NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Unum Group and Subsidiaries
March 31, 2019
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, 2018
.
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 2019:
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Accounting Standards Codification (ASC)
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Description
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Date of Adoption
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Effect on Financial Statements
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ASC 220 "Income Statement - Reporting Comprehensive Income"
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This update allowed entities to make an accounting policy election to reclassify the disproportionate tax effects arising as a result of the recognition of the enactment of the tax bill, H.R.1, An Act to Provide Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, more commonly known as the Tax Cuts and Jobs Act (TCJA) from accumulated other comprehensive income to retained earnings. Tax effects that are disproportionate in accumulated other comprehensive income for reasons other than the TCJA may not be reclassified. This update required additional disclosures on whether an entity elects to reclassify the disproportionate tax effects and its policy for releasing tax effects from accumulated other comprehensive income. This guidance was applied in the period of adoption.
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January 1, 2019
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The adoption of this update expanded certain of our disclosures but had no impact on our financial position or results of operations because we did not make the optional accounting policy election to reclassify the disproportionate tax effects resulting from the TCJA from accumulated other comprehensive income to retained earnings. We use an aggregate portfolio approach to release disproportionate tax effects when disposing of an entire business segment’s portfolio.
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ASC 310 "Receivables - Nonrefundable Fees and Other Costs"
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This update shortened the amortization period to the earliest call date for certain callable debt securities held at a premium. This update did not impact securities held at a discount. The guidance was applied in the period of adoption.
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January 1, 2019
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The adoption of this update did not have a material impact on our financial position or results of operations.
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ASC 718 "Compensation - Stock Compensation"
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This update generally aligned the accounting guidance for share-based payments issued to non-employees with guidance for share-based payments issued to employees. Specifically, the update required non-employee share-based payments to be measured using the grant date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered rather than being remeasured through the performance completion date. Additionally, for non-employee share-based payments that contain performance conditions, the update changed the criteria regarding the recognition of compensation cost to when achievement of a performance condition is probable rather than upon actual achievement of the performance condition. The guidance was applied in the period of adoption.
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January 1, 2019
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The adoption of this update did not have an impact on our financial position or results of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 2 - Accounting Developments - Continued
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ASC
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Description
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Date of Adoption
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Effect on Financial Statements
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ASC 842 "Leases"
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This update changed 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 remained similar to previous accounting requirements for capital and operating leases. For lessors, the guidance modified the classification criteria and the accounting for sales-type and direct financing leases. The guidance was applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings at the beginning of the period of adoption. In addition, the package of practical expedients available to leases that commenced prior to the date of adoption was applied.
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January 1, 2019
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See the summary table below for the financial statement impacts of this modified retrospective adoption on our financial statement line items at January 1, 2019. In addition, see Note 12 of the "Notes to Consolidated Financial Statements" contained herein in Item 1 for the additional disclosures required by the update.
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Summary of Financial Statement Impacts of Accounting Updates Adopted in 2019:
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Balance at December 31, 2018
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Balance at January 1, 2019
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Effect of Change
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(in millions of dollars)
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Adjustments due to ASC 842
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Consolidated Balance Sheets
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Assets
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Other Assets
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$
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789.0
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$
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906.7
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$
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117.7
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Deferred Income Tax
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109.9
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109.5
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(0.4
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)
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Liabilities
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Other Liabilities
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1,762.8
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1,884.8
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122.0
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Income Tax Payable
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24.0
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22.7
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(1.3
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)
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Stockholders' Equity
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Retained Earnings
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9,863.1
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9,859.7
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(3.4
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)
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Summary of Financial Statement Impacts of Accounting Updates adopted in 2018:
Effective January 1, 2018, we adopted an update under ASC 825 that changed the accounting and disclosure requirements for certain financial instruments. These changes included a requirement to measure equity investments, other than those that resulted in consolidation or are accounted for under the equity method, at fair value through net income unless the investment qualifies for certain practicability exceptions. The guidance was applied using a modified retrospective approach through a cumulative-effect reduction to accumulated other comprehensive income of
$17.5 million
with a corresponding increase to retained earnings of
$14.5 million
, a decrease to other long-term investments of
$3.8 million
, and a decrease to deferred income tax liability of
$0.8 million
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 2 - Accounting Developments - Continued
Accounting Updates Outstanding:
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ASC
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Description
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Date of Adoption
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Effect on Financial Statements
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ASC 326 "Financial Instruments - Credit Losses"
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This update amends the guidance on the impairment of financial instruments. The update adds an impairment model known as the current expected credit loss model that is based on expected losses rather than incurred losses and will generally result in earlier recognition of allowances for losses. The current expected credit loss model applies to financial instruments such as mortgage loans, fixed maturity securities classified as held-to-maturity, and certain receivables. The update also modifies the other-than-temporary impairment model used for available-for-sale fixed maturity securities such that credit losses are recognized as an allowance rather than as a reduction in the amortized cost of the security. The reversal of previously recognized credit losses on available-for-sale fixed maturity securities is allowed under specified circumstances. Additional disclosures will also be required, including information used to develop the allowance for losses. The guidance is to be applied to most instruments in scope using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. For available-for-sale fixed maturity securities, the update is applied prospectively. Other-than-temporary impairment losses recognized on available-for-sale fixed maturity securities prior to adoption of the update cannot be reversed. Early adoption is permitted.
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January 1, 2020
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We have determined that this guidance is primarily applicable to our mortgage loan investments and reinsurance recoverables. We are currently developing and implementing systems to support the expected credit loss projections for these asset types. We continue to evaluate the expected impact on our financial position, results of operations, and disclosures.
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ASC 350 "Intangibles - Goodwill and Other"
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This update eliminates the requirement to calculate the implied fair value of goodwill (the second step in the current two-step test) to measure a goodwill impairment charge. Instead, entities should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the excess of the carrying amount over the fair value, with the loss not to exceed the total amount of goodwill allocated to that reporting unit. The guidance is to be applied prospectively, with early adoption permitted for goodwill impairment tests performed on testing dates after January 1, 2017.
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January 1, 2020
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The adoption of this update will not have a material effect on our financial position or results of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 2 - Accounting Developments - Continued
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ASC
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Description
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Date of Adoption
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Effect on Financial Statements
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ASC 820 "Fair Value Measurement"
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This update amended the fair value measurement guidance by removing or clarifying certain existing disclosure requirements, while also adding new disclosure requirements. Specifically, this update removed certain disclosures related to Level 1 and Level 2 transfers and also removed the discussion regarding valuation processes of Level 3 fair value measurements. The update modifies guidance related to investments in certain entities that calculate net asset value to explicitly require disclosure regarding timing of liquidation of the investee's assets and timing of redemption restrictions. The update adds disclosures around the changes in unrealized gains and losses in other comprehensive income for recurring Level 3 investments held at the end of the reporting period and adds disclosures regarding certain unobservable inputs on Level 3 fair value measurements. The guidance was applied retrospectively or prospectively depending on the specific requirement of the update. Entities are permitted to early adopt any removed or modified disclosures and may delay adoption of the additional disclosures until their effective date.
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December 31, 2018 for the removal and modification of certain disclosures and January 1, 2020 for the addition of certain disclosures.
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We elected to early adopt the removal and modification of disclosures, as permitted by the update. We have elected to delay the adoption of the additional disclosures until the effective date. The adoption of this update will modify our disclosures but will not have an impact on our financial position or results of operations.
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ASC 715 "Compensation - Retirement Benefits"
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This update amends the defined benefit pension and other postretirement benefit guidance by removing or clarifying certain existing disclosure requirements, while also adding new disclosure requirements. Specifically, this update removes the requirement to disclose the effects of a one-percentage point change in the assumed healthcare cost trend and the requirement to disclose amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost of the next year. This update adds a requirement to describe the reasons for significant gains and losses related to changes in the benefit obligation for the period. The update also clarifies that the projected benefit obligation (PBO) and accumulated benefit obligation (ABO) and fair value of plan assets are to be disclosed for plans with PBOs or ABOs in excess of plan assets. The guidance is to be applied retrospectively and early adoption is permitted.
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December 31, 2020
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We have not yet determined the expected impact on our disclosures.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 2 - Accounting Developments - Continued
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ASC
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Description
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Date of Adoption
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Effect on Financial Statements
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ASC 944 "Financial Services - Insurance"
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This update significantly amends the accounting and disclosure requirements for long-duration insurance contracts. These changes include a requirement to review, and if necessary, update cash flow assumptions used to measure the liability for future policy benefits for traditional and limited-payment contracts at least annually, with changes recognized in earnings. In addition, an entity will be required to update the discount rate assumption at each reporting date using a yield that is reflective of an upper-medium grade fixed-income instrument, with changes recognized in other comprehensive income. These changes result in the elimination of the provision for risk of adverse deviation and premium deficiency (or loss recognition) testing. The update also requires that an entity measure all market risk benefits associated with deposit contracts at fair value, with changes recognized in earnings except for the portion attributable to a change in the instrument-specific credit risk, which is to be recognized in other comprehensive income. This update also simplifies the amortization of deferred acquisition costs by requiring amortization on a constant level basis over the expected term of the related contracts. Deferred acquisition costs are required to be written off for unexpected contract terminations but are no longer subject to an impairment test. Significant additional disclosures will also be required, which include disaggregated rollforwards of certain liability balances and the disclosure of qualitative and quantitative information about expected cash flows, estimates, and assumptions. The application of this guidance will vary based upon the specific requirements of the update but will generally result in either a modified retrospective or full retrospective approach with changes applied as of the beginning of the earliest period presented. Early adoption is permitted.
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January 1, 2021
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We are currently evaluating the impact of the update and expect that the adoption may have a material impact on our financial position and results of operations. The update will also significantly expand our disclosures.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments
Fair Value Measurements for Financial Instruments Carried at Fair Value
We report fixed maturity securities, which are classified as available-for-sale securities, derivative financial instruments, and unrestricted equity securities at fair value in our consolidated balance sheets. We report our investments in private equity partnerships at our share of the partnerships' net asset value per share or its equivalent (NAV) as a practical expedient for fair value.
The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and less judgment utilized in measuring fair value. An active market for a financial instrument is a market in which transactions for an asset or a similar asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and should be used to measure fair value whenever available. Conversely, financial instruments rarely traded or not quoted have less observability and are measured at fair value using valuation techniques that require more judgment. Pricing observability is generally impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction, and overall market conditions.
We classify financial instruments in accordance with a fair value hierarchy consisting of three levels based on the observability of valuation inputs:
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•
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Level 1 - the highest category of the fair value hierarchy classification wherein inputs are unadjusted and represent quoted prices in active markets for identical assets or liabilities at the measurement date.
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•
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Level 2 - valued using inputs (other than prices included in Level 1) that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument's anticipated life.
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•
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Level 3 - the lowest category of the fair value hierarchy and reflects the judgment of management regarding what market participants would use in pricing assets or liabilities at the measurement date. Financial assets and liabilities categorized as Level 3 are generally those that are valued using unobservable inputs to extrapolate an estimated fair value.
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Valuation Methodologies of Financial Instruments Measured at Fair Value
Valuation techniques used for assets and liabilities accounted for at fair value are generally categorized into three types. The market approach uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities. The income approach converts future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount. The cost approach is based upon the amount that currently would be required to replace the service capacity of an asset, or the current replacement cost.
We use valuation techniques that are appropriate in the circumstances and for which sufficient data are available that can be obtained without undue cost and effort. In some cases, a single valuation technique will be appropriate (for example, when valuing an asset or liability using quoted prices in an active market for identical assets or liabilities). In other cases, multiple valuation techniques will be appropriate. If we use multiple valuation techniques to measure fair value, we evaluate and weigh the results, as appropriate, considering the reasonableness of the range indicated by those results. A fair value measurement is the point within that range that is most representative of fair value in the circumstances.
The selection of the valuation method(s) to apply considers the definition of an exit price and depends on the nature of the asset or liability being valued. For assets and liabilities accounted for at fair value, we generally use valuation techniques consistent with the market approach, and to a lesser extent, the income approach. We believe the market approach provides more observable data than the income approach, considering the type of investments we hold. Our fair value measurements could differ significantly based on the valuation technique and available inputs. When using a pricing service, we obtain the vendor's pricing documentation to ensure we understand their methodologies. We periodically review and approve the selection of our
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued
pricing vendors to ensure we are in agreement with their current methodologies. When markets are less active, brokers may rely more on models with inputs based on the information available only to the broker. Our internal investment management professionals, which include portfolio managers and analysts, monitor securities priced by brokers and evaluate their prices for reasonableness based on benchmarking to available primary and secondary market information. In weighing a broker quote as an input to fair value, we place less reliance on quotes that do not reflect the result of market transactions. We also consider the nature of the quote, particularly whether the quote is a binding offer. If prices in an inactive market do not reflect current prices for the same or similar assets, adjustments may be necessary to arrive at fair value. When relevant market data is unavailable, which may be the case during periods of market uncertainty, the income approach can, in suitable circumstances, provide a more appropriate fair value. During
2019
, we have applied valuation approaches and techniques on a consistent basis to similar assets and liabilities and consistent with those approaches and techniques used at year end
2018
.
Fixed Maturity and Equity Securities
We use observable and unobservable inputs in measuring the fair value of our fixed maturity and equity securities. For securities categorized as Level 1, fair values equal active Trade Reporting and Compliance Engine (TRACE) pricing or unadjusted broker market maker prices. For securities categorized as Level 2 or Level 3, inputs that may be used in valuing each class of securities at any given time period are disclosed below. Actual inputs used to determine fair values will vary for each reporting period depending on the availability of inputs which may, at times, be affected by the lack of market liquidity.
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Level 2
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Level 3
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Instrument
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Observable Inputs
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Unobservable Inputs
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United States Government and Government Agencies and Authorities
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Valuation Method
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Principally the market approach
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Not applicable
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Valuation Techniques / Inputs
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Prices obtained from external pricing services
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States, Municipalities, and Political Subdivisions
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Valuation Method
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Principally the market approach
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Principally the market approach
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Valuation Techniques / Inputs
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Prices obtained from external pricing services
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Analysis of similar bonds, adjusted for comparability
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Relevant reports issued by analysts and rating agencies
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Non-binding broker quotes
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Audited financial statements
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Security and issuer level spreads
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Foreign Governments
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Valuation Method
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Principally the market approach
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Principally the market approach
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Valuation Techniques / Inputs
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Prices obtained from external pricing services
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Analysis of similar bonds, adjusted for comparability
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Non-binding broker quotes
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Non-binding broker quotes
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Call provisions
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Security and issuer level spreads
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued
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Level 2
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Level 3
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Instrument
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Observable Inputs
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Unobservable Inputs
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Public Utilities
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Valuation Method
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Principally the market and income approaches
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Principally the market and income approaches
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Valuation Techniques / Inputs
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TRACE pricing
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Change in benchmark reference
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Prices obtained from external pricing services
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Analysis of similar bonds, adjusted for comparability
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Non-binding broker quotes
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Discount for size - illiquidity
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Benchmark yields
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Non-binding broker quotes
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Transactional data for new issuances and secondary trades
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Lack of marketability
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Security cash flows and structures
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Security and issuer level spreads
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Recent issuance / supply
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Volatility of credit
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Matrix pricing
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Matrix pricing
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Security and issuer level spreads
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Security creditor ratings/maturity/capital structure/optionality
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Public covenants
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Comparative bond analysis
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Relevant reports issued by analysts and rating agencies
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Audited financial statements
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Mortgage/Asset-Backed Securities
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Valuation Method
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Principally the market and income approaches
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Principally the market approach
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Valuation Techniques / Inputs
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Prices obtained from external pricing services
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Analysis of similar bonds, adjusted for comparability
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Non-binding broker quotes
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Non-binding broker quotes
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Security cash flows and structures
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Security and issuer level spreads
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Underlying collateral
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Prepayment speeds/loan performance/delinquencies
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Relevant reports issued by analysts and rating agencies
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Audited financial statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued
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Level 2
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Level 3
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Instrument
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Observable Inputs
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Unobservable Inputs
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All Other Corporate Bonds
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Valuation Method
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Principally the market and income approaches
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Principally the market and income approaches
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Valuation Techniques / Inputs
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TRACE pricing
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|
Change in benchmark reference
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Prices obtained from external pricing services
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|
Analysis of similar bonds, adjusted for comparability
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Non-binding broker quotes
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Discount for size - illiquidity
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Benchmark yields
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Non-binding broker quotes
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Transactional data for new issuances and secondary trades
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Lack of marketability
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Security cash flows and structures
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Security and issuer level spreads
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Recent issuance / supply
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Volatility of credit
|
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Matrix pricing
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Matrix pricing
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Security and issuer level spreads
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Security creditor ratings/maturity/capital structure/optionality
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Public covenants
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Comparative bond analysis
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Relevant reports issued by analysts and rating agencies
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Audited financial statements
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Redeemable Preferred Stocks
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Valuation Method
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Principally the market approach
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Principally the market approach
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Valuation Techniques / Inputs
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Non-binding broker quotes
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Non-binding broker quotes
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Benchmark yields
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Comparative bond analysis
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Call provisions
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Relevant reports issued by analysts and rating agencies
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Audited financial statements
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Equity Securities
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Valuation Method
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Principally the market approach
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Principally the market and income approaches
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Valuation Techniques / Inputs
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|
Prices obtained from external pricing services
|
|
Financial statement analysis
|
|
|
|
Non-binding broker quotes
|
|
Non-binding broker quotes
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
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.
Certain of our investments do not have readily determinable market prices and/or observable inputs or may at times be affected by the lack of market liquidity. For these securities, we use internally prepared valuations combining matrix pricing with vendor purchased software programs, including valuations based on estimates of future profitability, to estimate the fair value. Additionally, we may obtain prices from independent third-party brokers to aid in establishing valuations for certain of these securities. Key assumptions used by us to determine fair value for these securities include risk free interest rates, risk premiums, performance of underlying collateral (if any), and other factors involving significant assumptions which may or may not reflect those of an active market.
The parameters and inputs used to validate a price on a security may be adjusted for assumptions about risk and current market conditions on a quarter to quarter basis, as certain features may be more significant drivers of valuation at the time of pricing. Changes to inputs in valuations are not changes to valuation methodologies; rather, the inputs are modified to reflect direct or indirect impacts on asset classes from changes in market conditions.
At
March 31, 2019
,
22.6
percent of our fixed maturity securities were valued using active trades from TRACE pricing or broker market maker prices for which there was current market activity in that specific security (comparable to receiving one binding quote). The prices obtained were not adjusted, and the assets were classified as Level 1.
The remaining
77.4
percent of our fixed maturity securities were valued based on non-binding quotes or other observable and unobservable inputs, as discussed below:
|
|
•
|
64.2
percent of our fixed maturity securities were valued based on prices from pricing services that generally use observable inputs such as prices for securities or comparable securities in active markets in their valuation techniques. These assets were classified as Level 2.
|
|
|
•
|
3.4
percent of our fixed maturity securities were valued based on one or more non-binding broker quotes, if validated by observable market data, or on TRACE prices for identical or similar assets absent current market activity. When only one price is available, it is used if observable inputs and analysis confirms that it is appropriate. These assets, for which we were able to validate the price using other observable market data, were classified as Level 2.
|
|
|
•
|
9.8
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.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued
Derivatives
Fair values for derivatives other than embedded derivatives in modified coinsurance arrangements are based on market quotes or pricing models and represent the net amount of cash we would have paid or received if the contracts had been settled or closed as of the last day of the period. We analyze credit default swap spreads relative to the average credit spread embedded within the LIBOR-setting syndicate in determining the effect of credit risk on our derivatives' fair values. If net counterparty credit risk for a derivative asset is determined to be material and is not adequately reflected in the LIBOR-based fair value obtained from our pricing sources, we adjust the valuations obtained from our pricing sources. For purposes of valuing net counterparty risk, we measure the fair value of a group of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position or transfer a net short position for a particular risk exposure in an orderly transaction between market participants at the measurement date under current market conditions. In regard to our own credit risk component, we adjust the valuation of derivative liabilities wherein the counterparty is exposed to our credit risk when the LIBOR-based valuation of our derivatives obtained from pricing sources does not effectively include an adequate credit component for our own credit risk.
Fair values for our embedded derivative in a modified coinsurance arrangement are estimated using internal pricing models and represent the hypothetical value of the duration mismatch of assets and liabilities, interest rate risk, and third party credit risk embedded in the modified coinsurance arrangement.
We consider transactions in inactive markets to be less representative of fair value. We use all available observable inputs when measuring fair value, but when significant unobservable inputs are used, we classify these assets or liabilities as Level 3.
Private Equity Partnerships
Our private equity partnerships represent funds that are primarily invested in private credit, private equity, and real assets, as described below. Distributions received from the funds arise from income generated by the underlying investments as well as the liquidation of the underlying investments. There is generally not a public market for these investments.
The following table presents additional information about our private equity partnerships, including commitments for additional investments which may or may not be funded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
Investment Category
|
|
Fair Value
|
|
Redemption Term / Redemption Notice
|
|
Unfunded Commitments
|
|
|
(in millions of dollars)
|
|
|
|
(in millions of dollars)
|
Private Credit
|
(a)
|
$
|
170.5
|
|
|
Not redeemable
|
|
$
|
93.8
|
|
|
|
26.5
|
|
|
Initial 2 year lock on each new investment / Quarterly after 2 year lock with 90 days notice
|
|
10.3
|
|
Total Private Credit
|
|
197.0
|
|
|
|
|
104.1
|
|
|
|
|
|
|
|
|
Private Equity
|
(b)
|
132.4
|
|
|
Not redeemable
|
|
161.5
|
|
|
|
|
|
|
|
|
Real Assets
|
(c)
|
135.0
|
|
|
Not redeemable
|
|
99.4
|
|
|
|
30.3
|
|
|
Quarterly / 90 days notice
|
|
—
|
|
Total Real Assets
|
|
165.3
|
|
|
|
|
99.4
|
|
|
|
|
|
|
|
|
Total Partnerships
|
|
$
|
494.7
|
|
|
|
|
$
|
365.0
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
Investment Category
|
|
Fair Value
|
|
Redemption Term / Redemption Notice
|
|
Unfunded Commitments
|
|
|
(in millions of dollars)
|
|
|
|
(in millions of dollars)
|
Private Credit
|
(a)
|
$
|
168.6
|
|
|
Not redeemable
|
|
$
|
99.5
|
|
|
|
25.7
|
|
|
Initial 2 year lock on each new investment / Quarterly after 2 year lock with 90 days notice
|
|
10.3
|
|
Total Private Credit
|
|
194.3
|
|
|
|
|
109.8
|
|
|
|
|
|
|
|
|
Private Equity
|
(b)
|
128.3
|
|
|
Not redeemable
|
|
169.5
|
|
|
|
|
|
|
|
|
Real Assets
|
(c)
|
131.0
|
|
|
Not redeemable
|
|
106.0
|
|
|
|
30.2
|
|
|
Quarterly / 90 days notice
|
|
—
|
|
Total Real Assets
|
|
161.2
|
|
|
|
|
106.0
|
|
|
|
|
|
|
|
|
Total Partnerships
|
|
$
|
483.8
|
|
|
|
|
$
|
385.3
|
|
|
|
(a)
|
Private Credit
- The limited partnerships described in this category employ various investment strategies, generally providing direct lending or other forms of debt financing including first-lien, second-lien, mezzanine, and subordinated loans. The limited partnerships have credit exposure to corporates, physical assets, and/or financial assets within variety of industries (including manufacturing, healthcare, energy, business services, technology, materials, and retail) in North America and, to a lesser extent, outside of North America. Unless specifically disclosed in the table above, these limited partnerships do not allow for redemptions. As of
March 31, 2019
, the estimated remaining life of the investments that do not allow for redemptions is approximately 44 percent in the next 3 years, 20 percent during the period from 3 to 5 years, 33 percent during the period from 5 to 10 years, and 3 percent during the period from 10 to 15 years.
|
|
|
(b)
|
Private Equity
- The limited partnerships described in this category employ various strategies generally investing in controlling or minority control equity positions directly in companies and/or assets across various industries (including manufacturing, healthcare, energy, business services, technology, materials, and retail), primarily in private markets within North America and, to a lesser extent, outside of North America. Unless specifically disclosed in the table above, these limited partnerships do not allow for redemptions. As of
March 31, 2019
, the estimated remaining life of the investments that do not allow for redemptions is approximately 46 percent in the next 3 years, 52 percent during the period from 5 to 10 years, and 2 percent during the period from 10 to 15 years.
|
|
|
(c)
|
Real Assets
- The limited partnerships described in this category employ various strategies, which include investing in the equity and/or debt financing of physical assets, including infrastructure (energy, power, water/wastewater, communications), transportation (including airports, ports, toll roads, aircraft, railcars) and real estate in North America, Europe, South America, and Asia. Unless specifically disclosed in the table above, these limited partnerships do not allow for redemption. As of
March 31, 2019
, the estimated remaining life of the investments that do not allow for redemptions is approximately 2 percent in the next 3 years, 18 percent during the period from 3 to 5 years, 75 percent during the period from 5 to 10 years, and 5 percent during the period from 10 to 15 years.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued
The following tables present information about assets and liabilities measured at fair value on a recurring basis by fair value level, based on the observability of the inputs used:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
NAV
|
|
Total
|
|
(in millions of dollars)
|
Assets
|
|
|
|
|
|
|
|
|
|
Fixed Maturity Securities
|
|
|
|
|
|
|
|
|
|
United States Government and Government Agencies and Authorities
|
$
|
466.9
|
|
|
$
|
1,378.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,845.8
|
|
States, Municipalities, and Political Subdivisions
|
—
|
|
|
2,540.4
|
|
|
—
|
|
|
—
|
|
|
2,540.4
|
|
Foreign Governments
|
—
|
|
|
976.1
|
|
|
31.6
|
|
|
—
|
|
|
1,007.7
|
|
Public Utilities
|
731.2
|
|
|
6,499.3
|
|
|
224.0
|
|
|
—
|
|
|
7,454.5
|
|
Mortgage/Asset-Backed Securities
|
—
|
|
|
1,556.1
|
|
|
—
|
|
|
—
|
|
|
1,556.1
|
|
All Other Corporate Bonds
|
8,942.5
|
|
|
20,899.4
|
|
|
496.0
|
|
|
—
|
|
|
30,337.9
|
|
Redeemable Preferred Stocks
|
—
|
|
|
19.2
|
|
|
21.0
|
|
|
—
|
|
|
40.2
|
|
Total Fixed Maturity Securities
|
10,140.6
|
|
|
33,869.4
|
|
|
772.6
|
|
|
—
|
|
|
44,782.6
|
|
|
|
|
|
|
|
|
|
|
|
Other Long-term Investments
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts
|
—
|
|
|
24.5
|
|
|
—
|
|
|
—
|
|
|
24.5
|
|
Credit Default Swaps
|
—
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
Equity Securities
|
27.5
|
|
|
0.2
|
|
|
4.6
|
|
|
—
|
|
|
32.3
|
|
Private Equity Partnerships
|
—
|
|
|
—
|
|
|
—
|
|
|
494.7
|
|
|
494.7
|
|
Total Other Long-term Investments
|
27.5
|
|
|
24.8
|
|
|
4.6
|
|
|
494.7
|
|
|
551.6
|
|
Total Financial Instrument Assets Carried at Fair Value
|
$
|
10,168.1
|
|
|
$
|
33,894.2
|
|
|
$
|
777.2
|
|
|
$
|
494.7
|
|
|
$
|
45,334.2
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps and Forwards
|
$
|
—
|
|
|
$
|
3.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3.8
|
|
Foreign Exchange Contracts
|
—
|
|
|
31.9
|
|
|
—
|
|
|
—
|
|
|
31.9
|
|
Embedded Derivative in Modified Coinsurance Arrangement
|
—
|
|
|
—
|
|
|
25.6
|
|
|
—
|
|
|
25.6
|
|
Total Derivatives
|
—
|
|
|
35.7
|
|
|
25.6
|
|
|
—
|
|
|
61.3
|
|
Total Financial Instrument Liabilities Carried at Fair Value
|
$
|
—
|
|
|
$
|
35.7
|
|
|
$
|
25.6
|
|
|
$
|
—
|
|
|
$
|
61.3
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
NAV
|
|
Total
|
|
(in millions of dollars)
|
Assets
|
|
|
|
|
|
|
|
|
|
Fixed Maturity Securities
|
|
|
|
|
|
|
|
|
|
United States Government and Government Agencies and Authorities
|
$
|
513.4
|
|
|
$
|
1,301.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,814.4
|
|
States, Municipalities, and Political Subdivisions
|
—
|
|
|
2,424.2
|
|
|
—
|
|
|
—
|
|
|
2,424.2
|
|
Foreign Governments
|
—
|
|
|
952.3
|
|
|
31.4
|
|
|
—
|
|
|
983.7
|
|
Public Utilities
|
286.4
|
|
|
7,041.7
|
|
|
84.7
|
|
|
—
|
|
|
7,412.8
|
|
Mortgage/Asset-Backed Securities
|
—
|
|
|
1,582.7
|
|
|
—
|
|
|
—
|
|
|
1,582.7
|
|
All Other Corporate Bonds
|
4,232.1
|
|
|
23,026.1
|
|
|
1,495.8
|
|
|
—
|
|
|
28,754.0
|
|
Redeemable Preferred Stocks
|
—
|
|
|
18.8
|
|
|
21.1
|
|
|
—
|
|
|
39.9
|
|
Total Fixed Maturity Securities
|
5,031.9
|
|
|
36,346.8
|
|
|
1,633.0
|
|
|
—
|
|
|
43,011.7
|
|
|
|
|
|
|
|
|
|
|
|
Other Long-term Investments
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts
|
—
|
|
|
30.4
|
|
|
—
|
|
|
—
|
|
|
30.4
|
|
Credit Default Swaps
|
—
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
Equity Securities
|
—
|
|
|
24.6
|
|
|
4.6
|
|
|
—
|
|
|
29.2
|
|
Private Equity Partnerships
|
—
|
|
|
—
|
|
|
—
|
|
|
483.8
|
|
|
483.8
|
|
Total Other Long-term Investments
|
—
|
|
|
55.5
|
|
|
4.6
|
|
|
483.8
|
|
|
543.9
|
|
Total Financial Instrument Assets Carried at Fair Value
|
$
|
5,031.9
|
|
|
$
|
36,402.3
|
|
|
$
|
1,637.6
|
|
|
$
|
483.8
|
|
|
$
|
43,555.6
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
$
|
—
|
|
|
$
|
5.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5.2
|
|
Foreign Exchange Contracts
|
—
|
|
|
32.8
|
|
|
—
|
|
|
—
|
|
|
32.8
|
|
Embedded Derivative in Modified Coinsurance Arrangement
|
—
|
|
|
—
|
|
|
31.1
|
|
|
—
|
|
|
31.1
|
|
Total Derivatives
|
—
|
|
|
38.0
|
|
|
31.1
|
|
|
—
|
|
|
69.1
|
|
Total Financial Instrument Liabilities Carried at Fair Value
|
$
|
—
|
|
|
$
|
38.0
|
|
|
$
|
31.1
|
|
|
$
|
—
|
|
|
$
|
69.1
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
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, 2019
|
|
|
|
Total Realized and
Unrealized Investment
Gains (Losses) Included in
|
|
|
|
|
|
Level 3 Transfers
|
|
|
|
Fair Value Beginning
of Period
|
|
Earnings
|
|
Other
Comprehensive
Income or Loss
|
|
Purchases
|
|
Sales
|
|
Into
|
|
Out of
|
|
Fair Value End of
Period
|
|
(in millions of dollars)
|
Fixed Maturity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Governments
|
$
|
31.4
|
|
|
$
|
—
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
31.6
|
|
Public Utilities
|
84.7
|
|
|
—
|
|
|
7.9
|
|
|
—
|
|
|
(0.4
|
)
|
|
208.6
|
|
|
(76.8
|
)
|
|
224.0
|
|
All Other Corporate Bonds
|
1,495.8
|
|
|
—
|
|
|
13.3
|
|
|
—
|
|
|
(29.4
|
)
|
|
36.1
|
|
|
(1,019.8
|
)
|
|
496.0
|
|
Redeemable Preferred Stocks
|
21.1
|
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21.0
|
|
Total Fixed Maturity Securities
|
1,633.0
|
|
|
—
|
|
|
21.3
|
|
|
—
|
|
|
(29.8
|
)
|
|
244.7
|
|
|
(1,096.6
|
)
|
|
772.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
4.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4.6
|
|
Embedded Derivative in Modified Coinsurance Arrangement
|
(31.1
|
)
|
|
5.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(25.6
|
)
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
|
|
Total Realized and
Unrealized Investment
Gains (Losses) Included in
|
|
|
|
|
|
Level 3 Transfers
|
|
|
|
Fair Value Beginning
of Period
|
|
Earnings
|
|
Other
Comprehensive
Income or Loss
|
|
Purchases
|
|
Sales
|
|
Into
|
|
Out of
|
|
Fair Value End of
Period
|
|
(in millions of dollars)
|
Fixed Maturity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, Municipalities, and Political Subdivisions
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.8
|
)
|
|
$
|
—
|
|
|
$
|
(0.1
|
)
|
|
$
|
36.6
|
|
|
$
|
—
|
|
|
$
|
35.7
|
|
Foreign Governments
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
—
|
|
|
32.7
|
|
|
—
|
|
|
32.3
|
|
Public Utilities
|
207.7
|
|
|
—
|
|
|
(6.7
|
)
|
|
—
|
|
|
(1.1
|
)
|
|
200.9
|
|
|
(116.6
|
)
|
|
284.2
|
|
Mortgage/Asset-Backed Securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
0.5
|
|
All Other Corporate Bonds
|
1,150.1
|
|
|
—
|
|
|
(22.1
|
)
|
|
—
|
|
|
(11.7
|
)
|
|
466.0
|
|
|
(595.1
|
)
|
|
987.2
|
|
Redeemable Preferred Stocks
|
22.8
|
|
|
—
|
|
|
(0.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
22.2
|
|
Total Fixed Maturity Securities
|
1,380.6
|
|
|
—
|
|
|
(30.6
|
)
|
|
—
|
|
|
(12.9
|
)
|
|
736.7
|
|
|
(711.7
|
)
|
|
1,362.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
1.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.1
|
|
Embedded Derivative in Modified Coinsurance Arrangement
|
(15.9
|
)
|
|
(1.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(17.6
|
)
|
Realized and unrealized investment gains and losses presented in the preceding tables represent gains and losses only for the time during which the applicable financial instruments were classified as Level 3. The transfers between levels resulted primarily from a change in observability of three inputs used to determine fair values of the securities transferred: (1) transactional data for new issuance and secondary trades, (2) broker/dealer quotes and pricing, primarily related to changes in the level of activity in the market and whether the market was considered orderly, and (3) comparable bond metrics from which to perform an analysis. For fair value measurements of financial instruments that were transferred either into or out of Level 3, we reflect the transfers using the fair value at the beginning of the period. We believe this allows for greater transparency, as all changes in fair value that arise during the reporting period of the transfer are disclosed as a component of our Level 3 reconciliation. Gains (losses) which are included in earnings and are attributable to the change in fair value of assets or liabilities valued using significant unobservable inputs and still held at period end were
$5.5 million
and
$(1.7) million
for the three months ended
March 31, 2019
and
2018
, 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued
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, 2019
|
|
Fair Value
|
|
Valuation Method
|
|
Unobservable Input
|
|
Range/Weighted Average
|
|
(in millions of dollars)
|
Fixed Maturity Securities
|
|
|
|
|
|
|
|
All Other Corporate Bonds - Private
|
$
|
208.2
|
|
|
Market Approach
|
|
Lack of Marketability
Volatility of Credit
Market Convention
|
(a)
(b)
(c)
|
0.25% - 0.25% / 0.25%
0.20% - 12.54% / 1.00%
Priced at Par
|
Equity Securities - Private
|
4.6
|
|
|
Market Approach
|
|
Market Convention
|
(c)
|
Priced at Cost or Owner's Equity
|
Embedded Derivative in Modified Coinsurance Arrangement
|
(25.6
|
)
|
|
Discounted Cash Flows
|
|
Projected Liability Cash Flows
|
(d)
|
Actuarial Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Fair Value
|
|
Valuation Method
|
|
Unobservable Input
|
|
Range/Weighted Average
|
|
(in millions of dollars)
|
Fixed Maturity Securities
|
|
|
|
|
|
|
|
All Other Corporate Bonds - Private
|
$
|
148.5
|
|
|
Market Approach
|
|
Lack of Marketability
Volatility of Credit
Market Convention
|
(a)
(b)
(c)
|
0.25% - 0.25% / 0.25%
0.25% - 10.99% / 1.00%
Priced at Par
|
Equity Securities - Private
|
4.6
|
|
|
Market Approach
|
|
Market Convention
|
(c)
|
Priced at Cost or Owner's Equity
|
Embedded Derivative in Modified Coinsurance Arrangement
|
(31.1
|
)
|
|
Discounted Cash Flows
|
|
Projected Liability Cash Flows
|
(d)
|
Actuarial Assumptions
|
|
|
(a)
|
Represents basis point adjustments to apply a discount due to the illiquidity of an investment
|
|
|
(b)
|
Represents basis point adjustments for credit-specific factors
|
|
|
(c)
|
Represents a decision to price based on par value, cost, or owner's equity when limited data is available
|
|
|
(d)
|
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued
Fair Value Measurements for Financial Instruments Not Carried at Fair Value
The methods and assumptions used to estimate fair values of financial instruments not carried at fair value are discussed as follows.
Mortgage Loans:
Fair values are estimated using discounted cash flow analyses and interest rates currently being offered for similar loans to borrowers with similar credit ratings and maturities. Loans with similar characteristics are aggregated for purposes of the calculations.
Policy Loans:
Fair values for policy loans, net of reinsurance ceded, are estimated using discounted cash flow analyses and interest rates currently being offered to policyholders with similar policies. Carrying amounts for ceded policy loans, which equal
$3,390.2 million
and
$3,449.3 million
as of
March 31, 2019
and
December 31, 2018
, respectively, approximate fair value and are reported on a gross basis in our consolidated balance sheets. A change in interest rates for ceded policy loans will not impact our financial position because the benefits and risks are fully ceded to reinsuring counterparties.
Miscellaneous Long-term Investments:
Carrying amounts for tax credit partnerships equal the unamortized balance of our contractual commitments and approximate fair value. Our shares of FHLB common stock are carried at cost, which approximates fair value.
Long-term Debt:
Fair values for long-term debt are obtained from independent pricing services or discounted cash flow analyses based on current incremental borrowing rates for similar types of borrowing arrangements.
FHLB Funding Agreements:
Funding agreements with the FHLB represent cash advances used for the purpose of investing in fixed maturity securities. Carrying amounts approximate fair value.
Unfunded Commitments to Investment Partnerships:
Unfunded equity commitments represent amounts that we have committed to fund certain investment partnerships. These commitments are legally binding, subject to the partnerships meeting specified conditions. Carrying amounts of these financial instruments approximate fair value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued
The following table presents the carrying amounts and estimated fair values of our financial instruments not measured at fair value and indicates the level in the fair value hierarchy of the estimated fair value measurement based on the observability of the inputs used:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Estimated Fair Value
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Carrying Value
|
|
(in millions of dollars)
|
Assets
|
|
|
|
|
|
|
|
|
|
Mortgage Loans
|
$
|
—
|
|
|
$
|
2,273.2
|
|
|
$
|
—
|
|
|
$
|
2,273.2
|
|
|
$
|
2,206.6
|
|
Policy Loans
|
—
|
|
|
—
|
|
|
3,780.5
|
|
|
3,780.5
|
|
|
3,673.3
|
|
Other Long-term Investments
|
|
|
|
|
|
|
|
|
|
Miscellaneous Long-term Investments
|
—
|
|
|
19.1
|
|
|
82.7
|
|
|
101.8
|
|
|
101.8
|
|
Total Financial Instrument Assets Not Carried at Fair Value
|
$
|
—
|
|
|
$
|
2,292.3
|
|
|
$
|
3,863.2
|
|
|
$
|
6,155.5
|
|
|
$
|
5,981.7
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Long-term Debt
|
$
|
2,847.6
|
|
|
$
|
317.1
|
|
|
$
|
—
|
|
|
$
|
3,164.7
|
|
|
$
|
2,958.7
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
|
Unfunded Commitments
|
—
|
|
|
2.3
|
|
|
—
|
|
|
2.3
|
|
|
2.3
|
|
Total Financial Instrument Liabilities Not Carried at Fair Value
|
$
|
2,847.6
|
|
|
$
|
319.4
|
|
|
$
|
—
|
|
|
$
|
3,167.0
|
|
|
$
|
2,961.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Estimated Fair Value
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Carrying Value
|
|
(in millions of dollars)
|
Assets
|
|
|
|
|
|
|
|
|
|
Mortgage Loans
|
$
|
—
|
|
|
$
|
2,317.4
|
|
|
$
|
—
|
|
|
$
|
2,317.4
|
|
|
$
|
2,295.0
|
|
Policy Loans
|
—
|
|
|
—
|
|
|
3,831.1
|
|
|
3,831.1
|
|
|
3,729.9
|
|
Other Long-term Investments
|
|
|
|
|
|
|
|
|
|
Miscellaneous Long-term Investments
|
—
|
|
|
24.1
|
|
|
91.5
|
|
|
115.6
|
|
|
115.6
|
|
Total Financial Instrument Assets Not Carried at Fair Value
|
$
|
—
|
|
|
$
|
2,341.5
|
|
|
$
|
3,922.6
|
|
|
$
|
6,264.1
|
|
|
$
|
6,140.5
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Long-term Debt
|
$
|
1,429.8
|
|
|
$
|
1,639.4
|
|
|
$
|
—
|
|
|
$
|
3,069.2
|
|
|
$
|
2,971.3
|
|
Payables for Collateral on Investments
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank (FHLB) Funding Agreements
|
—
|
|
|
104.0
|
|
|
—
|
|
|
104.0
|
|
|
104.0
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
|
Unfunded Commitments
|
—
|
|
|
2.3
|
|
|
—
|
|
|
2.3
|
|
|
2.3
|
|
Total Financial Instrument Liabilities Not Carried at Fair Value
|
$
|
1,429.8
|
|
|
$
|
1,745.7
|
|
|
$
|
—
|
|
|
$
|
3,175.5
|
|
|
$
|
3,077.6
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued
The carrying values of financial instruments such as short-term investments, cash and bank deposits, accounts and premiums receivable, accrued investment income, securities lending agreements, and short-term debt approximate fair value due to the short-term nature of the instruments. As such, these financial instruments are not included in the above chart.
Fair values for insurance contracts other than investment contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in our overall management of interest rate risk, which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.
Note 4 - Investments
Fixed Maturity Securities
At
March 31, 2019
and
December 31, 2018
, 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, 2019
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gain
|
|
Gross
Unrealized
Loss
|
|
Fair
Value
|
|
(in millions of dollars)
|
United States Government and Government Agencies and Authorities
|
$
|
1,714.2
|
|
|
$
|
135.6
|
|
|
$
|
4.0
|
|
|
$
|
1,845.8
|
|
States, Municipalities, and Political Subdivisions
|
2,151.0
|
|
|
389.7
|
|
|
0.3
|
|
|
2,540.4
|
|
Foreign Governments
|
822.1
|
|
|
188.6
|
|
|
3.0
|
|
|
1,007.7
|
|
Public Utilities
|
6,451.6
|
|
|
1,027.4
|
|
|
24.5
|
|
|
7,454.5
|
|
Mortgage/Asset-Backed Securities
|
1,473.6
|
|
|
84.5
|
|
|
2.0
|
|
|
1,556.1
|
|
All Other Corporate Bonds
|
27,822.7
|
|
|
2,753.2
|
|
|
238.0
|
|
|
30,337.9
|
|
Redeemable Preferred Stocks
|
39.0
|
|
|
1.2
|
|
|
—
|
|
|
40.2
|
|
Total Fixed Maturity Securities
|
$
|
40,474.2
|
|
|
$
|
4,580.2
|
|
|
$
|
271.8
|
|
|
$
|
44,782.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gain
|
|
Gross
Unrealized
Loss
|
|
Fair
Value
|
|
(in millions of dollars)
|
United States Government and Government Agencies and Authorities
|
$
|
1,702.1
|
|
|
$
|
123.2
|
|
|
$
|
10.9
|
|
|
$
|
1,814.4
|
|
States, Municipalities, and Political Subdivisions
|
2,121.5
|
|
|
307.1
|
|
|
4.4
|
|
|
2,424.2
|
|
Foreign Governments
|
825.8
|
|
|
162.7
|
|
|
4.8
|
|
|
983.7
|
|
Public Utilities
|
6,626.2
|
|
|
850.0
|
|
|
63.4
|
|
|
7,412.8
|
|
Mortgage/Asset-Backed Securities
|
1,523.8
|
|
|
67.2
|
|
|
8.3
|
|
|
1,582.7
|
|
All Other Corporate Bonds
|
27,436.8
|
|
|
1,981.6
|
|
|
664.4
|
|
|
28,754.0
|
|
Redeemable Preferred Stocks
|
39.0
|
|
|
1.1
|
|
|
0.2
|
|
|
39.9
|
|
Total Fixed Maturity Securities
|
$
|
40,275.2
|
|
|
$
|
3,492.9
|
|
|
$
|
756.4
|
|
|
$
|
43,011.7
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 4 - Investments - Continued
The following charts indicate the length of time our fixed maturity securities have been in a gross unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
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
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
217.6
|
|
|
$
|
4.0
|
|
States, Municipalities, and Political Subdivisions
|
9.6
|
|
|
0.2
|
|
|
9.6
|
|
|
0.1
|
|
Foreign Governments
|
54.7
|
|
|
3.0
|
|
|
—
|
|
|
—
|
|
Public Utilities
|
101.0
|
|
|
1.9
|
|
|
400.1
|
|
|
22.6
|
|
Mortgage/Asset-Backed Securities
|
35.2
|
|
|
0.1
|
|
|
150.2
|
|
|
1.9
|
|
All Other Corporate Bonds
|
1,254.2
|
|
|
42.4
|
|
|
3,830.8
|
|
|
195.6
|
|
Total Fixed Maturity Securities
|
$
|
1,454.8
|
|
|
$
|
47.6
|
|
|
$
|
4,608.3
|
|
|
$
|
224.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
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
|
$
|
68.8
|
|
|
$
|
1.7
|
|
|
$
|
212.5
|
|
|
$
|
9.2
|
|
States, Municipalities, and Political Subdivisions
|
183.2
|
|
|
2.1
|
|
|
65.0
|
|
|
2.3
|
|
Foreign Governments
|
58.4
|
|
|
3.8
|
|
|
12.0
|
|
|
1.0
|
|
Public Utilities
|
740.1
|
|
|
31.3
|
|
|
325.7
|
|
|
32.1
|
|
Mortgage/Asset-Backed Securities
|
81.5
|
|
|
1.2
|
|
|
201.6
|
|
|
7.1
|
|
All Other Corporate Bonds
|
9,240.2
|
|
|
462.2
|
|
|
1,704.9
|
|
|
202.2
|
|
Redeemable Preferred Stocks
|
18.8
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
Total Fixed Maturity Securities
|
$
|
10,391.0
|
|
|
$
|
502.5
|
|
|
$
|
2,521.7
|
|
|
$
|
253.9
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 4 - Investments - Continued
The following is a distribution of the maturity dates for fixed maturity securities. The maturity dates have not been adjusted for possible calls or prepayments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Total
Amortized Cost
|
|
Unrealized Gain Position
|
|
Unrealized Loss Position
|
|
|
Gross Gain
|
|
Fair Value
|
|
Gross Loss
|
|
Fair Value
|
|
(in millions of dollars)
|
1 year or less
|
$
|
1,039.7
|
|
|
$
|
15.1
|
|
|
$
|
972.8
|
|
|
$
|
9.1
|
|
|
$
|
72.9
|
|
Over 1 year through 5 years
|
6,433.0
|
|
|
387.7
|
|
|
6,244.3
|
|
|
49.6
|
|
|
526.8
|
|
Over 5 years through 10 years
|
12,907.5
|
|
|
1,095.3
|
|
|
11,243.1
|
|
|
80.8
|
|
|
2,678.9
|
|
Over 10 years
|
18,620.4
|
|
|
2,997.6
|
|
|
18,888.6
|
|
|
130.3
|
|
|
2,599.1
|
|
|
39,000.6
|
|
|
4,495.7
|
|
|
37,348.8
|
|
|
269.8
|
|
|
5,877.7
|
|
Mortgage/Asset-Backed Securities
|
1,473.6
|
|
|
84.5
|
|
|
1,370.7
|
|
|
2.0
|
|
|
185.4
|
|
Total Fixed Maturity Securities
|
$
|
40,474.2
|
|
|
$
|
4,580.2
|
|
|
$
|
38,719.5
|
|
|
$
|
271.8
|
|
|
$
|
6,063.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Total
Amortized Cost
|
|
Unrealized Gain Position
|
|
Unrealized Loss Position
|
|
|
Gross Gain
|
|
Fair Value
|
|
Gross Loss
|
|
Fair Value
|
|
(in millions of dollars)
|
1 year or less
|
$
|
1,073.3
|
|
|
$
|
14.5
|
|
|
$
|
1,020.1
|
|
|
$
|
8.4
|
|
|
$
|
59.3
|
|
Over 1 year through 5 years
|
6,267.5
|
|
|
300.6
|
|
|
5,186.9
|
|
|
80.2
|
|
|
1,301.0
|
|
Over 5 years through 10 years
|
12,573.4
|
|
|
795.0
|
|
|
6,812.7
|
|
|
303.9
|
|
|
6,251.8
|
|
Over 10 years
|
18,837.2
|
|
|
2,315.6
|
|
|
15,779.7
|
|
|
355.6
|
|
|
5,017.5
|
|
|
38,751.4
|
|
|
3,425.7
|
|
|
28,799.4
|
|
|
748.1
|
|
|
12,629.6
|
|
Mortgage/Asset-Backed Securities
|
1,523.8
|
|
|
67.2
|
|
|
1,299.6
|
|
|
8.3
|
|
|
283.1
|
|
Total Fixed Maturity Securities
|
$
|
40,275.2
|
|
|
$
|
3,492.9
|
|
|
$
|
30,099.0
|
|
|
$
|
756.4
|
|
|
$
|
12,912.7
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 4 - Investments - Continued
The following chart depicts an analysis of our fixed maturity security portfolio between investment-grade and below-investment-grade categories as of
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized Loss
|
|
Fair Value
|
|
Gross Unrealized Gain
|
|
Amount
|
|
Percent of Total Gross Unrealized Loss
|
|
(in millions of dollars)
|
|
|
Investment-Grade
|
$
|
41,548.7
|
|
|
$
|
4,497.1
|
|
|
$
|
175.3
|
|
|
64.5
|
%
|
Below-Investment-Grade
|
3,233.9
|
|
|
83.1
|
|
|
96.5
|
|
|
35.5
|
|
Total Fixed Maturity Securities
|
$
|
44,782.6
|
|
|
$
|
4,580.2
|
|
|
$
|
271.8
|
|
|
100.0
|
%
|
The unrealized losses on investment-grade fixed maturity securities principally relate to changes in interest rates or changes in market or sector credit spreads which occurred subsequent to the acquisition of the securities. Below-investment-grade fixed maturity securities are generally more likely to develop credit concerns than investment-grade securities. At
March 31, 2019
, the unrealized losses in our below-investment-grade fixed maturity securities were generally due to credit spreads in certain industries or sectors and, to a lesser extent, credit concerns related to specific securities. For each specific security in an unrealized loss position, we believe that there are positive factors which mitigate credit concerns and that the securities for which we have not recorded an other-than-temporary impairment will recover in value.
As of
March 31, 2019
, we held
270
individual investment-grade fixed maturity securities and
74
individual below-investment-grade fixed maturity securities that were in an unrealized loss position, of which
178
investment-grade fixed maturity securities and
56
below-investment-grade fixed maturity securities had been in an unrealized loss position continuously for over one year.
In determining when a decline in fair value below amortized cost of a fixed maturity security is other than temporary, we evaluate the following factors:
|
|
•
|
Whether we expect to recover the entire amortized cost basis of the security
|
|
|
•
|
Whether we intend to sell the security or will be required to sell the security before the recovery of its amortized cost basis
|
|
|
•
|
Whether the security is current as to principal and interest payments
|
|
|
•
|
The significance of the decline in value
|
|
|
•
|
The time period during which there has been a significant decline in value
|
|
|
•
|
Current and future business prospects and trends of earnings
|
|
|
•
|
The valuation of the security's underlying collateral
|
|
|
•
|
Relevant industry conditions and trends relative to their historical cycles
|
|
|
•
|
Rating agency and governmental actions
|
|
|
•
|
Bid and offering prices and the level of trading activity
|
|
|
•
|
Adverse changes in estimated cash flows for securitized investments
|
|
|
•
|
Changes in fair value subsequent to the balance sheet date
|
|
|
•
|
Any other key measures for the related security
|
While determining other-than-temporary impairments is a judgmental area, we utilize a formal, well-defined, and disciplined process to monitor and evaluate our fixed income investment portfolio, supported by issuer specific research and documentation as of the end of each period. The process results in a thorough evaluation of problem investments and the recording of losses on a timely basis for investments determined to have an other-than-temporary impairment.
We held
no
fixed maturity securities as of
March 31, 2019
or
December 31, 2018
for which a portion of an other-than-temporary impairment was recognized in accumulated other comprehensive income.
At
March 31, 2019
, we had commitments of
$138.5 million
to fund private placement fixed maturity securities, the amount of which may or may not be funded.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 4 - Investments - Continued
Variable Interest Entities
We invest in variable interests issued by variable interest entities. These investments include tax credit partnerships, private equity partnerships, and special purpose entities. For those variable interests that are not consolidated in our financial statements, we are not the primary beneficiary because we have neither the power to direct the activities that are most significant to economic performance nor the responsibility to absorb a majority of the expected losses. The determination of whether we are the primary beneficiary is performed at the time of our initial investment and at the date of each subsequent reporting period.
As of
March 31, 2019
, the carrying amount of our variable interest entity investments that are not consolidated in our financial statements was
$577.3 million
, comprised of
$82.6 million
of tax credit partnerships and
$494.7 million
of private equity partnerships. At
December 31, 2018
, the carrying amount of our variable interest entity investments that are not consolidated in our financial statements was
$575.3 million
, comprised of
$91.5 million
of tax credit partnerships and
$483.8 million
of private equity partnerships. These variable interest entity investments are reported as other long-term investments in our consolidated balance sheets.
The Company invests in tax credit partnerships primarily for the receipt of income tax credits and tax benefits derived from passive losses on the investments. Amounts recognized in the consolidated statements of income are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
2019
|
|
2018
|
|
(in millions of dollars)
|
Income Tax Credits
|
$
|
9.4
|
|
|
$
|
10.4
|
|
Amortization, net of tax
|
(6.8
|
)
|
|
(7.0
|
)
|
Income Tax Benefit
|
$
|
2.6
|
|
|
$
|
3.4
|
|
Contractually, we are a limited partner in these tax credit partnerships, and our maximum exposure to loss is limited to the carrying value of our investment, which includes
$2.3 million
of unfunded unconditional commitments at
March 31, 2019
. See Note 3 for commitments to fund private equity partnerships.
We are the sole beneficiary of a special purpose entity which is consolidated in our financial statements. This entity is a securitized asset trust containing a highly rated bond for principal protection which we contributed into the trust at the time it was established. There are no restrictions on the asset held in this trust, and the trust is free to dispose of the asset at any time. The fair values of the bond were
$157.9 million
and
$156.7 million
as of
March 31, 2019
and
December 31, 2018
, respectively. The bond is reported as a component of fixed maturity securities in our consolidated balance sheets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 4 - Investments - Continued
Mortgage Loans
Our mortgage loan portfolio is well diversified by both geographic region and property type to reduce risk of concentration. All of our mortgage loans are collateralized by commercial real estate. When issuing a new loan, our general policy is not to exceed a loan-to-value ratio, or the ratio of the loan balance to the estimated fair value of the underlying collateral, of
75
percent. We update the loan-to-value ratios at least every
three
years for each loan, and properties undergo a general inspection at least every
two
years. Our general policy for newly issued loans is to have a debt service coverage ratio greater than
1.25
times on a normalized
25
year amortization period. We update our debt service coverage ratios annually. Mortgage loans by property type and geographic region are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
(in millions of dollars)
|
|
Carrying
|
|
Percent of
|
|
Carrying
|
|
Percent of
|
|
Amount
|
|
Total
|
|
Amount
|
|
Total
|
Property Type
|
|
|
|
|
|
|
|
Apartment
|
$
|
471.4
|
|
|
21.4
|
%
|
|
$
|
491.0
|
|
|
21.4
|
%
|
Industrial
|
588.0
|
|
|
26.6
|
|
|
635.6
|
|
|
27.7
|
|
Office
|
585.0
|
|
|
26.5
|
|
|
604.2
|
|
|
26.3
|
|
Retail
|
517.8
|
|
|
23.5
|
|
|
519.5
|
|
|
22.6
|
|
Other
|
44.4
|
|
|
2.0
|
|
|
44.7
|
|
|
2.0
|
|
Total
|
$
|
2,206.6
|
|
|
100.0
|
%
|
|
$
|
2,295.0
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Region
|
|
|
|
|
|
|
|
New England
|
$
|
45.0
|
|
|
2.0
|
%
|
|
$
|
45.9
|
|
|
2.0
|
%
|
Mid-Atlantic
|
159.4
|
|
|
7.2
|
|
|
160.6
|
|
|
7.0
|
|
East North Central
|
311.7
|
|
|
14.1
|
|
|
354.4
|
|
|
15.4
|
|
West North Central
|
188.7
|
|
|
8.6
|
|
|
190.3
|
|
|
8.3
|
|
South Atlantic
|
481.2
|
|
|
21.8
|
|
|
485.2
|
|
|
21.1
|
|
East South Central
|
100.5
|
|
|
4.6
|
|
|
105.5
|
|
|
4.6
|
|
West South Central
|
213.0
|
|
|
9.7
|
|
|
240.6
|
|
|
10.5
|
|
Mountain
|
254.1
|
|
|
11.5
|
|
|
242.7
|
|
|
10.6
|
|
Pacific
|
453.0
|
|
|
20.5
|
|
|
469.8
|
|
|
20.5
|
|
Total
|
$
|
2,206.6
|
|
|
100.0
|
%
|
|
$
|
2,295.0
|
|
|
100.0
|
%
|
We evaluate each of our mortgage loans individually for impairment and assign an internal credit quality rating based on a comprehensive rating system used to evaluate the credit risk of the loan. The factors we use to derive our internal credit ratings may include the following:
|
|
•
|
Debt service coverage ratio based on current operating income
|
|
|
•
|
Property location, including regional economics, trends and demographics
|
|
|
•
|
Age, condition, and construction quality of property
|
|
|
•
|
Current and historical occupancy of property
|
|
|
•
|
Lease terms relative to market
|
|
|
•
|
Tenant size and financial strength
|
|
|
•
|
Borrower's financial strength
|
|
|
•
|
Borrower's equity in transaction
|
|
|
•
|
Additional collateral, if any
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 4 - Investments - Continued
Although all available and applicable factors are considered in our analysis, loan-to-value and debt service coverage ratios are the most critical factors in determining whether we will initially issue the loan and also in assigning values and determining impairment. We assign an overall rating to each loan using an internal rating scale of Aa (highest quality) to B (lowest quality). We review and adjust, as needed, our internal credit quality ratings on an annual basis. This review process is performed more frequently for mortgage loans deemed to have a higher risk of delinquency.
Mortgage loans, sorted by the applicable credit quality indicators, are as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
(in millions of dollars)
|
Internal Rating
|
|
|
|
A
|
$
|
394.8
|
|
|
$
|
477.5
|
|
Baa
|
1,811.8
|
|
|
1,814.1
|
|
Ba
|
—
|
|
|
3.4
|
|
Total
|
$
|
2,206.6
|
|
|
$
|
2,295.0
|
|
|
|
|
|
|
|
|
|
|
Loan-to-Value Ratio
|
|
|
|
<= 65%
|
$
|
1,167.4
|
|
|
$
|
1,204.8
|
|
> 65% <= 75%
|
1,013.4
|
|
|
1,049.1
|
|
> 75% <= 85%
|
—
|
|
|
11.8
|
|
> 85%
|
25.8
|
|
|
29.3
|
|
Total
|
$
|
2,206.6
|
|
|
$
|
2,295.0
|
|
There were
no
troubled debt restructurings during the
three
months ended
March 31, 2019
or
2018
. At
March 31, 2019
, we held
no
mortgage loans that were greater than 90 days past due regarding principal and/or interest payments. At
December 31, 2018
, we held
one
mortgage loan that was greater than 90 days past due regarding principal and/or interest payments which was settled during the first quarter of 2019 resulting in an additional loss of $0.1 million.
There have been
no
changes to our accounting policies or methodology from the prior period regarding estimating the allowance for credit losses on our mortgage loans. The activity in the allowance for credit losses is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
2019
|
|
2018
|
|
(in millions of dollars)
|
Balance at Beginning of Year
|
$
|
0.2
|
|
|
$
|
—
|
|
Provision
|
0.1
|
|
|
—
|
|
Charge-offs, Net of Recoveries
|
(0.3
|
)
|
|
—
|
|
Balance at End of Period
|
$
|
—
|
|
|
$
|
—
|
|
Our average investment in impaired mortgage loans was
$2.3 million
and
$1.1 million
for the three months ended
March 31, 2019
and
2018
, respectively. We did not recognize any interest income on mortgage loans subsequent to impairment for the three months ended
March 31, 2019
and
2018
.
At
March 31, 2019
, we had commitments of
$12.8 million
to fund certain commercial mortgage loans, the amount of which may or may not be funded.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 4 - Investments - Continued
Transfers of Financial Assets
To manage our cash position more efficiently, we may enter into repurchase agreements with unaffiliated financial institutions. We generally use repurchase agreements as a means to finance the purchase of invested assets or for short-term general business purposes until projected cash flows become available from our operations or existing investments. Our repurchase agreements are typically outstanding for less than
30 days
. We post collateral through our repurchase agreement transactions whereby the counterparty commits to purchase securities with the agreement to resell them to us at a later, specified date. The fair value of collateral posted is generally
102 percent
of the cash received.
Our investment policy also permits us to lend fixed maturity securities to unaffiliated financial institutions in short-term securities lending agreements. These agreements increase our investment income with minimal risk. Our securities lending policy requires that a minimum of
102 percent
of the fair value of the securities loaned be maintained as collateral. We may receive cash and/or securities as collateral under these agreements. Cash received as collateral is typically reinvested in short-term investments. If securities are received as collateral, we are not permitted to sell or re-post them.
As of
March 31, 2019
, the carrying amount of fixed maturity securities loaned to third parties under our securities lending program was
$137.6 million
, for which we received collateral in the form of a de minimis cash and securities of
$146.1 million
. As of
December 31, 2018
, the carrying amount of fixed maturity securities loaned to third parties under our securities lending program was
$164.1 million
, for which we received collateral in the form of cash and securities of
$0.1 million
and
$171.4 million
, respectively. We had
no
outstanding repurchase agreements at
March 31, 2019
or
December 31, 2018
.
The remaining contractual maturities of our securities lending agreements disaggregated by class of collateral pledged are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
|
Overnight and Continuous
|
|
|
(in millions of dollars)
|
All Other Corporate Bonds
|
|
$
|
—
|
|
|
$
|
0.1
|
|
Gross Amount of Recognized Liability for Securities Lending Transactions
|
|
—
|
|
|
0.1
|
|
Amounts Related to Agreements Not Included in Offsetting Disclosure Contained Herein
|
|
$
|
—
|
|
|
$
|
—
|
|
Certain of our U.S. insurance subsidiaries are members of regional FHLBs. Membership, which requires that we purchase a minimum amount of FHLB common stock on which we receive dividends, provides access to low-cost funding. Advances received from the FHLB are used for the purchase of fixed maturity securities. Additional common stock purchases may be required, based on the amount of funds we borrow from the FHLBs. The carrying value of common stock owned, collateral posted, and advances received are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
|
(in millions of dollars)
|
Carrying Value of FHLB Common Stock
|
|
$
|
19.1
|
|
|
$
|
24.1
|
|
Advances from FHLB
|
|
$
|
—
|
|
|
$
|
104.0
|
|
Carrying Value of Collateral Posted to FHLB
|
|
|
|
|
Fixed Maturity Securities
|
|
$
|
223.2
|
|
|
$
|
219.8
|
|
Commercial Mortgage Loans
|
|
178.4
|
|
|
179.9
|
|
Total Carrying Value of Collateral Posted to FHLB
|
|
$
|
401.6
|
|
|
$
|
399.7
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 4 - Investments - Continued
Offsetting of Financial Instruments
We enter into master netting agreements with each of our derivatives counterparties. These agreements provide for conditional rights of set-off upon the occurrence of an early termination event. An early termination event is considered a default, and it allows the non-defaulting party to offset its contracts in a loss position against any gain positions or payments due to the defaulting party. Under our agreements, default type events are defined as failure to pay or deliver as contractually agreed, misrepresentation, bankruptcy, or merger without assumption. See Note 5 for further discussion of collateral related to our derivative contracts.
We have securities lending agreements with unaffiliated financial institutions that post collateral to us in return for the use of our fixed maturity securities. A right of set-off exists that allows us to keep and apply collateral received in the event of default by the counterparty. Default within a securities lending agreement would typically occur if the counterparty failed to return the securities borrowed from us as contractually agreed. In addition, if we default by not returning collateral received, the counterparty has a right of set-off against our securities or any other amounts due to us.
Shown below are our financial instruments that either meet the accounting requirements that allow them to be offset in our balance sheets or that are subject to an enforceable master netting arrangement or similar agreement. Our accounting policy is to not offset these financial instruments in our balance sheets. Net amounts disclosed below have been reduced by the amount of collateral pledged to or received from our counterparties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
Gross Amount
|
|
|
|
|
|
Gross Amount Not
|
|
|
|
|
of Recognized
|
|
Gross Amount
|
|
Net Amount
|
|
Offset in Balance Sheet
|
|
|
|
|
Financial
|
|
Offset in
|
|
Presented in
|
|
Financial
|
|
Cash
|
|
Net
|
|
|
Instruments
|
|
Balance Sheet
|
|
Balance Sheet
|
|
Instruments
|
|
Collateral
|
|
Amount
|
|
|
(in millions of dollars)
|
Financial Assets:
|
|
|
Derivatives
|
|
$
|
24.6
|
|
|
$
|
—
|
|
|
$
|
24.6
|
|
|
$
|
(4.8
|
)
|
|
$
|
(19.8
|
)
|
|
$
|
—
|
|
Securities Lending
|
|
137.6
|
|
|
—
|
|
|
137.6
|
|
|
(137.6
|
)
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
162.2
|
|
|
$
|
—
|
|
|
$
|
162.2
|
|
|
$
|
(142.4
|
)
|
|
$
|
(19.8
|
)
|
|
$
|
—
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
35.7
|
|
|
$
|
—
|
|
|
$
|
35.7
|
|
|
$
|
(28.6
|
)
|
|
$
|
—
|
|
|
$
|
7.1
|
|
Total
|
|
$
|
35.7
|
|
|
$
|
—
|
|
|
$
|
35.7
|
|
|
$
|
(28.6
|
)
|
|
$
|
—
|
|
|
$
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Gross Amount
|
|
|
|
|
|
Gross Amount Not
|
|
|
|
|
of Recognized
|
|
Gross Amount
|
|
Net Amount
|
|
Offset in Balance Sheet
|
|
|
|
|
Financial
|
|
Offset in
|
|
Presented in
|
|
Financial
|
|
Cash
|
|
Net
|
|
|
Instruments
|
|
Balance Sheet
|
|
Balance Sheet
|
|
Instruments
|
|
Collateral
|
|
Amount
|
|
|
(in millions of dollars)
|
Financial Assets:
|
|
|
Derivatives
|
|
$
|
30.9
|
|
|
$
|
—
|
|
|
$
|
30.9
|
|
|
$
|
(6.9
|
)
|
|
$
|
(24.0
|
)
|
|
$
|
—
|
|
Securities Lending
|
|
164.1
|
|
|
—
|
|
|
164.1
|
|
|
(164.0
|
)
|
|
(0.1
|
)
|
|
—
|
|
Total
|
|
$
|
195.0
|
|
|
$
|
—
|
|
|
$
|
195.0
|
|
|
$
|
(170.9
|
)
|
|
$
|
(24.1
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
38.0
|
|
|
$
|
—
|
|
|
$
|
38.0
|
|
|
$
|
(33.2
|
)
|
|
$
|
—
|
|
|
$
|
4.8
|
|
Securities Lending
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
38.1
|
|
|
$
|
—
|
|
|
$
|
38.1
|
|
|
$
|
(33.3
|
)
|
|
$
|
—
|
|
|
$
|
4.8
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 4 - Investments - Continued
Net Investment Income
Net investment income reported in our consolidated statements of income is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
2019
|
|
2018
|
|
(in millions of dollars)
|
Fixed Maturity Securities
|
$
|
544.9
|
|
|
$
|
557.1
|
|
Derivatives
|
17.9
|
|
|
15.4
|
|
Mortgage Loans
|
26.7
|
|
|
27.3
|
|
Policy Loans
|
4.7
|
|
|
4.4
|
|
Other Long-term Investments
|
|
|
|
Equity Securities
1
|
4.1
|
|
|
(0.2
|
)
|
Private Equity Partnerships
2
|
2.2
|
|
|
5.6
|
|
Other
|
(0.5
|
)
|
|
2.1
|
|
Short-term Investments
|
7.0
|
|
|
3.6
|
|
Gross Investment Income
|
607.0
|
|
|
615.3
|
|
Less Investment Expenses
|
9.0
|
|
|
9.6
|
|
Less Investment Income on Participation Fund Account Assets
|
3.3
|
|
|
3.4
|
|
Net Investment Income
|
$
|
594.7
|
|
|
$
|
602.3
|
|
1
The net unrealized gain (loss) recognized in net investment income for the first three months of 2019 and 2018 related to equity securities still held at the end of reporting period was $3.1 million and ($2.0) million, respectively.
2
The net unrealized loss recognized in net investment income for the first three months of 2019 and 2018 related to private equity partnerships still held at the end of reporting period was $2.7 million and $1.6 million, respectively.
Realized Investment Gain and Loss
Realized investment gains and losses are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
2019
|
|
2018
|
|
(in millions of dollars)
|
Fixed Maturity Securities
|
|
|
|
Gross Gains on Sales
|
$
|
3.3
|
|
|
$
|
2.0
|
|
Gross Losses on Sales
|
(7.9
|
)
|
|
(1.4
|
)
|
Other-Than-Temporary Impairment Loss
|
—
|
|
|
(1.0
|
)
|
Mortgage Loans and Other Invested Assets
|
|
|
|
Gross Gains on Sales
|
0.9
|
|
|
—
|
|
Gross Losses on Sales
|
(0.1
|
)
|
|
—
|
|
Embedded Derivative in Modified Coinsurance Arrangement
|
5.5
|
|
|
(1.7
|
)
|
All Other Derivatives
|
0.3
|
|
|
0.7
|
|
Foreign Currency Transactions
|
(0.9
|
)
|
|
(0.8
|
)
|
Net Realized Investment Gain (Loss)
|
$
|
1.1
|
|
|
$
|
(2.2
|
)
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 5 - Derivative Financial Instruments
Purpose of Derivatives
We are exposed to certain risks relating to our ongoing business operations. The primary risks managed by using derivative instruments are interest rate risk, risk related to matching duration for our assets and liabilities, foreign currency risk, and credit risk.
Historically, we have utilized current and forward interest rate swaps, current and forward currency swaps, forward benchmark interest rate locks, currency forward contracts, forward contracts on specific fixed income securities, and credit default swaps. Transactions hedging interest rate risk are primarily associated with our individual and group long-term care and individual and group disability products. All other product portfolios are periodically reviewed to determine if hedging strategies would be appropriate for risk management purposes. We do not use derivative financial instruments for speculative purposes.
Derivatives designated as cash flow hedges and used to reduce our exposure to interest rate and duration risk are as follows:
|
|
•
|
Interest rate swaps
are used to hedge interest rate risks and to improve the matching of assets and liabilities. An interest rate swap is an agreement in which we agree with other parties to exchange, at specified intervals, the difference between fixed rate and variable rate interest amounts. We use interest rate swaps to hedge the anticipated purchase of fixed maturity securities thereby protecting us from the potential adverse impact of declining interest rates on the associated policy reserves. We also use interest rate swaps to hedge the potential adverse impact of rising interest rates in anticipation of issuing fixed rate long-term debt.
|
|
|
•
|
Forward benchmark interest rate locks
are used to minimize interest rate risk associated with the anticipated purchase or disposal of fixed maturity securities. A forward benchmark interest rate lock is a derivative contract without an initial investment where we and the counterparty agree to purchase or sell a specific benchmark interest rate bond at a future date at a pre-determined price.
|
Derivatives designated as fair value hedges and used to reduce our exposure to interest rate and duration risk are as follows:
|
|
•
|
Interest rate swaps
are used to effectively convert certain of our fixed rate securities into floating rate securities which are used to fund our floating rate long-term debt. Under these swap agreements, we receive a variable rate of interest and pay a fixed rate of interest. Additionally, we use interest rate swaps to effectively convert certain fixed rate, long-term debt into floating rate long-term debt. Under these swap agreements, we receive a fixed rate of interest and pay a variable rate of interest.
|
Derivatives designated as either cash flow or fair value hedges and used to reduce our exposure to foreign currency risk are as follows:
|
|
•
|
Foreign currency interest rate swaps
are used to hedge the currency risk of certain foreign currency-denominated fixed maturity securities owned for portfolio diversification. Under these swap agreements, we agree to pay, at specified intervals, fixed rate foreign currency-denominated principal and interest payments in exchange for fixed rate payments in the functional currency of the operating segment.
|
Derivatives not designated as hedging instruments and used to reduce our exposure to foreign currency risk, credit losses on securities owned, and interest rate risk are as follows:
|
|
•
|
Foreign currency interest rate swaps
previously designated as hedges were used to hedge the currency risk of certain foreign currency-denominated fixed maturity securities owned for portfolio diversification. These derivatives were effective hedges prior to novation to a new counterparty. In conjunction with the novation, these derivatives were de-designated as hedges. We agree to pay, at specified intervals, fixed rate foreign currency-denominated principal and interest payments in exchange for fixed rate payments in the functional currency of the operating segment. We hold offsetting swaps wherein we agree to pay fixed rate principal and interest payments in the functional currency of the operating segment in exchange for fixed rate foreign currency-denominated payments.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 5 - Derivative Financial Instruments - Continued
|
|
•
|
Credit default swaps
are used as economic hedges against credit risk but do not qualify for hedge accounting. A credit default swap is an agreement in which we agree with another party to pay, at specified intervals, a fixed-rate fee in exchange for insurance against a credit event on a specific investment. If a defined credit event occurs, our counterparty may either pay us a net cash settlement or we may surrender the specific investment to them in exchange for cash equal to the full notional amount of the swap. Credit events typically include events such as bankruptcy, failure to pay, or certain types of debt restructuring.
|
|
|
•
|
Interest rate swap
was used to effectively convert certain of our floating rate, long-term debt into fixed rate long-term debt. Under this swap agreement, we received a variable rate of interest and paid a fixed rate of interest.
|
Derivative Risks
The basic types of risks associated with derivatives are market risk (that the value of the derivative will be adversely impacted by changes in the market, primarily the change in interest and exchange rates) and credit risk (that the counterparty will not perform according to the terms of the contract). The market risk of the derivatives should generally offset the market risk associated with the hedged financial instrument or liability. To help limit the credit exposure of the derivatives, we enter into master netting agreements with our counterparties whereby contracts in a gain position can be offset against contracts in a loss position. We also typically enter into bilateral, cross-collateralization agreements with our counterparties to help limit the credit exposure of the derivatives. These agreements require the counterparty in a loss position to submit acceptable collateral with the other counterparty in the event the net loss position meets or exceeds an agreed upon amount. Our credit exposure on derivatives is limited to the value of those contracts in a net gain position, including accrued interest receivable less collateral held. As of
March 31, 2019
, we did not have any credit exposure on derivatives. As of
December 31, 2018
, we had
$0.9 million
credit exposure on derivatives. The table below summarizes the nature and amount of collateral received from and posted to our derivative counterparties.
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
|
(in millions of dollars)
|
Carrying Value of Collateral Received from Counterparties
|
|
|
|
|
Cash
|
|
$
|
20.2
|
|
|
$
|
24.0
|
|
Carrying Value of Collateral Posted to Counterparties
|
|
|
|
|
Fixed Maturity Securities
|
|
$
|
33.5
|
|
|
$
|
33.4
|
|
See Note 4 for further discussion of our master netting agreements.
The majority of our derivative instruments contain provisions that require us to maintain specified issuer credit ratings and financial strength ratings. Should our ratings fall below these specified levels, we would be in violation of the provisions, and our derivatives counterparties could terminate our contracts and request immediate payment. The aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a liability position was
$35.7 million
and
$38.0 million
at
March 31, 2019
and
December 31, 2018
, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 5 - Derivative Financial Instruments - Continued
Derivative Transactions
The table below summarizes, by notional amounts, the activity for each category of derivatives. The notional amounts represent the basis upon which our counterparty pay and receive amounts are calculated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
|
|
|
Receive
Variable/Pay
Fixed
|
|
Receive
Fixed/Pay
Fixed
|
|
Receive
Fixed/Pay
Variable
|
|
Credit Default
|
|
Forwards
|
|
Total
|
|
(in millions of dollars)
|
Balance at December 31, 2017
|
$
|
48.0
|
|
|
$
|
536.5
|
|
|
$
|
250.0
|
|
|
$
|
70.0
|
|
|
$
|
—
|
|
|
$
|
904.5
|
|
Additions
|
—
|
|
|
19.9
|
|
|
—
|
|
|
—
|
|
|
26.8
|
|
|
46.7
|
|
Terminations
|
—
|
|
|
—
|
|
|
—
|
|
|
70.0
|
|
|
—
|
|
|
70.0
|
|
Balance at March 31, 2018
|
$
|
48.0
|
|
|
$
|
556.4
|
|
|
$
|
250.0
|
|
|
$
|
—
|
|
|
$
|
26.8
|
|
|
$
|
881.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
$
|
—
|
|
|
$
|
538.2
|
|
|
$
|
250.0
|
|
|
$
|
11.0
|
|
|
$
|
—
|
|
|
$
|
799.2
|
|
Additions
|
—
|
|
|
42.6
|
|
|
—
|
|
|
—
|
|
|
13.0
|
|
|
55.6
|
|
Terminations
|
—
|
|
|
46.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
46.9
|
|
Foreign Currency
|
—
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
0.2
|
|
Balance at March 31, 2019
|
$
|
—
|
|
|
$
|
533.9
|
|
|
$
|
250.0
|
|
|
$
|
11.2
|
|
|
$
|
13.0
|
|
|
$
|
808.1
|
|
Cash Flow Hedges
As of
March 31, 2019
and
December 31, 2018
, we had
$265.0 million
and
$286.4 million
, respectively, notional amount of receive fixed, pay fixed, open current and forward foreign currency interest rate swaps to hedge fixed income foreign currency-denominated securities.
As of
March 31, 2019
, we expect to amortize approximately
$70.7 million
of net deferred gains on derivative instruments during the next twelve months. This amount will be reclassified from accumulated other comprehensive income into earnings and reported on the same income statement line item as the hedged item. The income statement line items that will be affected by this amortization are net investment income and interest and debt expense. Additional amounts that may be reclassified from accumulated other comprehensive income into earnings to offset the earnings impact of foreign currency translation of hedged items are not estimable.
As of
March 31, 2019
, we are hedging the variability of future cash flows associated with forecasted transactions through the year 2045.
Fair Value Hedges
As of
March 31, 2019
and
December 31, 2018
, we had
$120.7 million
and
$78.1 million
, respectively, notional amount of receive fixed, pay fixed, open current and forward foreign currency interest rate swaps to hedge fixed income foreign currency-denominated securities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 5 - Derivative Financial Instruments - Continued
As of
March 31, 2019
and
December 31, 2018
, we had
$250.0 million
notional amount of receive fixed, pay variable interest rate swaps to hedge the changes in the fair value of certain fixed rate long-term debt. These swaps effectively convert the associated fixed rate long-term debt into floating rate debt and provide for a better matching of interest rates with our short-term investments, which have frequent interest rate resets similar to a floating rate security.
The following table summarizes the carrying amount of hedged assets and liabilities and the related cumulative basis adjustments related to our fair value hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount of Hedged Assets (Liabilities)
|
|
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets (Liabilities)
|
|
March 31, 2019
|
|
December 31, 2018
|
|
March 31, 2019
|
|
December 31, 2018
|
|
(in millions of dollars)
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
Receive fixed functional currency interest, pay fixed foreign currency interest
|
$
|
88.2
|
|
|
$
|
56.2
|
|
|
$
|
(3.0
|
)
|
|
$
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
Long-term Debt
|
(245.9
|
)
|
|
(244.4
|
)
|
|
3.7
|
|
|
5.1
|
|
For the
three
months ended
March 31, 2019
,
$0.1 million
of the derivative instruments' loss was excluded from the assessment of hedge effectiveness. For the
three
months ended March 31, 2018, a de minimis amount of the derivative instruments' loss was excluded from the assessment of hedge effectiveness. There were
no
instances wherein we discontinued fair value hedge accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.
Derivatives not Designated as Hedging Instruments
As of
March 31, 2019
and
December 31, 2018
, we held
$148.2 million
and
$173.7 million
, respectively, notional amount of receive fixed, pay fixed, foreign currency interest rate swaps. These derivatives are not designated as hedges, and as such, changes in fair value related to these derivatives are reported in earnings as a component of net realized investment gain or loss.
As of
March 31, 2019
and
December 31, 2018
, we held
$11.2 million
and
$11.0 million
, respectively, notional amount of single name credit default swaps. We entered into these swaps in order to mitigate the credit risk associated with specific securities owned.
We have an embedded derivative in a modified coinsurance arrangement for which we include in our realized investment gains and losses a calculation intended to estimate the value of the option of our reinsurance counterparty to cancel the reinsurance contract with us. However, neither party can unilaterally terminate the reinsurance agreement except in extreme circumstances resulting from regulatory supervision, delinquency proceedings, or other direct regulatory action. Cash settlements or collateral related to this embedded derivative are not required at any time during the reinsurance contract or at termination of the reinsurance contract. There are no credit-related counterparty triggers, and any accumulated embedded derivative gain or loss reduces to zero over time as the reinsured business winds down.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 5 - Derivative Financial Instruments - Continued
Locations and Amounts of Derivative Financial Instruments
The following tables summarize the location and fair values of derivative financial instruments, as reported in our consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Balance Sheet
Location
|
|
Fair
Value
|
|
Balance Sheet
Location
|
|
Fair
Value
|
|
(in millions of dollars)
|
Designated as Hedging Instruments
|
|
|
|
|
|
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
Forwards
|
Other L-T Investments
|
|
$
|
—
|
|
|
Other Liabilities
|
|
$
|
0.1
|
|
Foreign Exchange Contracts
|
Other L-T Investments
|
|
19.4
|
|
|
Other Liabilities
|
|
9.8
|
|
Total Cash Flow Hedges
|
|
|
19.4
|
|
|
|
|
9.9
|
|
|
|
|
|
|
|
|
|
Fair Value Hedges
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
Other L-T Investments
|
|
—
|
|
|
Other Liabilities
|
|
3.7
|
|
Foreign Exchange Contracts
|
Other L-T Investments
|
|
5.1
|
|
|
Other Liabilities
|
|
0.4
|
|
Total Fair Value Hedges
|
|
|
5.1
|
|
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
Total Designated as Hedging Instruments
|
|
|
$
|
24.5
|
|
|
|
|
$
|
14.0
|
|
|
|
|
|
|
|
|
|
Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
Credit Default Swaps
|
Other L-T Investments
|
|
$
|
0.1
|
|
|
Other Liabilities
|
|
$
|
—
|
|
Foreign Exchange Contracts
|
Other L-T Investments
|
|
—
|
|
|
Other Liabilities
|
|
21.7
|
|
Embedded Derivative in Modified Coinsurance Arrangement
|
Other L-T Investments
|
|
—
|
|
|
Other Liabilities
|
|
25.6
|
|
Total Not Designated as Hedging Instruments
|
|
|
$
|
0.1
|
|
|
|
|
$
|
47.3
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 5 - Derivative Financial Instruments - Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Balance Sheet
Location
|
|
Fair
Value
|
|
Balance Sheet
Location
|
|
Fair
Value
|
|
(in millions of dollars)
|
Designated as Hedging Instruments
|
|
|
|
|
|
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
Foreign Exchange Contracts
|
Other L-T Investments
|
|
$
|
25.0
|
|
|
Other Liabilities
|
|
$
|
7.9
|
|
|
|
|
|
|
|
|
|
Fair Value Hedges
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
Other L-T Investments
|
|
—
|
|
|
Other Liabilities
|
|
5.2
|
|
Foreign Exchange Contracts
|
Other L-T Investments
|
|
5.4
|
|
|
Other Liabilities
|
|
0.4
|
|
Total Fair Value Hedges
|
|
|
5.4
|
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
Total Designated as Hedging Instruments
|
|
|
$
|
30.4
|
|
|
|
|
$
|
13.5
|
|
|
|
|
|
|
|
|
|
Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
Credit Default Swaps
|
Other L-T Investments
|
|
$
|
0.5
|
|
|
Other Liabilities
|
|
$
|
—
|
|
Foreign Exchange Contracts
|
Other L-T Investments
|
|
—
|
|
|
Other Liabilities
|
|
24.5
|
|
Embedded Derivative in Modified Coinsurance Arrangement
|
Other L-T Investments
|
|
—
|
|
|
Other Liabilities
|
|
31.1
|
|
Total Not Designated as Hedging Instruments
|
|
|
$
|
0.5
|
|
|
|
|
$
|
55.6
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 5 - Derivative Financial Instruments - Continued
The following table summarizes the location of gains and losses of derivative financial instruments designated as hedging instruments, as reported in our consolidated statements of income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
2019
|
|
2018
|
|
Net Investment Income
|
|
Net Realized Investment Gain (Loss)
|
|
Interest and Debt Expense
|
|
Net Investment Income
|
|
Net Realized Investment Gain (Loss)
|
|
Interest and Debt Expense
|
|
(in millions of dollars)
|
Total Income and Expense Presented in the Consolidated Statements of Income of Which Hedged Items are Recorded
|
$
|
594.7
|
|
|
$
|
1.1
|
|
|
$
|
42.1
|
|
|
$
|
602.3
|
|
|
$
|
(2.2
|
)
|
|
$
|
40.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on Cash Flow Hedging Relationships
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps:
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items
|
73.0
|
|
|
(3.5
|
)
|
|
7.7
|
|
|
77.8
|
|
|
0.1
|
|
|
11.4
|
|
Derivatives Designated as Hedging Instruments
|
17.7
|
|
|
4.1
|
|
|
0.6
|
|
|
15.9
|
|
|
(0.1
|
)
|
|
0.6
|
|
Foreign Exchange Contracts
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items
|
4.6
|
|
|
0.8
|
|
|
—
|
|
|
5.0
|
|
|
—
|
|
|
—
|
|
Derivatives Designated as Hedging Instruments
|
(0.1
|
)
|
|
(0.8
|
)
|
|
—
|
|
|
(0.3
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on Fair Value Hedging Relationships
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps:
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items
|
—
|
|
|
(1.5
|
)
|
|
3.6
|
|
|
0.7
|
|
|
1.9
|
|
|
3.6
|
|
Derivatives Designated as Hedging Instruments
|
—
|
|
|
1.5
|
|
|
0.8
|
|
|
(0.4
|
)
|
|
(1.9
|
)
|
|
0.1
|
|
Foreign Exchange Contracts
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items
|
0.5
|
|
|
(0.3
|
)
|
|
—
|
|
|
0.1
|
|
|
(0.3
|
)
|
|
—
|
|
Derivatives Designated as Hedging Instruments
|
0.3
|
|
|
0.3
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 5 - Derivative Financial Instruments - Continued
The following table summarizes the location of gains and losses of derivative financial instruments designated as hedging instruments, as reported in our consolidated statements of comprehensive income.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
|
2019
|
|
2018
|
|
|
(in millions of dollars)
|
Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives
|
|
|
|
Interest Rate Swaps and Forwards
|
$
|
—
|
|
|
$
|
(0.2
|
)
|
Foreign Exchange Contracts
|
(12.3
|
)
|
|
3.8
|
|
|
Total
|
$
|
(12.3
|
)
|
|
$
|
3.6
|
|
The following table summarizes the location of gains and losses on our derivatives not designated as hedging instruments, as reported in our consolidated statements of income.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
|
2019
|
|
2018
|
|
|
(in millions of dollars)
|
Net Realized Investment Gain (Loss)
|
|
|
|
|
Credit Default Swaps
|
$
|
(0.5
|
)
|
|
$
|
—
|
|
|
Foreign Exchange Contracts
|
0.7
|
|
|
0.7
|
|
|
Embedded Derivative in Modified Coinsurance Arrangement
|
5.5
|
|
|
(1.7
|
)
|
|
Total
|
$
|
5.7
|
|
|
$
|
(1.0
|
)
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 6 - Accumulated Other Comprehensive Loss
Components of our accumulated other comprehensive loss, after tax, and related changes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized Gain (Loss) on Securities
|
|
Net Gain on Hedges
|
|
Foreign Currency Translation Adjustment
|
|
Unrecognized Pension and Postretirement Benefit Costs
|
|
Total
|
|
|
|
(in millions of dollars)
|
Balance at December 31, 2018
|
$
|
(312.4
|
)
|
|
$
|
250.6
|
|
|
$
|
(305.2
|
)
|
|
$
|
(447.2
|
)
|
|
$
|
(814.2
|
)
|
|
Other Comprehensive Income (Loss) Before Reclassifications
|
|
305.4
|
|
|
(4.7
|
)
|
|
17.3
|
|
|
(0.8
|
)
|
|
317.2
|
|
|
Amounts Reclassified from Accumulated Other Comprehensive Income or Loss
|
|
6.9
|
|
|
(15.8
|
)
|
|
—
|
|
|
3.6
|
|
|
(5.3
|
)
|
|
Net Other Comprehensive Income (Loss)
|
|
312.3
|
|
|
(20.5
|
)
|
|
17.3
|
|
|
2.8
|
|
|
311.9
|
|
Balance at March 31, 2019
|
$
|
(0.1
|
)
|
|
$
|
230.1
|
|
|
$
|
(287.9
|
)
|
|
$
|
(444.4
|
)
|
|
$
|
(502.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
$
|
607.8
|
|
|
$
|
282.3
|
|
|
$
|
(254.5
|
)
|
|
$
|
(508.1
|
)
|
|
$
|
127.5
|
|
|
Adjustment to Adopt Accounting Standard Update - Note 2
|
|
(17.5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(17.5
|
)
|
|
Other Comprehensive Income (Loss) Before Reclassifications
|
|
(234.8
|
)
|
|
2.9
|
|
|
47.5
|
|
|
(1.2
|
)
|
|
(185.6
|
)
|
|
Amounts Reclassified from Accumulated Other Comprehensive Income or Loss
|
|
0.6
|
|
|
(11.7
|
)
|
|
—
|
|
|
4.3
|
|
|
(6.8
|
)
|
|
Net Other Comprehensive Income (Loss)
|
|
(234.2
|
)
|
|
(8.8
|
)
|
|
47.5
|
|
|
3.1
|
|
|
(192.4
|
)
|
Balance at March 31, 2018
|
$
|
356.1
|
|
|
$
|
273.5
|
|
|
$
|
(207.0
|
)
|
|
$
|
(505.0
|
)
|
|
$
|
(82.4
|
)
|
The net unrealized gain (loss) on securities consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
December 31
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
|
(in millions of dollars)
|
Fixed Maturity Securities
|
|
$
|
4,308.4
|
|
|
$
|
2,736.5
|
|
|
$
|
1,571.9
|
|
Deferred Acquisition Costs
|
|
(42.6
|
)
|
|
(27.9
|
)
|
|
(14.7
|
)
|
Reserves for Future Policy and Contract Benefits
|
|
(4,451.0
|
)
|
|
(3,220.3
|
)
|
|
(1,230.7
|
)
|
Reinsurance Recoverable
|
|
328.5
|
|
|
261.4
|
|
|
67.1
|
|
Income Tax
|
|
(143.4
|
)
|
|
(62.1
|
)
|
|
(81.3
|
)
|
Total
|
|
$
|
(0.1
|
)
|
|
$
|
(312.4
|
)
|
|
$
|
312.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
January 1
|
|
|
|
|
2018
|
|
2018
|
|
Change
|
|
|
(in millions of dollars)
|
Fixed Maturity Securities
|
|
$
|
4,348.2
|
|
|
$
|
5,665.2
|
|
|
$
|
(1,317.0
|
)
|
Deferred Acquisition Costs
|
|
(41.2
|
)
|
|
(51.4
|
)
|
|
10.2
|
|
Reserves for Future Policy and Contract Benefits
|
|
(4,030.1
|
)
|
|
(5,094.7
|
)
|
|
1,064.6
|
|
Reinsurance Recoverable
|
|
321.0
|
|
|
375.8
|
|
|
(54.8
|
)
|
Income Tax
|
|
(241.8
|
)
|
|
(304.6
|
)
|
|
62.8
|
|
Total
|
|
$
|
356.1
|
|
|
$
|
590.3
|
|
|
$
|
(234.2
|
)
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 6 - Accumulated Other Comprehensive Loss - Continued
Amounts reclassified from accumulated other comprehensive loss were recognized in our consolidated statements of income as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
|
|
2019
|
|
2018
|
|
|
|
(in millions of dollars)
|
Net Unrealized Gain (Loss) on Securities
|
|
|
|
|
Net Realized Investment Gain (Loss)
|
|
|
|
|
|
Net Gain (Loss) on Sales of Securities and Other Invested Assets
|
$
|
(8.7
|
)
|
|
$
|
0.2
|
|
|
|
Other-Than-Temporary Impairment Loss
|
—
|
|
|
(1.0
|
)
|
|
|
|
(8.7
|
)
|
|
(0.8
|
)
|
|
Income Tax Benefit
|
(1.8
|
)
|
|
(0.2
|
)
|
|
Total
|
$
|
(6.9
|
)
|
|
$
|
(0.6
|
)
|
|
|
|
|
|
|
Net Gain on Hedges
|
|
|
|
|
Net Investment Income
|
|
|
|
|
|
Gain on Interest Rate Swaps and Forwards
|
$
|
17.4
|
|
|
$
|
15.6
|
|
|
|
Loss on Foreign Exchange Contracts
|
(0.1
|
)
|
|
(0.3
|
)
|
|
Net Realized Investment Gain (Loss)
|
|
|
|
|
|
Gain (Loss) on Interest Rate Swaps
|
4.0
|
|
|
(0.1
|
)
|
|
|
Loss on Foreign Exchange Contracts
|
(0.8
|
)
|
|
—
|
|
|
Interest and Debt Expense
|
|
|
|
|
|
Loss on Interest Rate Swaps
|
(0.5
|
)
|
|
(0.5
|
)
|
|
|
|
20.0
|
|
|
14.7
|
|
|
Income Tax Expense
|
4.2
|
|
|
3.0
|
|
|
Total
|
$
|
15.8
|
|
|
$
|
11.7
|
|
|
|
|
|
|
|
Unrecognized Pension and Postretirement Benefit Costs
|
|
|
|
|
Other Expenses
|
|
|
|
|
|
Amortization of Net Actuarial Loss
|
$
|
(4.7
|
)
|
|
$
|
(5.6
|
)
|
|
|
Amortization of Prior Service Credit
|
0.1
|
|
|
0.1
|
|
|
|
|
(4.6
|
)
|
|
(5.5
|
)
|
|
Income Tax Benefit
|
(1.0
|
)
|
|
(1.2
|
)
|
|
Total
|
$
|
(3.6
|
)
|
|
$
|
(4.3
|
)
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 7 - Liability for Unpaid Claims and Claim Adjustment Expenses
Changes in the liability for unpaid claims and claim adjustment expenses are as follows:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
(in millions of dollars)
|
Balance at January 1
|
$
|
23,149.0
|
|
|
$
|
23,222.0
|
|
Less Reinsurance Recoverable
|
2,227.3
|
|
|
2,182.0
|
|
Net Balance at January 1
|
20,921.7
|
|
|
21,040.0
|
|
|
|
|
|
Incurred Related to
|
|
|
|
Current Year
|
1,556.8
|
|
|
1,543.1
|
|
Prior Years
|
|
|
|
Interest
|
280.0
|
|
|
283.6
|
|
All Other Incurred
|
(130.3
|
)
|
|
(192.0
|
)
|
Foreign Currency
|
41.1
|
|
|
72.2
|
|
Total Incurred
|
1,747.6
|
|
|
1,706.9
|
|
|
|
|
|
Paid Related to
|
|
|
|
Current Year
|
(328.7
|
)
|
|
(322.0
|
)
|
Prior Years
|
(1,439.5
|
)
|
|
(1,400.4
|
)
|
Total Paid
|
(1,768.2
|
)
|
|
(1,722.4
|
)
|
|
|
|
|
Net Balance at March 31
|
20,901.1
|
|
|
21,024.5
|
|
Plus Reinsurance Recoverable
|
2,241.0
|
|
|
2,184.1
|
|
Balance at March 31
|
$
|
23,142.1
|
|
|
$
|
23,208.6
|
|
The majority of the net balances are related to disability claims with long-tail payouts on which interest earned on assets backing liabilities is an integral part of pricing and reserving. Interest accrued on prior year reserves has been calculated on the opening reserve balance less one-half of the period's claim payments relative to prior years at our average reserve discount rate for the respective periods.
"Incurred Related to Prior Years - All Other Incurred" shown in the preceding chart is primarily impacted by the level of claim resolutions in the period relative to the long-term expectations reflected in the reserves. Our claim resolution rate assumption used in determining reserves is our expectation of the resolution rate we will experience over the life of the block of business and will vary from actual experience in any one period, both favorably and unfavorably.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 7 - Liability for Unpaid Claims and Claim Adjustment Expenses - Continued
Reconciliation
A reconciliation of policy and contract benefits and reserves for future policy and contract benefits as reported in our consolidated balance sheets to the liability for unpaid claims and claim adjustment expenses is as follows:
|
|
|
|
|
|
|
|
|
|
March 31
|
|
2019
|
|
2018
|
|
(in millions of dollars)
|
Policy and Contract Benefits
|
$
|
1,708.6
|
|
|
$
|
1,623.1
|
|
Reserves for Future Policy and Contract Benefits
|
46,109.4
|
|
|
44,668.5
|
|
Total
|
47,818.0
|
|
|
46,291.6
|
|
Less:
|
|
|
|
Life Reserves for Future Policy and Contract Benefits
|
8,315.5
|
|
|
8,278.7
|
|
Accident and Health Active Life Reserves
|
11,909.4
|
|
|
10,774.2
|
|
Adjustment Related to Unrealized Investment Gains and Losses
|
4,451.0
|
|
|
4,030.1
|
|
Liability for Unpaid Claims and Claim Adjustment Expenses
|
$
|
23,142.1
|
|
|
$
|
23,208.6
|
|
The adjustment related to unrealized investment gains and losses reflects the changes that would be necessary to policyholder liabilities if the unrealized investment gains and losses related to the corresponding available-for-sale securities had been realized. Changes in this adjustment are reported as a component of other comprehensive income or loss.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 8 - Segment Information
We have
three
principal operating business segments: Unum US, Unum International, and Colonial Life. Our other segments are Closed Block and Corporate.
Segment information is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
2019
|
|
2018
|
|
(in millions of dollars)
|
Premium Income
|
|
|
|
Unum US
|
|
|
|
Group Disability
|
|
|
|
Group Long-term Disability
|
$
|
452.9
|
|
|
$
|
441.2
|
|
Group Short-term Disability
|
188.7
|
|
|
176.3
|
|
Group Life and Accidental Death & Dismemberment
|
|
|
|
Group Life
|
414.4
|
|
|
399.2
|
|
Accidental Death & Dismemberment
|
41.0
|
|
|
38.7
|
|
Supplemental and Voluntary
|
|
|
|
Individual Disability
|
110.7
|
|
|
104.9
|
|
Voluntary Benefits
|
234.4
|
|
|
229.8
|
|
Dental and Vision
|
59.8
|
|
|
48.7
|
|
|
1,501.9
|
|
|
1,438.8
|
|
Unum International
|
|
|
|
Group Long-term Disability
|
87.9
|
|
|
90.8
|
|
Group Life
|
27.2
|
|
|
28.6
|
|
Supplemental
|
38.9
|
|
|
20.2
|
|
|
154.0
|
|
|
139.6
|
|
Colonial Life
|
|
|
|
Accident, Sickness, and Disability
|
242.2
|
|
|
231.3
|
|
Life
|
87.6
|
|
|
81.0
|
|
Cancer and Critical Illness
|
89.5
|
|
|
86.0
|
|
|
419.3
|
|
|
398.3
|
|
Closed Block
|
|
|
|
Individual Disability
|
98.1
|
|
|
109.4
|
|
Long-term Care
|
163.0
|
|
|
161.3
|
|
All Other
|
2.4
|
|
|
2.6
|
|
|
263.5
|
|
|
273.3
|
|
Total Premium Income
|
$
|
2,338.7
|
|
|
$
|
2,250.0
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 8 - Segment Information - Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unum US
|
|
Unum International
|
|
Colonial Life
|
|
Closed Block
|
|
Corporate
|
|
Total
|
|
(in millions of dollars)
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Premium Income
|
$
|
1,501.9
|
|
|
$
|
154.0
|
|
|
$
|
419.3
|
|
|
$
|
263.5
|
|
|
$
|
—
|
|
|
$
|
2,338.7
|
|
Net Investment Income
|
182.1
|
|
|
24.8
|
|
|
36.9
|
|
|
346.6
|
|
|
4.3
|
|
|
594.7
|
|
Other Income
|
34.5
|
|
|
—
|
|
|
0.6
|
|
|
18.0
|
|
|
—
|
|
|
53.1
|
|
Adjusted Operating Revenue
|
$
|
1,718.5
|
|
|
$
|
178.8
|
|
|
$
|
456.8
|
|
|
$
|
628.1
|
|
|
$
|
4.3
|
|
|
$
|
2,986.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income (Loss)
|
$
|
252.3
|
|
|
$
|
29.1
|
|
|
$
|
85.2
|
|
|
$
|
31.0
|
|
|
$
|
(45.4
|
)
|
|
$
|
352.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Premium Income
|
$
|
1,438.8
|
|
|
$
|
139.6
|
|
|
$
|
398.3
|
|
|
$
|
273.3
|
|
|
$
|
—
|
|
|
$
|
2,250.0
|
|
Net Investment Income
|
194.2
|
|
|
27.6
|
|
|
37.3
|
|
|
337.7
|
|
|
5.5
|
|
|
602.3
|
|
Other Income
|
29.0
|
|
|
—
|
|
|
0.3
|
|
|
19.0
|
|
|
1.2
|
|
|
49.5
|
|
Adjusted Operating Revenue
|
$
|
1,662.0
|
|
|
$
|
167.2
|
|
|
$
|
435.9
|
|
|
$
|
630.0
|
|
|
$
|
6.7
|
|
|
$
|
2,901.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income (Loss)
|
$
|
243.9
|
|
|
$
|
29.8
|
|
|
$
|
81.0
|
|
|
$
|
28.9
|
|
|
$
|
(40.3
|
)
|
|
$
|
343.3
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
December 31
|
|
2019
|
|
2018
|
|
(in millions of dollars)
|
Assets
|
|
|
|
Unum US
|
$
|
17,802.1
|
|
|
$
|
17,510.9
|
|
Unum International
|
3,646.6
|
|
|
3,426.8
|
|
Colonial Life
|
4,286.8
|
|
|
4,237.9
|
|
Closed Block
|
35,542.2
|
|
|
34,527.6
|
|
Corporate
|
2,644.0
|
|
|
2,172.4
|
|
Total Assets
|
$
|
63,921.7
|
|
|
$
|
61,875.6
|
|
We measure and analyze our segment performance on the basis of "adjusted operating revenue" and "adjusted operating income" or "adjusted operating loss", which differ from total revenue and income before income tax as presented in our consolidated statements of income due to the exclusion of net realized investment gains and losses as specified in the reconciliations below. We believe adjusted operating revenue and adjusted operating income or loss are better performance measures and better indicators of the revenue and profitability and underlying trends in our business. These performance measures are in accordance with GAAP guidance for segment reporting, but they should not be viewed as a substitute for total revenue, income before income tax, or net income.
Realized investment gains or losses depend on market conditions and do not necessarily relate to decisions regarding the underlying business of our segments. Our investment focus is on investment income to support our insurance liabilities as opposed to the generation of realized investment gains or losses. Although we may experience realized investment gains or losses which will affect future earnings levels, a long-term focus is necessary to maintain profitability over the life of the business since our underlying business is long-term in nature, and we need to earn the interest rates assumed in calculating our liabilities.
We may at other times exclude certain other items from our discussion of financial ratios and metrics in order to enhance the understanding and comparability of our operational performance and the underlying fundamentals. We exclude these items as we believe them to be infrequent or unusual in nature, but this exclusion is not an indication that similar items may not recur and does not replace net income or net loss as a measure of our overall profitability.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 8 - Segment Information - Continued
A reconciliation of total revenue to "adjusted operating revenue" and income before income tax to "adjusted operating income" is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
2019
|
|
2018
|
|
(in millions of dollars)
|
Total Revenue
|
$
|
2,987.6
|
|
|
$
|
2,899.6
|
|
Excluding:
|
|
|
|
Net Realized Investment Gain (Loss)
|
1.1
|
|
|
(2.2
|
)
|
Adjusted Operating Revenue
|
$
|
2,986.5
|
|
|
$
|
2,901.8
|
|
|
|
|
|
Income Before Income Tax
|
$
|
353.3
|
|
|
$
|
341.1
|
|
Excluding:
|
|
|
|
Net Realized Investment Gain (Loss)
|
1.1
|
|
|
(2.2
|
)
|
Adjusted Operating Income
|
$
|
352.2
|
|
|
$
|
343.3
|
|
Note 9 - Employee Benefit Plans
Defined Benefit Pension and Other Postretirement Benefit (OPEB) Plans
We sponsor several defined benefit pension and OPEB plans for our employees, including non-qualified pension plans. The U.S. qualified and non-qualified defined benefit pension plans comprise the majority of our total benefit obligation and benefit cost. We maintain a separate defined benefit plan for eligible employees in our U.K. operation. The U.S. defined benefit pension plans were closed to new entrants on December 31, 2013, the OPEB plan was closed to new entrants on December 31, 2012, and the U.K. plan was closed to new entrants on December 31, 2002.
The following table provides the components of the net periodic benefit cost (credit) for the defined benefit pension and OPEB plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
Pension Benefits
|
|
|
|
|
|
U.S. Plans
|
|
U.K. Plan
|
|
OPEB
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(in millions of dollars)
|
Service Cost
|
$
|
2.7
|
|
|
$
|
2.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest Cost
|
20.8
|
|
|
19.9
|
|
|
1.5
|
|
|
1.5
|
|
|
1.3
|
|
|
1.2
|
|
Expected Return on Plan Assets
|
(24.8
|
)
|
|
(26.1
|
)
|
|
(2.2
|
)
|
|
(2.4
|
)
|
|
(0.1
|
)
|
|
(0.1
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
Net Actuarial Loss (Gain)
|
5.1
|
|
|
5.4
|
|
|
0.2
|
|
|
0.2
|
|
|
(0.6
|
)
|
|
—
|
|
Prior Service Credit
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
Total
|
$
|
3.8
|
|
|
$
|
1.5
|
|
|
$
|
(0.5
|
)
|
|
$
|
(0.7
|
)
|
|
$
|
0.5
|
|
|
$
|
1.0
|
|
The service cost component of net periodic pension and postretirement benefit cost is included as a component of compensation expense in our consolidated statements of income. All other components of net periodic pension and postretirement benefit cost are included in other expenses.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 10 - Stockholders' Equity and Earnings Per Common Share
Earnings Per Common Share
Net income per common share is determined as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
2019
|
|
2018
|
|
(in millions of dollars, except share data)
|
Numerator
|
|
|
|
Net Income
|
$
|
280.9
|
|
|
$
|
273.5
|
|
|
|
|
|
Denominator (000s)
|
|
|
|
Weighted-Average Common Shares - Basic
|
214,297.1
|
|
|
221,894.0
|
|
Dilution for Assumed Exercises of Stock Options and Nonvested Stock Awards
|
132.6
|
|
|
683.0
|
|
Weighted-Average Common Shares - Assuming Dilution
|
214,429.7
|
|
|
222,577.0
|
|
|
|
|
|
Net Income Per Common Share
|
|
|
|
Basic
|
$
|
1.31
|
|
|
$
|
1.23
|
|
Assuming Dilution
|
$
|
1.31
|
|
|
$
|
1.23
|
|
We use the treasury stock method to account for the effect of outstanding stock options, nonvested restricted stock units, and nonvested performance share units on the computation of diluted earnings per share. Under this method, these potential common shares will each have a dilutive effect, as individually measured, when the average market price of Unum Group common stock during the period exceeds the exercise price of the stock options and the grant price of the nonvested restricted stock units and the nonvested performance share units. The outstanding stock options have exercise prices ranging from
$23.35
to
$26.29
, the nonvested restricted stock units have grant prices ranging from
$32.38
to
$55.26
, and the nonvested performance share units have grant prices ranging from
$37.67
to
$49.86
.
In computing earnings per share assuming dilution, only potential common shares that are dilutive (those that reduce earnings per share) are included. Potential common shares excluded in the computation of diluted earnings per share because the impact would be antidilutive, based on then current market prices, approximated
1.3 million
and a
de minimis
amount for the three months ended
March 31, 2019
and
2018
, respectively.
Common Stock
During the second quarter of 2018, our board of directors authorized the repurchase of up to
$750.0 million
of Unum Group's outstanding common stock through November 24, 2019. This authorization replaced the previous authorization of
$750.0 million
that was scheduled to expire on November 25, 2018. The remaining repurchase amount under the new program was
$400.0 million
at
March 31, 2019
.
Common stock repurchases, which are accounted for using the cost method and classified as treasury stock until otherwise retired, were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
2019
|
|
2018
|
|
(in millions)
|
Shares Repurchased
|
2.7
|
|
|
1.9
|
|
Cost of Shares Repurchased
1
|
$
|
100.0
|
|
|
$
|
100.2
|
|
1
Includes commissions of a
de minimis
amount for the three months ended
March 31, 2019
and
$0.2 million
for the three months ended
March 31, 2018
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 10 - Stockholders' Equity and Earnings Per Common Share - Continued
Preferred Stock
Unum Group has
25.0 million
shares of preferred stock authorized with a par value of
$0.10
per share.
No
preferred stock has been issued to date.
Note 11 - Commitments and Contingent Liabilities
Contingent Liabilities
We are a defendant in a number of litigation matters that have arisen in the normal course of business. Further, state insurance regulatory authorities and other federal and state authorities regularly make inquiries and conduct investigations concerning our compliance with applicable insurance and other laws and regulations. Given the complexity and scope of our litigation and regulatory matters, it is not possible to predict the ultimate outcome of all pending investigations or legal proceedings or provide reasonable estimates of potential losses, except if noted in connection with specific matters.
In some of these matters, no specified amount is sought. In others, very large or indeterminate amounts, including punitive and treble damages, are asserted. There is a wide variation of pleading practice permitted in the United States courts with respect to requests for monetary damages, including some courts in which no specified amount is required and others which allow the plaintiff to state only that the amount sought is sufficient to invoke the jurisdiction of that court. Further, some jurisdictions permit plaintiffs to allege damages well in excess of reasonably possible verdicts. Based on our extensive experience and that of others in the industry with respect to litigating or resolving claims through settlement over an extended period of time, we believe that the monetary damages asserted in a lawsuit or claim bear little relation to the merits of the case, or the likely disposition value. Therefore, the specific monetary relief sought is not stated.
Unless indicated otherwise in the descriptions below, reserves have not been established for litigation and contingencies. An estimated loss is accrued when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
Claims Handling Matters
We and our insurance subsidiaries, in the ordinary course of our business, are engaged in claim litigation where disputes arise as a result of a denial or termination of benefits. Most typically these lawsuits are filed on behalf of a single claimant or policyholder, and in some of these individual actions punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims. For our general claim litigation, we maintain reserves based on experience to satisfy judgments and settlements in the normal course. We expect that the ultimate liability, if any, with respect to general claim litigation, after consideration of the reserves maintained, will not be material to our consolidated financial condition. Nevertheless, given the inherent unpredictability of litigation, it is possible that an adverse outcome in certain claim litigation involving punitive damages could, from time to time, have a material adverse effect on our consolidated results of operations in a period, depending on the results of operations for the particular period.
From time to time class action allegations are pursued where the claimant or policyholder purports to represent a larger number of individuals who are similarly situated. Since each insurance claim is evaluated based on its own merits, there is rarely a single act or series of actions which can properly be addressed by a class action. Nevertheless, we monitor these cases closely and defend ourselves appropriately where these allegations are made.
Miscellaneous Matters
Similar to other insurers, we were recently the subject of an examination by a third party acting on behalf of a number of state treasurers concerning our compliance with the unclaimed property laws of the participating states. We cooperated fully with this examination and in the fourth quarter of 2017, we started the process to reach a Global Resolution Agreement with the third party regarding settlement of the examination, which we finalized in January of 2018. Under the terms of the agreement, the third party acting on behalf of the signatory states compared insured data to the Social Security Administration's Death Master File to identify deceased insureds and contract holders where a valid claim has not been made. During the fourth quarter of 2017, we established reserves which reflect our estimate of the liability expected to be paid as we execute on the terms of the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 11 - Commitments and Contingent Liabilities - Continued
settlement. We also are cooperating with a Delaware Market Conduct examination involving the same issue, which is currently inactive. The legal and regulatory environment around unclaimed death benefits continues to evolve. It is possible that the current settlement and/or similar investigations by other state jurisdictions may result in payments to beneficiaries, the payment of abandoned funds under state law, and/or administrative penalties, the total of which may be in excess of the reserves established.
In 2009, a Pennsylvania-based insurance company and its affiliates were ordered into rehabilitation, and the Pennsylvania Insurance Commissioner, who was appointed as the Rehabilitator, filed petitions for liquidation with the Commonwealth Court of Pennsylvania. Under Pennsylvania law, payment of covered claims and other related insurance obligations are provided, within prescribed limits, by state guaranty associations. These guaranty associations assess fees to meet these obligations on insurance companies that sell insurance within the state, which are generally based on a company's pro rata portion of average premiums written or received for several years prior to the insolvency. In March 2017, a formal order of liquidation was issued, and as such, we were subject to an assessment by those guaranty associations that are responsible for policyholder claims, and accordingly accrued, in the first quarter of 2017, an estimated loss contingency. We continue to submit payment to satisfy this assessment as requests for payment are received from the guaranty associations.
Securities Class Actions:
Three alleged securities class action lawsuits have been filed against Unum Group and individual defendants as follows:
|
|
•
|
On June 13, 2018, an alleged securities class action lawsuit entitled
Cynthia Pittman v. Unum Group, Richard McKenney, John McGarry, and Daniel Waxenberg
was filed in the United States District Court for the Eastern District of Tennessee. The plaintiff seeks to represent purchasers of Unum Group publicly traded securities between January 31, 2018 and May 2, 2018. The plaintiff alleges the Company caused its shares to trade at artificially high levels by failing to disclose information about the rate of long-term care policy terminations and long-term care claim incidence resulting in misleading statements about capital management plans and long-term care reserves. The complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and seeks compensatory damages in an amount to be proven at trial. The Company strongly denies these allegations and will vigorously defend the litigation.
|
|
|
•
|
On July 13, 2018, an alleged securities class action lawsuit entitled
Scott Cunningham v. Unum Group, Richard McKenney, John McGarry, and Daniel Waxenberg
was filed in the United States District Court for the Eastern District of Tennessee. The allegations, class period, and damages claimed mirror those in the
Pittman
matter. The Company strongly denies these allegations and will vigorously defend the litigation.
|
|
|
•
|
On July 25, 2018, an alleged securities class action lawsuit entitled
City of Taylor Police and Fire Retirement System v. Unum Group, Richard McKenney, John McGarry, Steve Zabel, and Daniel Waxenberg
was filed in the United States District Court for the Eastern District of Tennessee. The plaintiff seeks to represent purchasers of Unum Group publicly traded securities between October 27, 2016 and May 1, 2018. The allegations and damages claimed mirror those in the
Pittman
matter. The Company strongly denies these allegations and will vigorously defend the litigation.
|
On November 9, 2018, the court consolidated the
Pittman
,
Cunningham
, and
City of Taylor Police and Fire Retirement System
cases into one matter entitled
In re Unum Group Securities Litigation
, appointed a lead plaintiff and lead plaintiff’s counsel, and directed the plaintiff to file a consolidated amended complaint. On January 15, 2019, the plaintiff filed a consolidated amended complaint asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and seeks compensatory damages in an amount to be proven at trial as well as costs, expenses, and attorney’s fees. On March 18, 2019, the Company filed a motion to dismiss the consolidated amended complaint.
These lawsuits are in a very preliminary stage, the outcome is uncertain, and the Company is unable to estimate a range of reasonably possible losses. Reserves have not been established for these matters. Although we believe these claims lack merit, an adverse outcome in one or more of these actions could, depending on the nature, scope, and amount of the ruling, materially adversely affect our consolidated results of operations in a period.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 11 - Commitments and Contingent Liabilities - Continued
Shareholder Derivative Actions:
Three alleged derivative lawsuits have been filed against individual defendants and Unum Group, as nominal defendant, as follows:
|
|
•
|
On September 27, 2018, a purported shareholder derivative lawsuit entitled
Vladimir Gusinsky Revocable Trust, Derivatively on Behalf of Unum Group v. Richard P. McKenney, John F. McGarry, Daniel J. Waxenberg, Steve Zabel, Kevin T. Kabat, E. Michael Caulfield, Gloria C. Larson, Timothy F. Keaney, Theodore H. Bunting, Jr., Cynthia L. Egan, Ronald P. O'Hanley, Francis L. Shammo, Joseph J. Echevarria, Thomas R. Watjen, Pamela H. Godwin, Edward J. Muhl, and Unum Group as nominal defendant
was filed in the United States District Court for the District of Delaware. The complaint purports to assert claims on behalf of the Company against certain current and past members of our Board of Directors and Mr. McKenney for alleged misleading statements about the Company's long-term care business in the Company's proxy statement filed with the Securities and Exchange Commission on April 13, 2017 in violation of Section 14(a) of the Securities Exchange Act of 1934. The complaint also purports to assert claims on behalf of the Company against all individual defendants arising out of the Company's long-term care business for breach of fiduciary duties, waste of corporate assets and unjust enrichment. The complaint seeks compensatory damages in an amount to be proven at trial, changes to corporate governance and internal procedures, equitable and injunctive relief, restitution, costs, expenses, and attorney's fees. The Company strongly denies these allegations and will vigorously defend the litigation.
|
|
|
•
|
On October 23, 2018, a purported shareholder derivative lawsuit entitled
Steven Jenkins, Derivatively on Behalf of Unum Group v. Richard P. McKenney, John F. McGarry, Daniel J. Waxenberg, Steve Zabel, Kevin T. Kabat, E. Michael Caulfield, Gloria C. Larson, Timothy F. Keaney, Theodore H. Bunting, Jr., Cynthia L. Egan, Ronald P. O'Hanley, Francis J. Shammo, Joseph J. Echevarria, Thomas R. Watjen, Pamela H. Godwin, Edward J. Muhl, and Unum Group as nominal defendant
was filed in the United States District Court for the District of Delaware. The defendants, allegations, and damages claimed mirror those in the
Gusinsky
matter. The Company strongly denies these allegations and will vigorously defend the litigation.
|
|
|
•
|
On November 1, 2018, a purported shareholder derivative lawsuit entitled
Julie Nguyen, Derivatively on Behalf of Unum Group v. Richard P. McKenney, John F. McGarry, Daniel J. Waxenberg, Steve Zabel, Kevin T. Kabat, E. Michael Caulfield, Gloria C. Larson, Timothy F. Keaney, Theodore H. Bunting, Jr., Cynthia L. Egan, Ronald P. O'Hanley, Francis J. Shammo, Joseph J. Echevarria, Thomas R. Watjen, Pamela H. Godwin, Edward J. Muhl, and Unum Group as nominal defendant
was filed in the United States District Court for the District of Delaware. The defendants, allegations, and damages claimed mirror those in the
Gusinsky
matter. The Company strongly denies these allegations and will vigorously defend the litigation.
|
On December 10, 2018, the court consolidated the
Gusinsky
,
Jenkins
, and
Nguyen
cases into one matter entitled
In re Unum Group Stockholder Derivative Litigation
, appointed co-lead counsel and liaison counsel for plaintiffs and directed the parties to propose a schedule of proceedings for the consolidated matter. On February 27, 2019, the court granted plaintiffs' motion to voluntarily dismiss the action without prejudice.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 12 - Leases
We lease certain buildings and equipment under various noncancelable operating lease agreements. In addition, we have sub-lease agreements on a limited number of our building lease agreements. The majority of our building leases and sub-leases expire within a five to ten year period and we generally have the option to renew at the end of the lease term for an additional five to ten year period at the fair rental value at the time of renewal. The majority of our equipment leases expire within a one to three year period and we generally have the option to renew at the end of the lease term for an additional one to three year period at the fair rental value at the time of renewal.
We do not have any lease agreements or sub-lease agreements that contain variable lease payments. In addition, we do not have lease agreements or sub-lease agreements that contain residual value guarantees or impose any restrictions or covenants with the lessors.
We determine if an arrangement is a lease at inception through a formal process that evaluates our right to control the use of an identified asset for a period of time in exchange for consideration. We account for the lease and non-lease components of our building leases separately and have elected to use the available practical expedient to account for the lease and non-lease components of our equipment leases as a single component. All of our leases are classified as operating, none of which are classified as short-term leases. For each operating lease, we calculate a lease liability at commencement date based on the present value of lease payments over the lease term and a corresponding right-of-use (ROU) asset, adjusted for lease incentives.
ROU assets represent our right to use an underlying asset for a specified lease term and are included in other assets in our consolidated balance sheet. Lease liabilities represent the present value of lease payments that we are obligated to pay arising from a lease and are included in other liabilities in our consolidated balance sheet. We consider the likelihood of renewal in determining the lease terms for the calculation of the ROU asset and lease liability. As most of our leases do not provide an implicit rate of interest, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate of interest when readily determinable.
Operating lease cost is calculated on a straight-line basis over the lease term and is included in other expenses in our consolidated statement of income. We amortize the ROU asset over the lease term on a pattern determined by the difference between the straight-line lease liability expense and the accretion of the imputed interest calculated on the lease liability.
Operating lease information is as follows:
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
(in millions of dollars)
|
Lease Cost
|
|
Operating Lease Cost
|
$
|
7.5
|
|
Sublease Income
|
(0.4
|
)
|
Total Lease Cost
|
$
|
7.1
|
|
|
|
Other Information
|
|
Cash Paid for Amounts Included in the Measurement of Lease Liabilities
|
$
|
7.3
|
|
Weighted-Average Remaining Lease Term
|
7 years
|
|
Weighted-Average Discount Rate
|
4.68
|
%
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 12 - Leases - Continued
As of
March 31, 2019
, aggregate undiscounted minimum net lease payments and the reconciliation to our lease liability are as follows:
|
|
|
|
|
|
Remainder of 2019
|
$
|
21.0
|
|
2020
|
24.7
|
|
2021
|
21.1
|
|
2022
|
17.7
|
|
2023
|
12.1
|
|
2024 and Thereafter
|
49.5
|
|
Total
|
$
|
146.1
|
|
Less Imputed Interest
|
24.0
|
|
Lease Liability
|
$
|
122.1
|
|
As of March 31, 2019, the right-of-use asset was
$116.0 million
.
Note 13 - Debt
During the
three
months ended
March 31, 2019
, we made principal payments of
$15.0 million
on our senior secured non-recourse notes issued by Northwind Holdings, LLC.
On April 29, 2019, we amended the terms of our existing
five
-year unsecured revolving credit facility, increasing it from
$400.0 million
to
$500.0 million
. The credit facility, which was previously set to expire in 2021, was extended through April 2024. Under the terms of the amended agreement, we may request that the credit facility be increased up to
$700.0 million
, up from the previous amount of $600.0 million. We also may request, on up to two occasions, that the lenders' commitment termination dates be extended by one year. The credit facility provides for the issuance of letters of credit subject to certain terms and limitations. At
March 31, 2019
, letters of credit totaling
$2.1 million
had been issued from the credit facility, but there were
no
borrowed amounts outstanding.
Also on April 29, 2019, we separately entered into a
three
-year,
$100.0 million
unsecured revolving credit facility with a different syndicate of lenders, which is set to expire in April 2022. Under the terms of the agreement, we may request that the credit facility be increased up to
$140.0 million
. We also may request that the lenders' commitment termination dates be extended by one year. The credit facility provides for the issuance of letters of credit subject to certain terms and limitations.
Borrowings under the credit facilities are for general corporate uses and are subject to financial covenants, negative covenants, and events of default that are customary. The two primary financial covenants include limitations based on our leverage ratio and consolidated net worth. We are also subject to covenants that limit subsidiary indebtedness. The credit facilities provide for borrowings at an interest rate based either on the prime rate or LIBOR.