Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - Unum Groupunm03312016ex311.htm
EX-10.2 - EXHIBIT 10.2 - Unum Groupunm03312016ex102.htm
EX-32.2 - EXHIBIT 32.2 - Unum Groupunm03312016ex322.htm
EX-10.3 - EXHIBIT 10.3 - Unum Groupunm03312016ex103.htm
EX-31.2 - EXHIBIT 31.2 - Unum Groupunm03312016ex312.htm
EX-32.1 - EXHIBIT 32.1 - Unum Groupunm03312016ex321.htm
EX-10.1 - EXHIBIT 10.1 - Unum Groupunm03312016ex101.htm


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2016
 

¨
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)
 
(Zip Code)
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
237,758,775 shares of the registrant's common stock were outstanding as of April 26, 2016.

 





 TABLE OF CONTENTS

 
 
 
Page
 
  
 
 
 
 
  
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




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 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," "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 government programs.
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.
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.
A cyber attack or other security breach could result in the unauthorized disclosure 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.
Increased competition from other insurers and financial services companies due to industry consolidation, new entrants to our markets, or other factors.
Execution risk related to our technology needs.
Changes in our financial strength and credit ratings.
Damage to our reputation due to, among other factors, regulatory investigations, legal proceedings, external events, and/or inadequate or failed internal controls and procedures.
Actual experience that deviates from our assumptions used in pricing, underwriting, and reserving.
Actual persistency and/or sales growth that is higher or lower than projected.
Changes in demand for our products due to, among other factors, changes in societal attitudes, the rate of unemployment, consumer confidence, and/or legislative and regulatory changes, including healthcare reform.
Effectiveness of our risk management program.
Contingencies and the level and results of litigation.
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.
Changes in accounting standards, practices, or policies.
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.


1



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, 2015.

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.


2



PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

Unum Group and Subsidiaries

 
March 31
 
December 31
 
2016
 
2015
 
(in millions of dollars)
 
 
 
As Adjusted
Assets
 
 
 
 
 
 
 
Investments
 
 
 
Fixed Maturity Securities - at fair value (amortized cost: $39,804.7; $39,658.7)
$
44,699.2

 
$
43,354.4

Mortgage Loans
1,881.3

 
1,883.6

Policy Loans
3,343.9

 
3,395.4

Other Long-term Investments
572.2

 
583.0

Short-term Investments
743.3

 
807.3

Total Investments
51,239.9

 
50,023.7

 
 
 
 
Other Assets
 
 
 
Cash and Bank Deposits
120.7

 
112.9

Accounts and Premiums Receivable
1,661.0

 
1,598.4

Reinsurance Recoverable
4,798.5

 
4,725.1

Accrued Investment Income
754.5

 
702.8

Deferred Acquisition Costs
2,015.4

 
2,008.5

Goodwill
229.8

 
230.9

Property and Equipment
515.2

 
523.9

Other Assets
632.9

 
637.4

 
 
 
 
Total Assets
$
61,967.9

 
$
60,563.6

    
 See notes to consolidated financial statements.

3



CONSOLIDATED BALANCE SHEETS (UNAUDITED) - Continued

Unum Group and Subsidiaries

 
March 31
 
December 31
 
2016
 
2015
 
(in millions of dollars)
 
 
 
As Adjusted
Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
Liabilities
 
 
 
Policy and Contract Benefits
$
1,462.2

 
$
1,484.6

Reserves for Future Policy and Contract Benefits
44,446.6

 
43,540.6

Unearned Premiums
433.8

 
384.2

Other Policyholders’ Funds
1,672.9

 
1,674.6

Income Tax Payable
54.1

 
6.0

Deferred Income Tax
233.3

 
91.8

Short-term Debt
351.4

 
352.0

Long-term Debt
2,442.5

 
2,449.4

Payables for Collateral on Investments
425.9

 
415.4

Other Liabilities
1,524.9

 
1,501.1

 
 
 
 
Total Liabilities
53,047.6

 
51,899.7

 
 
 
 
Commitments and Contingent Liabilities - Note 10

 

 
 
 
 
Stockholders' Equity
 
 
 
Common Stock, $0.10 par
 
 
 
Authorized: 725,000,000 shares
 
 
 
Issued: 303,176,096 and 302,702,811 shares
30.3

 
30.3

Additional Paid-in Capital
2,253.6

 
2,247.2

Accumulated Other Comprehensive Income
200.7

 
16.1

Retained Earnings
8,160.6

 
7,995.2

Treasury Stock - at cost: 65,442,566 and 61,785,466 shares
(1,724.9
)
 
(1,624.9
)
 
 
 
 
Total Stockholders' Equity
8,920.3

 
8,663.9

 
 
 
 
Total Liabilities and Stockholders' Equity
$
61,967.9

 
$
60,563.6


See notes to consolidated financial statements.

4



CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Unum Group and Subsidiaries

 
Three Months Ended March 31
 
2016
 
2015
 
(in millions of dollars, except share data)
Revenue
 
 
 
Premium Income
$
2,087.5

 
$
2,006.3

Net Investment Income
606.4

 
602.0

Realized Investment Gain (Loss)
 
 
 
Other-Than-Temporary Impairment Loss on Fixed Maturity Securities
(21.1
)
 
(4.5
)
Net Realized Investment Gain (Loss), Excluding Other-Than-Temporary Impairment Loss on Fixed Maturity Securities
0.6

 
(10.8
)
Net Realized Investment Loss
(20.5
)
 
(15.3
)
Other Income
52.0

 
54.4

Total Revenue
2,725.4

 
2,647.4

 
 
 
 
Benefits and Expenses
 
 
 
Benefits and Change in Reserves for Future Benefits
1,729.8

 
1,653.9

Commissions
259.9

 
256.9

Interest and Debt Expense
38.6

 
37.8

Deferral of Acquisition Costs
(152.5
)
 
(145.0
)
Amortization of Deferred Acquisition Costs
132.2

 
134.3

Compensation Expense
207.6

 
213.1

Other Expenses
205.6

 
193.4

Total Benefits and Expenses
2,421.2

 
2,344.4

 
 
 
 
Income Before Income Tax
304.2

 
303.0

 
 
 
 
Income Tax
 
 
 
Current
51.0

 
40.6

Deferred
42.6

 
49.5

Total Income Tax
93.6

 
90.1

 
 
 
 
Net Income
$
210.6

 
$
212.9

 
 
 
 
Net Income Per Common Share
 
 
 
Basic
$
0.88

 
$
0.85

Assuming Dilution
$
0.88

 
$
0.84


See notes to consolidated financial statements.

5



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Unum Group and Subsidiaries
 
 
Three Months Ended March 31
 
2016
 
2015
 
(in millions of dollars)
Net Income
$
210.6

 
$
212.9

 
 
 
 
Other Comprehensive Income (Loss)
 
 
 
Change in Net Unrealized Gain on Securities Before Adjustment (net of tax expense of $414.3; $182.8)
800.1

 
350.2

Change in Adjustment to Deferred Acquisition Costs and Reserves for Future Policy and Contract Benefits, Net of Reinsurance (net of tax benefit of $287.7; $120.3)
(566.0
)
 
(226.2
)
Change in Net Gain on Cash Flow Hedges (net of tax expense (benefit) of $(13.6); $9.0)
(26.2
)
 
20.9

Change in Foreign Currency Translation Adjustment (net of tax benefit of $0.0; $0.1)
(26.4
)
 
(54.0
)
Change in Unrecognized Pension and Postretirement Benefit Costs (net of tax expense of $1.6; $1.5)
3.1

 
3.1

Total Other Comprehensive Income
184.6

 
94.0

 
 
 
 
Comprehensive Income
$
395.2

 
$
306.9


See notes to consolidated financial statements.


6



CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)

Unum Group and Subsidiaries

 
Three Months Ended March 31
 
2016
 
2015
 
(in millions of dollars)
Common Stock
 
 
 
Balance at Beginning of Year and End of Period
$
30.3

 
$
30.2

 
 
 
 
Additional Paid-in Capital
 
 
 
Balance at Beginning of Year
2,247.2

 
2,221.2

Common Stock Activity
6.4

 
9.5

Balance at End of Period
2,253.6

 
2,230.7

 
 
 
 
Accumulated Other Comprehensive Income
 
 
 
Balance at Beginning of Year
16.1

 
166.4

Other Comprehensive Income
184.6

 
94.0

Balance at End of Period
200.7

 
260.4

 
 
 
 
Retained Earnings
 
 
 
Balance at Beginning of Year
7,995.2

 
7,302.3

Net Income
210.6

 
212.9

Dividends to Stockholders (per common share: $0.185; $0.165)
(45.2
)
 
(42.3
)
Balance at End of Period
8,160.6

 
7,472.9

 
 
 
 
Treasury Stock
 
 
 
Balance at Beginning of Year
(1,624.9
)
 
(1,198.2
)
Purchases of Treasury Stock
(100.0
)
 
(108.1
)
Balance at End of Period
(1,724.9
)
 
(1,306.3
)
 
 
 
 
Total Stockholders' Equity at End of Period
$
8,920.3

 
$
8,687.9


See notes to consolidated financial statements.
 

7



CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Unum Group and Subsidiaries
 
 
Three Months Ended March 31
 
2016
 
2015
 
(in millions of dollars)
Cash Flows from Operating Activities
 
 
 
Net Income
$
210.6

 
$
212.9

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
 
 
 
Change in Receivables
(27.3
)
 
49.2

Change in Deferred Acquisition Costs
(20.3
)
 
(10.7
)
Change in Insurance Reserves and Liabilities
113.0

 
98.4

Change in Income Taxes
83.0

 
161.4

Change in Other Accrued Liabilities
(30.8
)
 
(69.0
)
Non-cash Components of Net Investment Income
(86.9
)
 
(90.5
)
Net Realized Investment Loss
20.5

 
15.3

Depreciation
25.4

 
23.5

Other, Net
6.1

 
9.6

Net Cash Provided by Operating Activities
293.3

 
400.1

 
 
 
 
Cash Flows from Investing Activities
 
 
 
Proceeds from Sales of Fixed Maturity Securities
364.8

 
108.5

Proceeds from Maturities of Fixed Maturity Securities
348.7

 
468.0

Proceeds from Sales and Maturities of Other Investments
78.5

 
42.5

Purchases of Fixed Maturity Securities
(882.7
)
 
(959.5
)
Purchases of Other Investments
(84.0
)
 
(127.6
)
Net Sales of Short-term Investments
70.9

 
259.8

Net Increase in Payables for Collateral on Investments
10.5

 
6.1

Net Purchases of Property and Equipment
(17.2
)
 
(31.4
)
Net Cash Used by Investing Activities
(110.5
)
 
(233.6
)
 
 
 
 
Cash Flows from Financing Activities
 
 
 
Long-term Debt Repayments
(13.2
)
 
(29.1
)
Issuance of Common Stock
1.7

 
0.8

Repurchase of Common Stock
(108.8
)
 
(108.1
)
Dividends Paid to Stockholders
(45.2
)
 
(42.3
)
Other, Net
(9.5
)
 
(6.2
)
Net Cash Used by Financing Activities
(175.0
)
 
(184.9
)
 
 
 
 
Net Increase (Decrease) in Cash and Bank Deposits
7.8

 
(18.4
)
 
 
 
 
Cash and Bank Deposits at Beginning of Year
112.9

 
102.5

 
 
 
 
Cash and Bank Deposits at End of Period
$
120.7

 
$
84.1


See notes to consolidated financial statements.

8


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Unum Group and Subsidiaries
March 31, 2016
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, 2015.
    
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.

Note 2 - Accounting Developments

Accounting Updates Adopted in 2016:
Accounting Standards Codification (ASC)
 
Description
 
Date of Adoption
 
Effect on Financial Statements
 
 
 
 
 
 
 
ASC 820 "Fair Value Measurement"
 
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 is to be applied retrospectively.
 
January 1, 2016
 
The adoption of this update had no effect on our financial position or results of operations but will modify certain of our annual reporting period disclosures for invested assets held in our employee benefit plans.
 
 
 
 
 
 
 
ASC 835 "Interest - Imputation of Interest"
 
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.
 
January 1, 2016
 
The adoption of this update resulted in the following reclassification adjustments to our consolidated balance sheets but had no effect on our financial position or results of operations.
 
December 31, 2015
 
Historical Accounting Method
 
As Adjusted
 
Effect of Change
 
(in millions of dollars)
Consolidated Balance Sheets
 
 
 
 
 
Short-term Debt
$
352.4

 
$
352.0

 
$
(0.4
)
Long-term Debt
2,475.1

 
2,449.4

 
(25.7
)
Other Assets
663.5

 
637.4

 
(26.1
)


9


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2016
Note 2 - Accounting Developments - Continued


Accounting Updates Outstanding:
ASC
 
Description
 
Date of Adoption
 
Effect on Financial Statements
 
 
 
 
 
 
 
ASC 944 "Financial Services - Insurance"
 
This update changes the disclosure requirements for certain insurance contracts. These changes include 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 will also be required for short-duration contracts. The guidance is to be applied retrospectively.
 
January 1, 2016 for annual reporting period disclosures and January 1, 2017 for interim reporting period disclosures.
 
The disclosure requirements for annual reporting period 2016 are not applicable to our insurance contracts. We will adopt the interim reporting period disclosures effective January 1, 2017. The adoption of this update will have no effect on our financial position or results of operations.
 
 
 
 
 
 
 
ASC 718 "Compensation - Stock Compensation"
 
This update changes the accounting and disclosure requirements for certain aspects of share-based payments to employees. The update requires 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. Transition guidance for the amendments varies between the retrospective, modified retrospective, and prospective methods depending on the specific requirement of the update. Early adoption is also permitted.
 
January 1, 2017
 
We have not yet determined the expected impact on our financial position or results of operations.
 
 
 
 
 
 
 
ASC 606 "Revenue from Contracts with Customers"
 
This update supersedes virtually all existing guidance regarding the recognition of revenue from customers. Specifically excluded from the scope of this update are insurance contracts, although our fee-based service products are included within the scope. 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. The guidance is to be applied retrospectively.
 
January 1, 2018
 
The adoption of this update will not have a material effect on our financial position or results of operations.
 
 
 
 
 
 
 
ASC 825 "Financial Instruments - Overall"
 
This update changes 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 clarifies 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 include 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 is to be applied retrospectively.
 
January 1, 2018
 
We have not yet determined the expected impact on our financial position or results of operations.
 
 
 
 
 
 
 

10


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2016
Note 2 - Accounting Developments - Continued


ASC
 
Description
 
Date of Adoption
 
Effect on Financial Statements
ASC 842 "Leases"
 
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 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 is to be applied using a modified retrospective approach at the beginning of the earliest comparative period presented.
 
January 1, 2019
 
We have not yet determined the expected impact 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 securities lending agreements approximate fair value due to the short-term nature of the instruments. As such, these financial instruments are not included in the following chart.
 
March 31, 2016
 
December 31, 2015
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
 
(in millions of dollars)
Assets
 
 
 
 
 
 
 
Fixed Maturity Securities
$
44,699.2

 
$
44,699.2

 
$
43,354.4

 
$
43,354.4

Mortgage Loans
1,881.3

 
2,042.6

 
1,883.6

 
2,013.9

Policy Loans
3,343.9

 
3,458.0

 
3,395.4

 
3,498.0

Other Long-term Investments
 
 
 
 
 
 
 
Derivatives
40.1

 
40.1

 
49.8

 
49.8

Equity Securities
1.5

 
1.5

 
1.4

 
1.4

Miscellaneous Long-term Investments
473.5

 
473.5

 
474.4

 
474.4

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Policyholders' Funds
 
 
 
 
 
 
 
Deferred Annuity Products
$
607.0

 
$
607.0

 
$
608.8

 
$
608.8

Supplementary Contracts without Life Contingencies
632.6

 
632.6

 
641.1

 
641.1

Short-term Debt
351.4

 
361.7

 
352.0

 
366.2

Long-term Debt
2,442.5

 
2,634.4

 
2,449.4

 
2,645.9

Payables for Collateral on Investments
 
 
 
 
 
 
 
Federal Home Loan Bank (FHLB) Funding Agreements
350.0

 
350.0

 
350.0

 
350.0

Other Liabilities
 
 
 
 
 
 
 
Derivatives
58.0

 
58.0

 
50.2

 
50.2

Embedded Derivative in Modified Coinsurance Arrangement
93.2

 
93.2

 
87.6

 
87.6

Unfunded Commitments to Investment Partnerships
4.8

 
4.8

 
5.0

 
5.0


The methods and assumptions used to estimate fair values of financial instruments are discussed as follows.


11


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2016
Note 3 - Fair Values of Financial Instruments - Continued


Fair Value Measurements for Financial Instruments Not Carried at Fair Value

Mortgage Loans: Fair values are estimated using discounted cash flow analyses and interest rates currently being offered for similar loans to borrowers with similar credit ratings and maturities. Loans with similar characteristics are aggregated for purposes of the calculations. These financial instruments are assigned a Level 2 within the fair value hierarchy.

Policy Loans: Fair values for policy loans, net of reinsurance ceded, are estimated using discounted cash flow analyses and interest rates currently being offered to policyholders with similar policies. Carrying amounts for ceded policy loans, which equal $3,094.5 million and $3,150.1 million as of March 31, 2016 and December 31, 2015, 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 net asset values provided by the general partner in the partnerships' financial statements. Our private equity partnerships represent funds that are primarily invested in railcar leasing, the financial services industry, mezzanine debt, and bank loans. Distributions received from the funds arise from income generated by the underlying investments as well as the liquidation of the underlying investments. As of March 31, 2016, we estimate that the underlying assets of the funds will be liquidated over the next one to eleven years. These financial instruments are assigned a Level 3 within the fair value hierarchy. Our shares of FHLB common stock are carried at cost, which approximates fair value. These financial instruments are considered restricted investments and are assigned a Level 2 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.

Short-term Debt: Fair values for short-term debt are determined based on prices from independent pricing services that generally use observable inputs for securities or comparable securities in active markets in their valuation techniques. These financial instruments are assigned a Level 1.

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 by pricing services using active trades for which there was current market activity in that specific debt instrument have fair values of $1,806.4 million and $956.4 million as of March 31, 2016 and December 31, 2015, respectively, and are assigned a Level 1 within the fair value hierarchy. Debt instruments which are valued by pricing services that generally use observable inputs for securities or comparable securities in active markets in their valuation techniques have fair values of $828.0 million and $1,689.5 million as of March 31, 2016 and December 31, 2015, respectively, and are assigned a Level 2.

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 and are assigned a Level 2 within the fair value hierarchy.

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 approximate fair value and are assigned a Level 2 within the fair value hierarchy.


12


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2016
Note 3 - Fair Values of Financial Instruments - Continued


Fair Value Measurements for Financial Instruments Carried at Fair Value

We report fixed maturity securities, derivative financial instruments, and unrestricted equity securities at fair value in our consolidated balance sheets. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and less judgment utilized in measuring fair value. An active market for a financial instrument is a market in which transactions for an asset or a similar asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and should be used to measure fair value whenever available. Conversely, financial instruments rarely traded or not quoted have less observability and are measured at fair value using valuation techniques that require more judgment. Pricing observability is generally impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction, and overall market conditions.

Valuation techniques used for assets and liabilities accounted for at fair value are generally categorized into three types. The market approach uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities. The income approach converts future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount. The cost approach is based upon the amount that currently would be required to replace the service capacity of an asset, or the current replacement cost.

We use valuation techniques that are appropriate in the circumstances and for which sufficient data are available that can be obtained without undue cost and effort. In some cases, a single valuation technique will be appropriate (for example, when valuing an asset or liability using quoted prices in an active market for identical assets or liabilities). In other cases, multiple valuation techniques will be appropriate. If we use multiple valuation techniques to measure fair value, we evaluate and weigh the results, as appropriate, considering the reasonableness of the range indicated by those results. A fair value measurement is the point within that range that is most representative of fair value in the circumstances.

The selection of the valuation method(s) to apply considers the definition of an exit price and depends on the nature of the asset or liability being valued. For assets and liabilities accounted for at fair value, we generally use valuation techniques consistent with the market approach, and to a lesser extent, the income approach. We believe the market approach valuation technique provides more observable data than the income approach, considering the type of investments we hold. Our fair value measurements could differ significantly based on the valuation technique and available inputs. When 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 2016, we have applied valuation techniques on a consistent basis to similar assets and liabilities and consistent with those techniques used at year end 2015.


13


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2016
Note 3 - Fair Values of Financial Instruments - Continued


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 presented as follows. 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.
 
 
Level 2
 
Level 3
Instrument
 
Observable Inputs
 
Unobservable Inputs
United States Government and Government Agencies and Authorities
 
 
 
Valuation Techniques
 
Principally the market approach
 
Not applicable
 
 
 
 
 
 
 
Key Inputs
 
Prices obtained from external pricing services
 
 
 
 
 
 
 
 
States, Municipalities, and Political Subdivisions
 
 
 
Valuation Techniques
 
Principally the market approach
 
Principally the market approach
 
 
 
 
 
 
 
Key Inputs
 
Prices obtained from external pricing services
 
Analysis of similar bonds, adjusted for comparability
 
 
 
Relevant reports issued by analysts and rating agencies
 
Non-binding broker quotes
 
 
 
Audited financial statements
 
Security and issuer level spreads
 
 
 
 
 
 
Foreign Governments
 
 
 
Valuation Techniques
 
Principally the market approach
 
Principally the market approach
 
 
 
 
 
 
 
Key Inputs
 
Prices obtained from external pricing services
 
Analysis of similar bonds, adjusted for comparability
 
 
 
Non-binding broker quotes
 
Non-binding broker quotes
 
 
 
Call provisions
 
Security and issuer level spreads
 
 
 
 
 
 
Public Utilities
 
 
 
Valuation Techniques
 
Principally the market and income approaches
 
Principally the market and income approaches
 
 
 
 
 
 
 
Key Inputs
 
TRACE pricing
 
Change in benchmark reference
 
 
 
Prices obtained from external pricing services
 
Analysis of similar bonds, adjusted for comparability
 
 
 
Non-binding broker quotes
 
Discount for size - illiquidity
 
 
 
Benchmark yields
 
Non-binding broker quotes
 
 
 
Transactional data for new issuances and secondary trades
 
Lack of marketability
 
 
 
Security cash flows and structures
 
Security and issuer level spreads
 
 
 
Recent issuance / supply
 
Volatility of credit
 
 
 
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 Techniques
 
Principally the market and income approaches
 
Principally the market approach
 
 
 
 
 
 
 
Key Inputs
 
Prices obtained from external pricing services
 
Analysis of similar bonds, adjusted for comparability

14


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2016
Note 3 - Fair Values of Financial Instruments - Continued


 
 
Level 2
 
Level 3
Instrument
 
Observable Inputs
 
Unobservable Inputs
 
 
 
Non-binding broker quotes
 
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 Techniques
 
Principally the market and income approaches
 
Principally the market and income approaches
 
 
 
 
 
 
 
Key Inputs
 
TRACE pricing
 
Change in benchmark reference
 
 
 
Prices obtained from external pricing services
 
Analysis of similar bonds, adjusted for comparability
 
 
 
Non-binding broker quotes
 
Discount for size - illiquidity
 
 
 
Benchmark yields
 
Non-binding broker quotes
 
 
 
Transactional data for new issuances and secondary trades
 
Lack of marketability
 
 
 
Security cash flows and structures
 
Security and issuer level spreads
 
 
 
Recent issuance / supply
 
Volatility of credit
 
 
 
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 Techniques:
 
Principally the market approach
 
Principally the market approach
 
 
 
 
 
 
 
Key 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 Techniques:
 
Principally the market approach
 
Principally the market and income approaches
 
 
 
 
 
 
 
Key Inputs:
 
Prices obtained from external pricing services
 
Financial statement analysis
 
 
 
Non-binding broker quotes
 
Non-binding broker quotes


15


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2016
Note 3 - Fair Values of Financial Instruments - Continued


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.
The parameters and inputs used to validate a price on a security may be adjusted for assumptions about risk and current market conditions on a quarter to quarter basis, as certain features may be more significant drivers of valuation at the time of pricing. Changes to inputs in valuations are not changes to valuation methodologies; rather, the inputs are modified to reflect direct or indirect impacts on asset classes from changes in market conditions.

Fair values for derivatives other than embedded derivatives in modified coinsurance arrangements are based on market quotes or pricing models and represent the net amount of cash we would have paid or received if the contracts had been settled or closed as of the last day of the period. We analyze credit default swap spreads relative to the average credit spread embedded within the LIBOR-setting syndicate in determining the effect of credit risk on our derivatives' fair values.  If net counterparty credit risk for a derivative asset is determined to be material and is not adequately reflected in the LIBOR-based fair value obtained from our pricing sources, we adjust the valuations obtained from our pricing sources. For purposes of valuing net counterparty risk, we measure the fair value of a group of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position or transfer a net short position for a particular risk exposure in an orderly transaction between market participants at the measurement date under current market conditions. In regard to our own credit risk component, we adjust the valuation of derivative liabilities wherein the counterparty is exposed to our credit risk when the LIBOR-based valuation of our derivatives obtained from pricing sources does not effectively include an adequate credit component for our own credit risk.
Fair values for our embedded derivative in a modified coinsurance arrangement are estimated using internal pricing models and represent the hypothetical value of the duration mismatch of assets and liabilities, interest rate risk, and third party credit risk embedded in the modified coinsurance arrangement.

Certain of our investments do not have readily determinable market prices and/or observable inputs or may at times be affected by the lack of market liquidity. For these securities, we use internally prepared valuations combining matrix pricing with vendor purchased software programs, including valuations based on estimates of future profitability, to estimate the fair value. Additionally, we may obtain prices from independent third-party brokers to aid in establishing valuations for certain of these securities. Key assumptions used by us to determine fair value for these securities include risk free interest rates, risk premiums, performance of underlying collateral (if any), and other factors involving significant assumptions which may or may not reflect those of an active market.

At March 31, 2016, approximately 20.9 percent of our fixed maturity securities were valued using active trades from TRACE pricing or broker market maker prices for which there was current market activity in that specific security (comparable to receiving one binding quote).  The prices obtained were not adjusted, and the assets were classified as Level 1, the highest category of the three-level fair value hierarchy classification wherein inputs are unadjusted and represent quoted prices in active markets for identical assets or liabilities.


16


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2016
Note 3 - Fair Values of Financial Instruments - Continued


The remaining 79.1 percent of our fixed maturity securities were valued based on non-binding quotes or other observable and unobservable inputs, as discussed below.

Approximately 65.3 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 2.8 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.

Approximately 11.0 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.











17


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2016
Note 3 - Fair Values of Financial Instruments - Continued


Fair value measurements by input level for financial instruments carried at fair value are as follows:
 
March 31, 2016
 
Quoted Prices
in Active Markets
for Identical Assets
or Liabilities
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(in millions of dollars)
Assets
 
 
 
 
 
 
 
Fixed Maturity Securities
 
 
 
 
 
 
 
United States Government and Government Agencies and Authorities
$
689.4

 
$
896.9

 
$

 
$
1,586.3

States, Municipalities, and Political Subdivisions

 
2,087.9

 
88.7

 
2,176.6

Foreign Governments

 
1,024.0

 
53.9

 
1,077.9

Public Utilities
569.1

 
7,403.9

 
270.2

 
8,243.2

Mortgage/Asset-Backed Securities

 
2,480.4

 

 
2,480.4

All Other Corporate Bonds
8,074.0

 
19,938.8

 
1,074.7

 
29,087.5

Redeemable Preferred Stocks

 
23.9

 
23.4

 
47.3

Total Fixed Maturity Securities
9,332.5

 
33,855.8

 
1,510.9

 
44,699.2

 
 
 
 
 
 
 
 
Other Long-term Investments
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Interest Rate Swaps

 
5.3

 

 
5.3

Foreign Exchange Contracts

 
34.8

 

 
34.8

Total Derivatives

 
40.1

 

 
40.1

Equity Securities

 
0.3

 
1.2

 
1.5

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Other Liabilities
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Interest Rate Swaps
$

 
$
7.8

 
$

 
$
7.8

Foreign Exchange Contracts

 
50.1

 

 
50.1

Credit Default Swaps

 
0.1

 

 
0.1

Embedded Derivative in Modified Coinsurance Arrangement

 

 
93.2

 
93.2

Total Derivatives

 
58.0

 
93.2

 
151.2

 


18


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2016
Note 3 - Fair Values of Financial Instruments - Continued


 
December 31, 2015
 
Quoted Prices
in Active Markets
for Identical Assets
or Liabilities
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(in millions of dollars)
Assets
 
 
 
 
 
 
 
Fixed Maturity Securities
 
 
 
 
 
 
 
United States Government and Government Agencies and Authorities
$
97.3

 
$
1,367.9

 
$

 
$
1,465.2

States, Municipalities, and Political Subdivisions

 
1,994.9

 
122.2

 
2,117.1

Foreign Governments

 
998.7

 
52.9

 
1,051.6

Public Utilities
59.1

 
7,687.2

 
274.1

 
8,020.4

Mortgage/Asset-Backed Securities

 
2,481.5

 

 
2,481.5

All Other Corporate Bonds
2,770.4

 
23,992.8

 
1,408.2

 
28,171.4

Redeemable Preferred Stocks

 
23.4

 
23.8

 
47.2

Total Fixed Maturity Securities
2,926.8

 
38,546.4

 
1,881.2

 
43,354.4

 
 
 
 
 
 
 
 
Other Long-term Investments
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 Interest Rate Swaps

 
2.4

 

 
2.4

 Foreign Exchange Contracts

 
47.4

 

 
47.4

 Total Derivatives

 
49.8

 

 
49.8

Equity Securities

 

 
1.4

 
1.4

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Other Liabilities
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Interest Rate Swaps
$

 
$
12.3

 
$

 
$
12.3

Foreign Exchange Contracts

 
37.6

 

 
37.6

Credit Default Swaps

 
0.3

 

 
0.3

Embedded Derivative in Modified Coinsurance Arrangement

 

 
87.6

 
87.6

Total Derivatives

 
50.2

 
87.6

 
137.8



19


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2016
Note 3 - Fair Values of Financial Instruments - Continued


Transfers of assets between Level 1 and Level 2 are as follows:
 
Three Months Ended March 31
 
2016
 
2015
 
Transfers into
 
Level 1 from
Level 2
 
Level 2 from
Level 1
 
Level 1 from
Level 2
 
Level 2 from
Level 1
 
(in millions of dollars)
Fixed Maturity Securities
 
 
 
 
 
 
 
United States Government and Government Agencies and Authorities
$
423.8

 
$

 
$
219.6

 
$

Public Utilities
511.6

 
43.0

 
606.7

 
48.9

All Other Corporate Bonds
5,352.0

 
786.4

 
4,463.8

 
1,189.4

Total Fixed Maturity Securities
$
6,287.4

 
$
829.4

 
$
5,290.1

 
$
1,238.3

 
 
 
 
 
 
 
 
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.


20


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2016
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 March 31, 2016
 
 
 
Total Realized and
Unrealized Investment
Gains (Losses) Included in
 
 
 
 
 
 
 
 
 
 
 
Beginning
of Period
 
Earnings
 
Other
Comprehensive
Income or Loss
 
Purchases
 
Sales
 
Level 3 Transfers
 
End of
Period
 
Into
 
Out of
 
 
(in millions of dollars)
Fixed Maturity Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
States, Municipalities, and Political Subdivisions
$
122.2

 
$

 
$
0.6

 
$

 
$

 
$

 
$
(34.1
)
 
$
88.7

Foreign Governments
52.9

 

 
1.0

 

 

 

 

 
53.9

Public Utilities
274.1

 

 
4.2

 

 

 
94.5

 
(102.6
)
 
270.2

All Other Corporate Bonds
1,408.2

 
(1.6
)
 
15.6

 

 
(28.0
)
 
282.6

 
(602.1
)
 
1,074.7

Redeemable Preferred Stocks
23.8

 

 
(0.4
)
 

 

 

 

 
23.4

Total Fixed Maturity Securities
1,881.2

 
(1.6
)
 
21.0

 

 
(28.0
)
 
377.1

 
(738.8
)
 
1,510.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities
1.4

 

 

 

 

 

 
(0.2
)
 
1.2

Embedded Derivative in Modified Coinsurance Arrangement
(87.6
)
 
(5.6
)
 

 

 

 

 

 
(93.2
)
 
 
Three Months Ended March 31, 2015
 
 
 
Total Realized and
Unrealized Investment
Gains (Losses) Included in
 
 
 
 
 
 
 
 
 
 
 
Beginning
of Period
 
Earnings
 
Other
Comprehensive
Income or Loss
 
Purchases
 
Sales
 
Level 3 Transfers
 
End of
Period
 
Into
 
Out of
 
 
(in millions of dollars)
Fixed Maturity Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
States, Municipalities, and Political Subdivisions
$
140.1

 
$

 
$
4.1

 
$

 
$

 
$

 
$

 
$
144.2

Foreign Governments
69.3

 

 
(0.2
)
 

 

 

 

 
69.1

Public Utilities
315.0

 

 
3.1

 

 
(0.1
)
 
300.8

 
(69.0
)
 
549.8

All Other Corporate Bonds
1,425.3

 
(0.3
)
 
12.5

 

 
(15.9
)
 
498.5

 
(284.3
)
 
1,635.8

Redeemable Preferred Stocks
24.9

 

 

 

 

 

 

 
24.9

Total Fixed Maturity Securities
1,974.6

 
(0.3
)
 
19.5

 

 
(16.0
)
 
799.3

 
(353.3
)
 
2,423.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Equity Securities
1.4

 

 

 

 

 

 

 
1.4

Embedded Derivative in Modified Coinsurance Arrangement
(49.9
)
 
(3.9
)
 

 

 

 

 

 
(53.8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

21


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2016
Note 3 - 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. 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 period end were $5.6 million and $3.9 million for the three months ended March 31, 2016 and 2015, 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.
 
March 31, 2016
 
Fair Value
 
Unobservable Input
 
Range/Weighted Average
 
(in millions of dollars)
Fixed Maturity Securities
 
 
 
 
 
All Other Corporate Bonds - Private
$
111.8

 
Comparability Adjustment
Discount for Size
Lack of Marketability
Volatility of Credit
Market Convention
(b)
(c)
(d)
(e)
(f)
0.50% - 0.50% / 0.50%
0.50% - 0.50% / 0.50%
1.00% - 2.00% / 1.75%
0.25% - 6.10% / 0.95%
Priced at Par
All Other Corporate Bonds - Public
9.5

 
Lack of Marketability
(d)
2.50% - 2.50% / 2.50%
Equity Securities - Private
1.1

 
Market Convention
(f)
Priced at Cost or Owner's Equity
Embedded Derivative in Modified Coinsurance Arrangement
(93.2
)
 
Projected Liability Cash Flows
(g)
Actuarial Assumptions

22


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2016
Note 3 - Fair Values of Financial Instruments - Continued


 
December 31, 2015
 
Fair Value
 
Unobservable Input
 
Range/Weighted Average
 
(in millions of dollars)
Fixed Maturity Securities
 
 
 
 
 
States, Municipalities, and Political Subdivisions - Private
$
73.3

 
Change in Benchmark Reference
(a)
0.50% - 1.00% / 0.70%
States, Municipalities, and Political Subdivisions - Public
12.0

 
Market Convention
(f)
Priced at Par
All Other Corporate Bonds - Private
151.0

 
Comparability Adjustment
Discount for Size
Lack of Marketability
Volatility of Credit
Market Convention
(b)
(c)
(d)
(e)
(f)
0.50% - 0.50% / 0.50%
0.50% - 0.50% / 0.50%
1.00% - 2.00% / 1.75%
0.25% - 5.56% / 0.94%
Priced at Par
All Other Corporate Bonds - Public
36.2

 
Lack of Marketability
(d)
1.00% - 1.00% / 1.00%
Equity Securities - Private
1.1

 
Market Convention
(f)
Priced at Cost or Owner's Equity
Embedded Derivative in Modified Coinsurance Arrangement
(87.6
)
 
Projected Liability Cash Flows
(g)
Actuarial Assumptions

(a)
Represents basis point adjustments for changes in benchmark spreads associated with various ratings categories
(b)
Represents basis point adjustments for changes in benchmark spreads associated with various industry sectors
(c)
Represents basis point adjustments based on issue/issuer size relative to the benchmark
(d)
Represents basis point adjustments to apply a discount due to the illiquidity of an investment
(e)
Represents basis point adjustments for credit-specific factors
(f)
Represents a decision to price based on par value, cost, or owner's equity when limited data is available
(g)
Represents various actuarial assumptions required to derive the liability cash flows including incidence, termination, and lapse rates

Isolated increases in unobservable inputs other than market convention will result in a lower fair value measurement, whereas isolated decreases will result in a higher fair value measurement. The unobservable input for market convention is not sensitive to input movements. The projected liability cash flows used in the fair value measurement of our Level 3 embedded derivative are based on expected claim payments. If claim payments increase, the projected liability cash flows will increase, resulting in a decrease in the fair value of the embedded derivative. Decreases in projected liability cash flows will result in an increase in the fair value of the embedded derivative.


23


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2016
Note 4 - Investments


Fixed Maturity Securities

At March 31, 2016 and December 31, 2015, 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:
 
March 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair
Value
 
(in millions of dollars)
United States Government and Government Agencies and Authorities
$
1,338.7

 
$
247.7

 
$
0.1

 
$
1,586.3

States, Municipalities, and Political Subdivisions
1,814.0

 
364.0

 
1.4

 
2,176.6

Foreign Governments
895.7

 
182.2

 

 
1,077.9

Public Utilities
6,974.0

 
1,273.0

 
3.8

 
8,243.2

Mortgage/Asset-Backed Securities
2,279.8

 
201.0

 
0.4

 
2,480.4

All Other Corporate Bonds
26,458.5

 
3,047.5

 
418.5

 
29,087.5

Redeemable Preferred Stocks
44.0

 
3.6

 
0.3

 
47.3

Total Fixed Maturity Securities
$
39,804.7

 
$
5,319.0

 
$
424.5

 
$
44,699.2

 
December 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair
Value
 
(in millions of dollars)
United States Government and Government Agencies and Authorities
$
1,265.8

 
$
207.3

 
$
7.9

 
$
1,465.2

States, Municipalities, and Political Subdivisions
1,828.3

 
293.4

 
4.6

 
2,117.1

Foreign Governments
897.2

 
154.4

 

 
1,051.6

Public Utilities
6,979.3

 
1,057.4

 
16.3

 
8,020.4

Mortgage/Asset-Backed Securities
2,318.6

 
167.6

 
4.7

 
2,481.5

All Other Corporate Bonds
26,325.5

 
2,454.1

 
608.2

 
28,171.4

Redeemable Preferred Stocks
44.0

 
3.8

 
0.6

 
47.2

Total Fixed Maturity Securities
$
39,658.7

 
$
4,338.0

 
$
642.3

 
$
43,354.4


The following charts indicate the length of time our fixed maturity securities have been in a gross unrealized loss position.
 
March 31, 2016
 
Less Than 12 Months
 
12 Months or Greater
 
Fair
Value
 
Gross
Unrealized
Loss
 
Fair
Value
 
Gross
Unrealized
Loss
 
(in millions of dollars)
United States Government and Government Agencies and Authorities
$
33.0

 
$
0.1

 
$

 
$

States, Municipalities, and Political Subdivisions
58.2

 
1.1

 
3.3

 
0.3

Public Utilities
192.4

 
2.7

 
18.8

 
1.1

Mortgage/Asset-Backed Securities
53.7

 
0.3

 
8.9

 
0.1

All Other Corporate Bonds
3,469.7

 
289.8

 
761.9

 
128.7

Redeemable Preferred Stocks
10.7

 
0.3

 

 

Total Fixed Maturity Securities
$
3,817.7

 
$
294.3

 
$
792.9

 
$
130.2


24


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2016
Note 4 - Investments - Continued


<
 
December 31, 2015
 
Less Than 12 Months
 
12 Months or Greater
 
Fair
Value
 
Gross
Unrealized
Loss
 
Fair
Value
 
Gross
Unrealized
Loss
 
(in millions of dollars)
United States Government and Government Agencies and Authorities
$
213.5

 
$
7.9

 
$

 
$

States, Municipalities, and Political Subdivisions
112.3

 
4.3

 
3.3

 
0.3

Public Utilities
408.4

 
14.4

 
10.3

 
1.9

Mortgage/Asset-Backed Securities
504.3