.
Certain of our investments do not have readily determinable market prices and/or observable inputs or may at times be affected by the lack of market liquidity. For these securities, we use internally prepared valuations combining matrix pricing with vendor purchased software programs, including valuations based on estimates of future profitability, to estimate the fair value. Additionally, we may obtain prices from independent third-party brokers to aid in establishing valuations for certain of these securities. Key assumptions used by us to determine fair value for these securities include risk free interest rates, risk premiums, performance of underlying collateral (if any), and other factors involving significant assumptions which may or may not reflect those of an active market.
At September 30, 2012, approximately 15.3 percent of our fixed maturity securities were valued using active trades from TRACE pricing or broker market maker prices for which there was current market activity in that specific security (comparable to receiving one binding quote). The prices obtained were not adjusted, and the assets were classified as Level 1, the highest category of the three-level fair value hierarchy classification wherein inputs are unadjusted and represent quoted prices in active markets for identical assets or liabilities.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2012
Note 3 - Fair Values of Financial Instruments - Continued
The remaining 84.7 percent of our fixed maturity securities were valued based on non-binding quotes or other observable and unobservable inputs, as discussed below.
•
Approximately 68.7 percent of our fixed maturity securities were valued based on prices from pricing services that generally use observable inputs such as prices for securities or comparable securities in active markets in their valuation techniques. These assets were classified as Level 2. Level 2 assets or liabilities are those valued using inputs (other than prices included in Level 1) that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument's anticipated life.
•
Approximately 3.3 percent of our fixed maturity securities were valued based on one or more non-binding broker price levels, if validated by observable market data, or on TRACE prices for identical or similar assets absent current market activity. When only one price is available, it is used if observable inputs and analysis confirms that it is appropriate. These assets, for which we were able to validate the price using other observable market data, were classified as Level 2.
•
Approximately 12.7 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. Level 3 is the lowest category of the fair value hierarchy and reflects the judgment of management regarding what market participants would use in pricing assets or liabilities at the measurement date. Financial assets and liabilities categorized as Level 3 are generally those that are valued using unobservable inputs to extrapolate an estimated fair value.
We consider transactions in inactive or disorderly markets to be less representative of fair value. We use all available observable inputs when measuring fair value, but when significant other unobservable inputs and adjustments are necessary, we classify these assets or liabilities as Level 3.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2012
Note 3 - Fair Values of Financial Instruments - Continued
Fair value measurements by input level for financial instruments carried at fair value are as follows:
September 30, 2012
(in millions of dollars)
Quoted Prices
in Active Markets
for Identical Assets
or Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Assets
Fixed Maturity Securities
United States Government and Government Agencies and Authorities
$
539.5
$
836.9
$
—
$
1,376.4
States, Municipalities, and Political Subdivisions
44.0
1,578.5
110.1
1,732.6
Foreign Governments
20.6
1,368.3
46.1
1,435.0
Public Utilities
793.8
9,760.9
499.1
11,053.8
Mortgage/Asset-Backed Securities
—
2,415.2
8.4
2,423.6
All Other Corporate Bonds
5,425.6
20,364.2
894.6
26,684.4
Redeemable Preferred Stocks
24.3
14.6
—
38.9
Total Fixed Maturity Securities
6,847.8
36,338.6
1,558.3
44,744.7
Other Long-term Investments
Derivatives
Interest Rate Swaps and Forwards
—
101.3
—
101.3
Foreign Exchange Contracts
—
6.9
—
6.9
Total Derivatives
—
108.2
—
108.2
Equity Securities
—
8.6
4.4
13.0
Liabilities
Other Liabilities
Derivatives
Interest Rate Swaps
$
—
$
33.3
$
—
$
33.3
Foreign Exchange Contracts
—
149.2
—
149.2
Embedded Derivative in Modified Coinsurance Arrangement
—
—
107.0
107.0
Total Derivatives
—
182.5
107.0
289.5
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2012
Note 3 - Fair Values of Financial Instruments - Continued
December 31, 2011
(in millions of dollars)
Quoted Prices
in Active Markets
for Identical Assets
or Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Assets
Fixed Maturity Securities
United States Government and Government Agencies and Authorities
$
326.6
$
977.8
$
—
$
1,304.4
States, Municipalities, and Political Subdivisions
107.3
1,416.2
68.1
1,591.6
Foreign Governments
—
1,376.7
—
1,376.7
Public Utilities
718.0
9,576.4
338.9
10,633.3
Mortgage/Asset-Backed Securities
—
2,941.5
31.7
2,973.2
All Other Corporate Bonds
3,469.5
20,415.1
665.5
24,550.1
Redeemable Preferred Stocks
—
20.2
37.2
57.4
Total Fixed Maturity Securities
4,621.4
36,723.9
1,141.4
42,486.7
Other Long-term Investments
Derivatives
Interest Rate Swaps
—
134.2
—
134.2
Foreign Exchange Contracts
—
3.5
—
3.5
Total Derivatives
—
137.7
—
137.7
Equity Securities
—
—
11.2
11.2
Liabilities
Other Liabilities
Derivatives
Interest Rate Swaps
$
—
$
32.9
$
—
$
32.9
Foreign Exchange Contracts
—
140.8
—
140.8
Embedded Derivative in Modified Coinsurance Arrangement
—
—
135.7
135.7
Total Derivatives
—
173.7
135.7
309.4
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2012
Note 3 - Fair Values of Financial Instruments - Continued
Transfers of assets between Level 1 and Level 2 are as follows:
Three Months Ended
Nine Months Ended
September 30, 2012
September 30, 2012
(in millions of dollars)
Transfers into
Level 1 from
Level 2
Level 2 from
Level 1
Level 1 from
Level 2
Level 2 from
Level 1
Fixed Maturity Securities
United States Government and Government Agencies and Authorities
$
426.8
$
60.5
$
205.9
$
20.5
States, Municipalities, and Political Subdivisions
43.0
62.9
41.9
74.8
Foreign Governments
21.7
—
20.7
—
Public Utilities
382.4
743.6
479.0
483.6
All Other Corporate Bonds
2,152.9
1,667.4
2,823.3
1,706.0
Total Fixed Maturity Securities
$
3,026.8
$
2,534.4
$
3,570.8
$
2,284.9
Equity Securities
$
—
$
7.4
$
—
$
—
Three Months Ended
Nine Months Ended
September 30, 2011
September 30, 2011
(in millions of dollars)
Transfers into
Level 1 from
Level 2
Level 2 from
Level 1
Level 1 from
Level 2
Level 2 from
Level 1
Fixed Maturity Securities
United States Government and Government Agencies and Authorities
$
177.2
$
16.1
$
169.8
$
—
States, Municipalities, and Political Subdivisions
—
20.0
25.4
301.9
Foreign Governments
—
—
—
0.7
Public Utilities
665.7
694.8
710.5
488.6
All Other Corporate Bonds
1,798.1
2,347.2
2,334.1
1,732.3
Total Fixed Maturity Securities
$
2,641.0
$
3,078.1
$
3,239.8
$
2,523.5
Transfers between Level 1 and Level 2 occurred due to the change in availability of either a TRACE or broker market maker price. Depending on current market conditions, the availability of these Level 1 prices can vary from period to period. For fair value measurements of financial instruments that were transferred either into or out of Level 1 or 2, we reflect the transfers using the fair value at the beginning of the period.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2012
Note 3 - 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:
Three Months Ended September 30, 2012
(in millions of dollars)
Total Realized and
Unrealized Investment
Gains Included in
Beginning
of Period
Earnings
Other
Comprehensive
Income or Loss
Purchases
Sales
Level 3 Transfers
End of
Period
Into
Out of
Fixed Maturity Securities
States, Municipalities, and Political Subdivisions
$
—
$
—
$
2.0
$
—
$
—
$
108.1
$
—
$
110.1
Foreign Governments
—
—
1.3
—
—
44.8
—
46.1
Public Utilities
162.8
—
8.4
—
(1.7
)
340.5
(10.9
)
499.1
Mortgage/Asset-Backed Securities
0.6
—
0.4
—
—
7.4
—
8.4
All Other Corporate Bonds
639.6
—
19.8
—
(5.3
)
386.7
(146.2
)
894.6
Redeemable Preferred Stocks
22.2
—
—
—
—
—
(22.2
)
—
Total Fixed Maturity Securities
825.2
—
31.9
—
(7.0
)
887.5
(179.3
)
1,558.3
Equity Securities
4.4
—
—
—
—
—
—
4.4
Embedded Derivative in Modified Coinsurance Arrangement
