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Unum 2011 Annual Report a
2011 ANNUAL REPORT
The Growing
Need for
Financial Protection

Table of contents

  • Page 1
    The Growing Need for Financial Protection 2011 ANNUAL REPORT Unum 2011 Annual Report a

  • Page 2
    Financial Highlights 2011 2010 2009 2008 2007 Income Per Share* Income from Continuing Operations, As Adjusted** Net Realized Investment Gain (Loss) Deferred Acquisition Costs and Reserve Charges for Closed Block Special Tax Items and Debt Extinguishment Costs Regulatory Reassessment Charges Income...

  • Page 3
    ... the case as we look toward an improving but still challenging environment ahead. While I am very pleased with our overall performance, this is no time to be complacent, and in 2012 our focus will continue to be on the principles that have contributed to our past success. Unum 2011 Annual Report 1

  • Page 4
    ... of this was our decision earlier this year to discontinue the sale of new group long-term care policies. This was a difficult decision because we recognize there's a need in the market for this coverage. After a very thorough analysis, however, we concluded that given 2 Unum 2011 Annual Report

  • Page 5
    ... our group and individual long-term care business (which we discontinued selling in 2009) into a closed block that is reported separately from our ongoing businesses. While there was a cost in taking this action, we can now focus our resources on those product lines that present the best long-range...

  • Page 6
    ... need for financial protection has never been greater, and I continue to believe Unum is uniquely positioned among benefit providers to capitalize on these opportunities. Since the value of our products and services extends well beyond the individual, and we now see the impact to public policy, we...

  • Page 7
    .... We will continue to take the actions needed to deliver value for our customers and solid financial results for our shareholders. On behalf of all of us at Unum, I'd like to thank you for your continued support of our company. Regards, Thomas R. Watjen President and CEO Unum 2011 Annual Report 5

  • Page 8
    Kevin McCarthy Rick McKenney Strength and Flexibility to Target Solutions Kevin McCarthy, chief operating officer, and Rick McKenney, chief financial officer, discuss how Unum's operational approach and capital management help the company navigate the uncertain economy and prepare it for the ...

  • Page 9
    ...benefits. Throughout 2012, we'll continue our efforts to educate policymakers in both countries about the critical role our products play in financial security for working people, in hopes that we can partner with the public sector in developing a solution to these economic issues. Unum 2011 Annual...

  • Page 10
    Unum US 8 Unum 2011 Annual Report

  • Page 11
    ... partners who deliver the benefits solutions and services they need. That means helping employers manage increasingly tight budgets while providing their employees the right mix of financial protection benefits like disability, life, accident and critical illness insurance. At the center of this is...

  • Page 12
    ..., developing more affordable products and partnering with brokers and employers to help them appreciate the value of an income protection plan, we will help ensure that U.K. workers get the back-up plan they deserve." - Jack McGarry, President and Chief Executive Officer, Unum UK 10 Unum 2011 Annual...

  • Page 13
    Unum UK Unum 2011 Annual Report 11

  • Page 14
    Colonial Life 12 Unum 2011 Annual Report

  • Page 15
    ... business in 2011, through new efforts such as a partnership with the U.S. Conference of Mayors and research projects with the Government Financial Officers Association. Smaller companies and over-stretched public employers typically don't have the resources to conduct individual benefits education...

  • Page 16
    ... President and Chief Marketing Officer Christopher J. Jerome Senior Vice President, Global Services 14 Unum 2011 Annual Report BOARD OF DIRECTORS William J. Ryan Chairman of the Board of the Company; Retired Chairman, TD Banknorth Inc. E. Michael Caulfield Former President, Mercer Human Resource...

  • Page 17
    ... Income 96 Notes to Consolidated Financial Statements 163 Reports of Independent Registered Public Accounting Firm and Management's Annual Report on Internal Control Over Financial Reporting 166 Cautionary Statement Regarding Forward-Looking Statements 167 Appendix Unum 2011 Annual Report...

  • Page 18
    ...except share data) 2011 2010 2009 2008 2007 Income Statement Data Revenue Premium Income Net Investment Income Net Realized Investment Gain (Loss) Other Income Total Benefits and Expenses Benefits and Change in Reserves for Future Benefits...515.2 $ 463.5 7,576.4 $ 8,039.9 16 Unum 2011 Annual Report

  • Page 19
    ... reduction of income tax in 2011 related to a tax settlement; an income tax charge of $18.6 million in 2011 related to repatriation of dividends from our U.K. subsidiaries; and an income tax charge of $10.2 million in 2010 to reflect the impact of a tax law change. Unum 2011 Annual Report 17

  • Page 20
    ... long-term care produc t line strategic review as well as a claim reser ve increase in our individual disabilit y closed block of business to reflec t our current estimate of future benefit obligations. Also excluded from af ter-tax operating income are a reduc tion in our 2011 income tax resulting...

  • Page 21
    ... our long-term care products from the Unum US segment to the Closed Block segment. We also reclassified our other insurance products not actively marketed, including individual life and corporate-owned life insurance, reinsurance pools and management operations, group pension, health insurance, and...

  • Page 22
    ... our 2011 net income by $561.2 million. The increase in reserves represented a 10.5 percent increase in long-term care policy and claim reserves as of December 31, 2011, which equal $5.4 billion subsequent to the charge. Claim Reserve Increase for Individual Disability Closed Block Business Claim...

  • Page 23
    ... disability and voluntary benefits products in our Unum US segment; individual disability products in our Unum UK segment; disability and cancer and critical illness policies in our Colonial Life segment; and individual disability and long-term care products in our Closed Block segment. The reserves...

  • Page 24
    ...allowed. Policy reserves for our Closed Block segment include certain older policy forms for individual disability, individual and group long-term care, and certain other products, all of which are no longer actively marketed. The reserves for individual disability and individual and group long-term...

  • Page 25
    ... are those that we believe produce the most reliable reserves. Claim reserves supporting our Unum US group and individual disability product lines and our Closed Block individual disability and individual and group long-term care product lines represent approximately 36.6 percent and 46.8 percent...

  • Page 26
    ... dollars) Policy Reserves % Total Total Net Group Disability Group Life and Accidental Death & Dismemberment Individual Disability - Recently Issued Voluntary Benefits Unum US Segment Unum UK Segment Colonial Life Segment Individual Disability Long-term Care Other Closed Block Segment Subtotal...

  • Page 27
    ... to reflect the effect of the new investment yield. 2. The claim resolution rate, used for both policy reserves and incurred and IBNR claim reserves, is the probability that a disability or long-term care claim will close due to recovery or death of the insured. It is important because it is...

  • Page 28
    ... our long-term care closed block of business as of December 31, 2011. See "Long-term Care Strategic Review" contained herein. Throughout the period 2009 to 2011, actual new money interest rates varied with the changing market conditions, and the assumptions we used to discount our reserves generally...

  • Page 29
    ...variance for both the Unum US group long-term disability line of business and the Closed Block individual disability line of business is the claim resolution rate. In addition, we consider variability in our reserve assumptions related to long-term care policy reserves. These reserves are held under...

  • Page 30
    ... & Dismemberment Supplemental and Voluntary: Individual Disability - Recently Issued Voluntary Benefits Unum UK Group Disability Group Life Supplemental and Voluntary Colonial Life Accident, Sickness, and Disability Life Cancer and Critical Illness Closed Block Long-term Care Totals - - - - - $2,300...

  • Page 31
    ...decrease in net income in 2012. See Note 1 of the "Notes to Consolidated Financial Statements" contained herein. Valuation of Investments All of our fixed maturity securities are classified as available-for-sale and are reported at fair value. Our derivative financial instruments, including certain...

  • Page 32
    ... rate swap curves) • Transactional data for new issuance and secondary trades • Security cash flows and structures • Recent issuance/supply • Sector and issuer level spreads • Security credit ratings/maturity/capital structure/optionality • Corporate actions 30 Unum 2011 Annual Report

  • Page 33
    2011 Unum • Underlying collateral • Prepayment speeds/loan performance/delinquencies/weighted average life/seasoning • Public covenants • Comparative bond analysis • Derivative spreads • Relevant reports issued by analysts and rating agencies • Audited financial statements We review ...

  • Page 34
    ... 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 as shown in Note 2 of the "Notes to Consolidated Financial Statements" contained herein. 32 Unum 2011 Annual Report

  • Page 35
    ... in the security at the date of acquisition. The determination of cash flows is inherently subjective, and methodologies may vary depending on the circumstances specific to the security. The timing and amount of our cash flow estimates are developed using historical Unum 2011 Annual Report 33

  • Page 36
    ...) rate and the long-term rate of return on plan assets. We also use, as applicable, expected increases in compensation levels and a weighted average annual rate of increase in the per capita cost of covered benefits, which reflects a health care cost trend rate, and the U.K. pension plan also...

  • Page 37
    ...asset/liability studies, and quarterly investment portfolio reviews. Risk tolerance is established through consideration of plan liabilities, plan funded status, and corporate financial condition. In 2011, we changed the investment strategy for our U.K. pension plan, which resulted in new investment...

  • Page 38
    ... Changing the expected long-term rate of return on the plan assets by +/-50 basis points would have changed our 2011 pension plan expense by approximately $7.0 million before tax, but our OPEB plan expense would not change. A lower rate of return on plan assets increases our expense. Benefit...

  • Page 39
    ... contribute to the plan at the rate of at least 24.8 percent of pensionable salaries for active members of the plan, plus 0.4 percent of pensionable salaries for all employees (including active members of the plan) who are entitled to lump sum death in service benefits under the plan, sufficient to...

  • Page 40
    ... to Consolidated Financial Statements" contained herein. Consolidated Operating Results Year Ended December 31 (in millions of dollars) 2011 % Change 2010 % Change 2009 Revenue Premium Income Net Investment Income Net Realized Investment Gain (Loss) Other Income Total Revenue Benefits and Expenses...

  • Page 41
    ... group long-term care sales. Net investment income was higher in 2011 relative to 2010 due primarily to continued growth in the level of invested assets and higher bond call premiums, partially offset by an increase in the amortization of the principal amount invested in our tax credit partnerships...

  • Page 42
    ... settlement with the Internal Revenue Service (IRS) with respect to our appeal of audit adjustments for the tax years 1996 to 2004. Also favorably impacting 2011 income tax compared to prior years is our increased level of investments in low-income housing tax credit partnerships. Our income tax...

  • Page 43
    ...Long-term Care Closed Block Reserve Charge for Individual Disability Closed Block Tax Reduction from IRS Settlement Tax Related to U.K. Repatriation Tax Related to Healthcare Reform Legislation Net Realized Investment Gain (Loss) Income Tax (Benefit) on Net Realized Investment Gain (Loss) Net Income...

  • Page 44
    ... sales results have been restated to reflect this change in our reporting classifications. Year Ended December 31 (in millions of dollars) 2011 % Change 2010 % Change 2009 Unum US Fully Insured Products Administrative Services Only (ASO) Products Total Unum US Unum UK Colonial Life Closed Block...

  • Page 45
    ... our long-term care products from the Unum US segment to the Closed Block segment. We also reclassified our other insurance products not actively marketed, including individual life and corporate-owned life insurance, reinsurance pools and management operations, group pension, health insurance, and...

  • Page 46
    ...indicators for Unum US group disability. Year Ended December 31 (in millions of dollars, except ratios) 2011 % Change 2010 % Change 2009 Operating Revenue Premium Income Group Long-term Disability Group Short-term Disability Total Premium Income Net Investment Income Other Income Total Benefits and...

  • Page 47
    ... fee-based family medical leave products. The benefit ratio was lower in 2010 compared to 2009 due primarily to a higher rate of claim recoveries for group long-term disability, offset partially by an increase in claim incidence rates for both group long-term and short-term disability. Interest and...

  • Page 48
    ... of dollars, except ratios) 2011 % Change 2010 % Change 2009 Operating Revenue Premium Income Group Life Accidental Death & Dismemberment Total Premium Income Net Investment Income Other Income Total Benefits and Expenses Benefits and Change in Reserves for Future Benefits Commissions Deferral of...

  • Page 49
    .... Premium and case persistency for the group life product line increased in both the core and large case market segments. Net investment income was higher in 2010 compared to 2009 due primarily to an increase in the level of assets supporting this line of business. The benefit ratio for 2010...

  • Page 50
    ... income on mortgagebacked securities. The interest adjusted loss ratio for the individual disability - recently issued line of business in 2010 was consistent with 2009, with a higher rate of claim recoveries generally offsetting the higher paid claim incidence rates. The benefit ratio for voluntary...

  • Page 51
    2011 Unum Unum US Sales Year Ended December 31 (in millions of dollars) 2011 % Change 2010 % Change 2009 Sales by Product Fully Insured Products Group Disability, Group Life, and AD&D Group Long-term Disability Group Short-term Disability Group Life AD&D Subtotal Supplemental and Voluntary ...

  • Page 52
    ... long-term and short-term disability sales and lower group life and accidental death and dismemberment sales. The number of new accounts added in our group core market segment during 2010 was 3.0 percent lower than the number of new accounts added during 2009. Sales in the group large case market...

  • Page 53
    ... for the Unum UK segment. Year Ended December 31 (in millions of dollars, except ratios) 2011 % Change 2010 % Change 2009 Operating Revenue Premium Income Group Long-term Disability Group Life Supplemental and Voluntary Total Premium Income Net Investment Income Other Income Total Benefits and...

  • Page 54
    ... assets supporting this business segment, an increase in bond calls, and higher returns from inflation index-linked bonds. These index-linked bonds support the claim reserves associated with certain of our group policies that provide for inflation-linked increases in benefits. 52 Unum 2011 Annual...

  • Page 55
    ...-linked bonds. The benefit ratio increased in 2010 relative to 2009 due primarily to unfavorable risk results for the group long-term disability product line, which was driven primarily by lower premium income and the impact of higher inflation on claim reserves associated with disability policies...

  • Page 56
    ... in Unum UK decreased slightly in 2010 compared to 2009, with the decrease in sales in the group long-term disability line of business being attributable to a decline in sales in the large case market, partially offset by higher sales to existing customers and higher core market sales. The sales...

  • Page 57
    ... includes insurance for accident, sickness, and disability products, life products, and cancer and critical illness products issued primarily by Colonial Life & Accident Insurance Company and marketed to employees at the workplace through an independent contractor agency sales force and brokers...

  • Page 58
    ...2010. In the public sector market, sales were generally consistent in 2011 as compared to 2010. Sales results for 2011 were unfavorably impacted by our decision to discontinue selling our limited benefit medical product during 2011. The number of new accounts declined 1.8 percent in 2011 compared to...

  • Page 59
    ... 2009. The other insurance products line of business consists of certain other products no longer actively marketed, including individual life and corporate-owned life insurance, reinsurance pools and management operations, group pension, health insurance, and individual annuities. Unum 2011 Annual...

  • Page 60
    ... the Closed Block segment. Year Ended December 31 (in millions of dollars, except ratios) 2011 % Change 2010 % Change 2009 Operating Revenue Premium Income Individual Disability Long-term Care All Other Total Premium Income Net Investment Income Other Income Total Benefits and Expenses Benefits and...

  • Page 61
    ... by strong persistency and higher sales of group long-term care, which increased 36.5 percent in 2011 compared to 2010. Net investment income was higher in 2011 compared to 2010 due primarily to an increase in the level of assets supporting this line of business, partially offset by a decline in the...

  • Page 62
    ... operating revenue and income for this segment will continue to decline over time as these closed blocks of business wind down, although we do expect higher premium income associated with long-term care rate increases. We also expect a small amount of new group long-term care business to continue...

  • Page 63
    ... in tax-credit partnerships is offset by a lower income tax rate due to the tax benefits recognized as a result of these investments. Other income was higher in 2011 compared to 2010 due to $17.5 million of interest income related to the previously discussed settlement of our appeal to the IRS...

  • Page 64
    ...of directors of our insurance subsidiaries and is more restrictive than the five percent limit generally allowed by the state insurance departments which regulate the type of investments our insurance subsidiaries are allowed to own. These internal limits are as follows: 62 Unum 2011 Annual Report

  • Page 65
    ... subcommittee appointed by the boards of directors of our insurance subsidiaries. These actions are also reviewed by the finance committee of Unum Group's board of directors on a quarterly basis. • We review these investment policies and guidelines annually, or more frequently if deemed necessary...

  • Page 66
    ... our various product lines and the aggregate discount rates embedded in the reserves. Realized investment gains and losses, before tax, are as follows: Year Ended December 31 (in millions of dollars) 2011 2010 2009 Fixed Maturity Securities Gross Gains on Sales Gross Losses on Sales Other-Than...

  • Page 67
    ... 2009, the company announced that it had hired a financial adviser to review its capital structure alternatives regarding debt payments due in 2010. At the time of disposition, these securities had been in an unrealized loss position for a period of greater than three years. Unum 2011 Annual Report...

  • Page 68
    ... will not result in a permanent change in assets or stockholders' equity. The change in fair value of this embedded derivative recognized as a realized gain or loss during 2011, 2010, and 2009 resulted primarily from a change in credit spreads in the overall investment market. The fair value of this...

  • Page 69
    2011 Unum The following two tables show the length of time our investment-grade and below-investment-grade fixed maturity securities had been in a gross unrealized loss position as of December 31, 2011....4 14.5 1.6 1.5 9.6 37.2 161.6 $ 93.2 16.9 1.9 - 2.0 24.4 43.3 181.7 Unum 2011 Annual Report 67

  • Page 70
    ... Loss Number of Issuers Investment-Grade Financial Institutions Communications $149.7 51.9 $201.6 $30.7 10.6 $41.3 2 1 3 At December 31, 2011, our mortgage/asset-backed securities had an average life of 4.28 years, effective duration of 3.78 years, and a weighted average credit rating of AAA. The...

  • Page 71
    ... our exposure or to sell credit protection. Our exposure relates only to non-financial institutions and is as follows: European Fixed Maturity Securities Exposure - By Country (in millions of dollars) As of December 31, 2011 Fair Value Amortized Cost Greece Ireland Italy Portugal Spain Total $ 54...

  • Page 72
    .... This security was in an unrealized gain position as of December 31, 2011. Ireland We have no direct exposure to Irish financial institutions. In November 2010, Ireland received a support package valued at â,¬85 billion from the International Monetary Fund/European Union based on its plan of...

  • Page 73
    ... and $56.2 million on a fair value basis at December 31, 2011 and December 31, 2010, respectively. See Notes 3 and 4 of the "Notes to Consolidated Financial Statements" contained herein for further discussion of our investments and our derivative financial instruments. Unum 2011 Annual Report 71

  • Page 74
    ...in our insurance subsidiaries. Premium and investment income, as well as maturities and sales of invested assets, provide the primary sources of cash. Debt and/or securities offerings provide an additional source of liquidity. Cash is applied to the payment of policy benefits, costs of acquiring new...

  • Page 75
    ...of claims, commissions, expenses, and income taxes. Premium income growth is dependent not only on new sales, but on renewals of existing business, renewal price increases, and persistency. Investment income growth is dependent on the growth in the underlying assets supporting our insurance reserves...

  • Page 76
    ... of Unum Group common stock. This decline in net purchases was partially offset by an increase in purchases of short-term investments using cash received under our securities lending program. Net purchases of short-term investments increased during 2010 relative to 2009 due to the increase in bond...

  • Page 77
    ... The payment of dividends to a parent company from its insurance subsidiaries is generally further limited to the amount of unassigned statutory surplus. Unum Group and/or certain of its intermediate holding company subsidiaries may also receive dividends from its United Kingdombased affiliate, Unum...

  • Page 78
    ... rate, insured, senior, secured notes, due 2037, in a private offering. Recourse for the payment of principal, interest, and other amounts due on the notes will be limited to the assets of Northwind Holdings, consisting primarily of the stock of its sole subsidiary Northwind Re, a Vermont special...

  • Page 79
    ..., in a private offering. Recourse for the payment of principal, interest, and other amounts due on the notes will be limited to the assets of Tailwind Holdings, consisting primarily of the stock of its sole subsidiary Tailwind Re, a South Carolina special purpose financial captive insurance company...

  • Page 80
    ... liability management under "Investments" contained herein and Note 1 of the "Notes to Consolidated Financial Statements" contained herein for additional information. Pensions and other postretirement benefit obligations include our defined benefit pension and postretirement plans for our employees...

  • Page 81
    ..., 2011. Transfers of Financial Assets To manage our cash position more efficiently, we 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...

  • Page 82
    ... insurance subsidiaries as of the date of this filing. AM Best Fitch Moody's S&P Issuer Credit Ratings Financial Strength Ratings Provident Life and Accident Provident Life and Casualty Unum Life of America First Unum Life Colonial Life & Accident Paul Revere Life Paul Revere Variable Unum Limited...

  • Page 83
    ...- credit rating of Unum Group and the A- financial strength rating of its domestic subsidiaries and raised the outlook for the Company and its domestic subsidiaries to "positive." There have been no other changes in any of the rating agencies' outlook statements or ratings during 2011 or during 2012...

  • Page 84
    ... our holding companies, and our investment strategy which we believe provides for adequate cash flows to meet the funding requirements of our business. We may in certain circumstances, however, need to sell investments due to changes in regulatory or capital requirements, changes in tax laws, rating...

  • Page 85
    2011 Unum Although our policy benefits are primarily in the form of claim payments and we therefore have minimal exposure to the policy withdrawal risk associated with deposit products such as individual life policies or annuities, the fair values of liabilities under all insurance contracts are ...

  • Page 86
    ... that would be necessary if the unrealized investment gains and losses related to the fixed maturity securities and derivatives had been realized. Changes in this adjustment are also reported as a component of other comprehensive income or loss, net of deferred taxes. 84 Unum 2011 Annual Report

  • Page 87
    ... realized investment gains and losses and income tax, as reported in U.S. dollars would have decreased approximately $18.9 million and $22.5 million, respectively, for the years then ended. Dividends paid by Unum Limited are generally held at our U.K. finance subsidiary or our U.K. holding company...

  • Page 88
    ...1st Line: The Business 2nd Line: Risk and Control 3rd Line: Independent Review All Unum Employees Frontline Business Management Risk Committees and Chief Risk Officer Chief Actuary Compliance Officers and Staff Internal Audit and Internal Controls Audit Committee of Unum Group Board Unum Group...

  • Page 89
    ... and casualty insurance. Our corporate strategy is focused on providing group, individual, and voluntary benefits, either as stand-alone products or combined with other coverages, that create comprehensive benefits solutions for employers. We have market leadership positions in the product lines we...

  • Page 90
    ..., risk limit determination, reinsurance purchases, hedging activities, asset allocation, pricing, and corporate development. Risk Management Activities We accept and manage strategic, credit, and insurance risks in accordance with our corporate strategy, investment policy, and annual business plans...

  • Page 91
    ...the strengths of our ERM framework, measurement approaches, key assumptions utilized in assessing our risks, and prospective solvency assessments under both normal and stressed conditions. During 2012, we will implement actions to prepare for compliance with this evolving standard. Unum 2011 Annual...

  • Page 92
    ... Maturity Securities - at fair value (amortized cost: $36,640.7; $36,546.6) Mortgage Loans Policy Loans Other Long-term Investments Short-term Investments Total Investments Other Assets Cash and Bank Deposits Accounts and Premiums Receivable Reinsurance Recoverable Accrued Investment Income Deferred...

  • Page 93
    ...Contract Benefits Reserves for Future Policy and Contract Benefits Unearned Premiums Other Policyholders' Funds Income Tax Payable Deferred Income Tax Short-term Debt Long-term Debt Other Liabilities Total Liabilities Commitments and Contingent Liabilities - Note 13 Stockholders' Equity Common Stock...

  • Page 94
    ...Statements of Income Year Ended December 31 (in millions of dollars, except share data) 2011 2010 2009 Revenue Premium Income Net Investment Income Realized Investment Gain (Loss) Total Other-Than-Temporary Impairment Loss on Fixed Maturity Securities... $ 852.6 2.57 2.57 92 Unum 2011 Annual Report

  • Page 95
    ... at End of Year Retained Earnings Balance at Beginning of Year Net Income Dividends to Stockholders (per common share: $0.395; $0.350; $0.315) Retirement of Repurchased Common Shares Cumulative Effect of Accounting Principle Change - Note 1 Balance at End of Year Treasury Stock Balance at Beginning...

  • Page 96
    ... Insurance Reserves and Liabilities Change in Income Taxes Change in Other Accrued Liabilities Non-cash Adjustments to Net Investment Income Net Realized Investment (Gain) Loss Depreciation Other, Net Net Cash Provided by Operating Activities Cash Flows from Investing Activities Proceeds from Sales...

  • Page 97
    ... Currency Translation Adjustment (net of tax expense of $ - ; $0.6; $ - ) Change in Unrecognized Pension and Postretirement Benefit Costs (net of tax expense (benefit) of $(67.4); $(12.7); $42.0) Total Other Comprehensive Income Comprehensive Income See notes to consolidated financial statements...

  • Page 98
    ... insurance, employer- and employee-paid group benefits, and other related services. We market our products primarily to employers interested in providing benefits to their employees. We have three major business segments: Unum US, Unum UK, and Colonial Life. Our other reporting segments are Closed...

  • Page 99
    ...partnerships, and private equity partnerships. Freestanding derivatives are more fully described in the derivatives accounting policy which follows. Tax credit partnerships in which we have invested were formed for the purpose of investing in the construction and rehabilitation of low-income housing...

  • Page 100
    ... of net realized investment gain or loss. When interest rate swaps are used in hedge accounting relationships, periodic settlements are recorded in the same income statement line as the related settlements of the hedged items. • Cash flow hedge. To the extent it is effective, changes in the fair...

  • Page 101
    ..., such as commissions on group products which are generally level throughout the life of the policy, are excluded from deferral. Deferred acquisition costs are subject to recoverability testing at the time of policy issue and loss recognition testing in subsequent years. Unum 2011 Annual Report 99

  • Page 102
    ...losses and estimates of incurred but not reported losses for traditional life and accident and health products. For interest-sensitive products, benefits are the amounts paid and expected to be paid on insured claims in excess of the policyholders' policy fund balances. 100 Unum 2011 Annual Report

  • Page 103
    2011 Unum Policy and Contract Benefits Liabilities: Policy reserves represent future policy and contract benefits for claims not yet incurred. Policy reserves for traditional life and accident and health products are determined using the net level premium method. The reserves are calculated based ...

  • Page 104
    Notes To Consolidated Financial Statements Revenue Recognition: Traditional life and accident and health products are long-duration contracts, and premium income is recognized as revenue when due from policyholders. If the contracts are experience rated, the estimated ultimate premium is recognized...

  • Page 105
    ... a stock life insurance company will remain participating as long as the policies remain in-force. A Participation Fund Account (PFA) was established for the benefit of all such individual participating life and annuity policies and contracts. The assets of the PFA provide for the benefit, dividend...

  • Page 106
    ... accumulated other comprehensive income (loss). ASC 715 "Compensation - Retirement Benefits." In December 2008, the FASB issued a new accounting standard, now included in ASC 715, to provide guidance on an employer's disclosures about plan assets of a defined benefit pension or other postretirement...

  • Page 107
    ... issued a new accounting standard, now included in ASC 855, to provide subsequent events guidance. This topic was previously addressed only in the auditing literature, and is largely similar to the auditing guidance with limited exceptions which are not intended to result in significant changes in...

  • Page 108
    ...replacement financial assets. The amendments in this update are effective for interim and annual reporting periods beginning on or after December 15, 2011. The adoption of this update will have no effect on our financial position or results of operations. ASC 944 "Financial Services - Insurance." In...

  • Page 109
    ... Value Assets Fixed Maturity Securities Mortgage Loans Policy Loans Other Long-term Investments Derivatives Equity Securities Miscellaneous Long-term Investments Liabilities Policyholders' Funds Deferred Annuity Products Supplementary Contracts without Life Contingencies Short-term Debt Long-term...

  • Page 110
    ... in our overall management of interest rate risk, which minimizes exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts. Short-term and Long-term Debt: Fair values for short-term and long-term debt other than securities lending...

  • Page 111
    ... average life/seasoning • Public covenants • Comparative bond analysis • Derivative spreads • Relevant reports issued by analysts and rating agencies • Audited financial statements We review all prices obtained to ensure they are consistent with a variety of observable market inputs...

  • Page 112
    ... directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument's anticipated life. • Approximately 4.1 percent of our fixed maturity securities were valued based on one or more non-binding broker...

  • Page 113
    ...Governments Public Utilities Mortgage/Asset-Backed Securities All Other Corporate Bonds Redeemable Preferred Stocks Total Fixed Maturity Securities Other Long-term Investments Derivatives Interest Rate....4 $ 1,304.4 1,591.6 1,376.7 10,633.3 2,973.2 24,550.1 57.4 42,486.7 Unum 2011 Annual Report 111

  • Page 114
    ... States, Municipalities, and Political Subdivisions Foreign Governments Public Utilities Mortgage/Asset-Backed Securities All Other Corporate Bonds Redeemable Preferred Stocks Total Fixed Maturity Securities Other Long-term Investments Derivatives Interest Rate Swaps Foreign Exchange Contracts Total...

  • Page 115
    ... Foreign Governments Public Utilities All Other Corporate Bonds Redeemable Preferred Stocks Total Fixed Maturity Securities $ 169.8 47.7 - 362.1 1,426.5 - $2,006.1 $ - 274.9 0.7 534.2 2,452.7 - $3,262.5 $ 95.9 36.2 0.7 483.2 1,940.1 - $2,556.1 $ - 33.7 - 673.6 1,676.6 5.5 $2,389.4 Transfers between...

  • Page 116
    ... Income or Loss Purchases Level 3 Transfers Into Out of End of Year (in millions of dollars) Earnings Sales Fixed Maturity Securities Public Utilities Mortgage/Asset-Backed Securities All Other Corporate Bonds Redeemable Preferred Stocks Total Fixed Maturity Securities Equity Securities...

  • Page 117
    ... Agencies and Authorities States, Municipalities, and Political Subdivisions Foreign Governments Public Utilities Mortgage/Asset-Backed Securities All Other Corporate Bonds Redeemable Preferred Stocks Total Fixed Maturity Securities $ 1,005.8 1,377.8 1,139.4 9,015.7 2,634.6 21,411.6 55.8 $36...

  • Page 118
    ... Mortgage/Asset-Backed Securities All Other Corporate Bonds Redeemable Preferred Stocks Total Fixed Maturity Securities $ - 51.6 192.0 94.2 1,703.9 - $2,041.7 $ - 1.3 7.9 4.8 65.5 - $79.5 $ 6.3 75.3 142.2 19.6 684.9 20.9 $949.2 $ 1.1 7.5 20.7 0.7 110.8 1.9 $142.7 116 Unum 2011 Annual Report

  • Page 119
    ...United States Government and Government Agencies and Authorities States, Municipalities, and Political Subdivisions Public Utilities Mortgage/Asset-Backed Securities All Other Corporate Bonds Redeemable Preferred Stocks Total Fixed Maturity Securities... 236.8 0.6 $237.4 Unum 2011 Annual Report 117

  • Page 120
    ... loss on fixed maturity securities. Unrealized losses on investment-grade fixed maturity securities principally relate to changes in interest rates or changes in market or sector credit spreads which occurred subsequent to the acquisition of the securities. At December 31, 2011, the fair value of...

  • Page 121
    ... analyst reports and forecasts, sector credit ratings, future business prospects and earnings trends, issuer refinancing capabilities, actual and/or potential asset sales by the issuer, and other data relevant to the collectibility of the contractual cash flows of the security. We take into account...

  • Page 122
    ... 31, 2011. We are the sole beneficiary of a special purpose entity which is consolidated under the provisions of GAAP. This entity is a securitized asset trust containing a highly rated bond for principal protection, nonredeemable preferred stock, and several partnership equity investments. We...

  • Page 123
    ..., 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 Unum 2011 Annual Report 121

  • Page 124
    ... in the allowance for credit losses is as follows: Year Ended December 31 (in millions of dollars) 2011 2010 2009 Balance at Beginning of Year Provision Charge-offs, Net of Recoveries Balance at End of Year $1.5 - - $1.5 $ 3.2 2.4 (4.1) $ 1.5 $ - 5.5 (2.3) $ 3.2 122 Unum 2011 Annual Report

  • Page 125
    ... due and had a carrying value of $9.4 million. As of December 31, 2010, none of our mortgage loans were past due regarding principal and interest payments, and none were on nonaccrual status. At December 31, 2011, we had no commitments to fund commercial mortgage loans. Unum 2011 Annual Report 123

  • Page 126
    ... 2011 2010 2009 Fixed Maturity Securities Derivative Financial Instruments Mortgage Loans Policy Loans Other Long-term Investments Short-term Investments Gross Investment Income Less Investment Expenses Less Investment Income on PFA Assets Less Amortization of Tax Credit Partnerships Net Investment...

  • Page 127
    ... contracts on specific fixed income securities. Hedging transactions 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...

  • Page 128
    ... 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...

  • Page 129
    ... of anticipated settlements of interest rate swaps outstanding under our cash flow hedging programs at December 31, 2011, whereby we receive a fixed rate and pay a variable rate. The weighted average variable interest rates assume current market conditions. (in millions of dollars) 2012 2013 Total...

  • Page 130
    ..., pay variable interest rate swap to hedge the changes in the fair value of certain fixed rate long-term debt. This swap effectively converts the associated fixed rate long-term debt into floating rate debt and provides for a better matching of interest rates with our short-term investments, which...

  • Page 131
    ... time as the reinsured business winds down. Locations and Amounts of Derivative Financial Instruments The following tables summarize the location and fair values of derivative financial instruments, as reported in our consolidated balance sheets. December 31, 2011 Asset Derivatives (in millions of...

  • Page 132
    ...summarize the location of and gains and losses on derivative financial instruments designated as cash flow hedging instruments, as reported in our consolidated statements of income and consolidated statements of comprehensive income. Year Ended December 31, 2011 Gain Recognized in OCI on Derivatives...

  • Page 133
    ... arrangement, as reported in our consolidated statements of income. Year Ended December 31 (in millions of dollars) 2011 2010 2009 Gain (Loss) Recognized in Net Realized Investment Gain (Loss) $(39.4) $21.1 $243.1 Note 5. Liability for Unpaid Claims and Claim Adjustment Expenses Changes in the...

  • Page 134
    ...continued increased rate of claim recoveries for our Unum US group long-term disability line of business and our Closed Block individual disability line of business. Throughout the period 2009 to 2011, we had generally stable to improving claims management performance, and our claim resolution rates...

  • Page 135
    ... the unrealized investment gains and losses related to the available-for-sale securities had been realized. Changes in these adjustments are reported as a component of other comprehensive income or loss. Note 6. Income Tax Total income tax expense (benefit) is allocated as follows: 2011 Year Ended...

  • Page 136
    ... Invested Assets Employee Benefits Other Gross Deferred Tax Asset Less Valuation Allowance Net Deferred Tax Asset Total Net Deferred Tax Liability 349.8 262.3 29.7 641.8 - 641.8 $261.2 317.8 174.2 16.6 508.6 4.1 504.5 $417.2 $257.0 507.8 138.2 903.0 $328.4 392.7 200.6 921.7 134 Unum 2011 Annual...

  • Page 137
    ... income tax rate reduction was enacted which reduced the tax rate from 27 percent to 26 percent, retroactive to April 2011, and from 26 percent to 25 percent, effective April 2012. We are required to adjust deferred tax assets and liabilities through income on the date of enactment of a rate change...

  • Page 138
    ...federal income tax returns. During the fourth quarter of 2011, the Congressional Joint Committee on Taxation approved our final settlement with the IRS for tax years 1996 to 2004. The settlement resulted from our administrative appeal of audit adjustments relating primarily to insurance tax reserves...

  • Page 139
    ... of dividends from Northwind Reinsurance Company (Northwind Re), the sole subsidiary of Northwind Holdings. Northwind Re reinsured the risks attributable to specified individual disability insurance policies issued by or reinsured by Provident Life and Accident Insurance Company, Unum Life Insurance...

  • Page 140
    ... of dividends from Tailwind Reinsurance Company (Tailwind Re), the sole subsidiary of Tailwind Holdings. Tailwind Re reinsured Unum America's liability with respect to certain specified long-term disability claims incurred between January 1, 1999 and December 31, 2001 that were in payment status on...

  • Page 141
    ...31, 2011 and 2010, respectively. Junior Subordinated Debt Securities In 1998, Provident Financing Trust I (the trust) issued $300.0 million of 7.405% capital securities in a public offering. These capital securities, which mature in 2038, are fully and unconditionally guaranteed by Unum Group, have...

  • Page 142
    ... benefit pension plan was closed to new entrants on December 31, 2002. The following tables provide the changes in the benefit obligation and fair value of plan assets and statements of the funded status of the plans. Pension Benefits U.S. Plans (in millions of dollars) 2011 2010 Non U.S. Plans 2011...

  • Page 143
    ... of dollars) 2011 2010 Non U.S. Plans 2011 2010 OPEB 2011 2010 Current Liability Noncurrent Liability Noncurrent Asset Underfunded (Overfunded) Status Unrecognized Pension and Postretirement Benefit Costs Net Actuarial Gain (Loss) Prior Service Credit (Cost) Deferred Income Tax Asset Total Included...

  • Page 144
    ... purposes and limiting the concentration of risk in any one type of investment. Assets for life insurance benefits payable to certain former retirees covered under the OPEB plan are invested in life insurance contracts issued by one of our insurance subsidiaries. The terms of these contracts...

  • Page 145
    Notes To Consolidated Financial Statements 2011 Unum The categorization of fair value measurements by input level for the invested assets in our U.S. pension plans is as follows: December 31, 2011 Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) Significant Other ...

  • Page 146
    ... to mature between five and eight years from the date of initial investment. Changes in our U.S. pension plans' assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 31, 2011 and 2010 are as follows: Year Ended December 31...

  • Page 147
    ... U.K. Fixed Interest Corporate Bonds U.K. Index-linked Government Bonds Cash Equivalents Total Plan Assets $ - - - 0.2 $0.2 $106.6 61.1 8.1 - $175.8 106.6 61.1 8.1 0.2 $176.0 Level 2 assets consist of funds that are valued based on the NAV of the underlying holdings. These investments have no...

  • Page 148
    ... annual liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews. Risk tolerance is established through consideration of plan liabilities, plan funded status, and corporate financial condition. The expected return assumption for the life insurance reserve...

  • Page 149
    2011 Unum Our rate of compensation increase assumption is generally based on periodic studies of compensation trends. For measurement purposes at December 31, 2011 and 2010, the annual rate of increase in the per capita cost of covered postretirement health care benefits assumed for the next ...

  • Page 150
    ... Consolidated Financial Statements Benefit Payments The following table provides expected benefit payments, which reflect expected future service, as appropriate. Pension Benefits (in millions of dollars) U.S. Plans Non U.S. Plans Gross OPEB Subsidy Payments Net Year 2012 2013 2014 2015 2016 2017...

  • Page 151
    .... Any price adjustment payable to us was to be settled in shares of Unum Group common stock. Any price adjustment we would have been required to pay would have been settled in either cash or common stock at our option. The final price adjustment settlement occurred in March 2011, resulting in the...

  • Page 152
    ...grant and generally vested after three years. Under the stock plan of 1999 (the 1999 Plan), an aggregate of up to 17.50 million shares of common stock were available for awards to our employees, officers, brokers, and directors. Awards could be in the form of stock options, stock appreciation rights...

  • Page 153
    ... in the form of additional units. Compensation cost for cash-settled awards subject to accelerated vesting upon retirement is recognized over the implicit service period. The amount payable per unit awarded is equal to the price per share of Unum Group's common stock at settlement of the award...

  • Page 154
    ...the date of grant. Expense Compensation expense for the stock plans, as reported in our consolidated statements of income, is as follows: 2011 Year Ended December 31 2010 (in millions of dollars) 2009 Nonvested Stock Awards and Cash-Settled Awards Performance Restricted Stock Units Stock Options...

  • Page 155
    ... insurance for accident, sickness, and disability products, life products, and cancer and critical illness products marketed to employees at the workplace through an agency sales force and brokers. The Closed Block segment, which previously included only our closed block of individual disability...

  • Page 156
    ... Financial Statements We reclassified our long-term care products from the Unum US segment to the Closed Block segment following completion of a 2011 comprehensive and strategic review of our long-term care business. We had previously discontinued selling individual long-term care in 2009...

  • Page 157
    ... Issued Voluntary Benefits 464.7 580.0 4,296.0 Unum UK Group Long-term Disability Group Life Supplemental and Voluntary 419.6 203.6 64.4 687.6 Colonial Life Accident, Sickness, and Disability Life Cancer and Critical Illness 695.3 190.7 249.3 1,135.3 Closed Block Individual Disability Long-term Care...

  • Page 158
    ... Financial Statements Selected operating statement data by segment is presented as follows: (in millions of dollars) Unum US Unum UK Colonial Life Closed Block Corporate Total Year Ended December 31, 2011 Premium Income Net Investment Income Other Income Operating Revenue Operating Income...

  • Page 159
    2011 Unum The following table provides the changes in deferred acquisition costs by segment: (in millions of dollars) Unum US Unum UK Colonial Life Closed Block Total Year Ended December 31, 2011 Beginning of Year Capitalized Amortization Impairment of Long-term Care Deferred Acquisition Costs ...

  • Page 160
    ... 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. 158 Unum 2011 Annual Report

  • Page 161
    ... group life insurance policies when we paid life insurance proceeds by establishing interestbearing retained asset accounts rather than by mailing checks. Plaintiffs seek to represent a class of beneficiaries under group life insurance contracts that were part of ERISA employee welfare benefit plans...

  • Page 162
    ... the market for demand deposits. The District Court also certified a class of people who, during a certain period of time, were beneficiaries under certain group life insurance contracts that were part of ERISA employee welfare benefit plans and were paid death benefits using retained asset accounts...

  • Page 163
    ... current law, $634.4 million is available during 2012 for the payment of ordinary dividends to Unum Group from its traditional U.S. insurance subsidiaries, which exclude Tailwind Re and Northwind Re. The ability of Tailwind Re and Northwind Re to pay dividends to their respective parent companies...

  • Page 164
    ...tax related to our long-term care business. • A reserve charge of $183.5 million before tax and $119.3 million after tax related to our individual disability closed block business. • An income tax benefit of $41.3 million due to a final settlement with the IRS with respect to our appeal of audit...

  • Page 165
    ... an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about...

  • Page 166
    Management's Annual Report on Internal Control Over Financial Reporting The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. The Company's ...

  • Page 167
    .... We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Unum Group and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of income, stockholders' equity, cash...

  • Page 168
    ..., or policies. • Changes in our financial strength and credit ratings. • Rating agency actions, state insurance department market conduct examinations and other inquiries, other governmental investigations and actions, and negative media attention. • Effectiveness in managing our operating...

  • Page 169
    ... of accounting principle changes of $422.5 million effective January 1, 2007. (in millions) Year Ended December 31 2011 2007 After-tax Operating Income, As Adjusted Deferred Acquisition Costs and Reserve Charges for Closed Block, Net of Tax Regulatory Reassessment Charges, Net of Tax Special Tax...

  • Page 170
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  • Page 171
    ...Blvd. Columbia, SC 29210 803 798 7000 Milton Court Dorking, Surrey RH4 3LZ England 011 44 1306 887766 18 Chestnut Street Worcester, MA 01608 774 437 4441 PRINCIPAL SUBSIDIARIES Provident Life and Accident Insurance Company Chattanooga, Tennessee Unum Life Insurance Company of America Portland, Maine...

  • Page 172
    © 2012 Unum Group. All rights reserved. Unum is a registered trademark and marketing brand of Unum Group and its insuring subsidiaries. Unum Group 1 Fountain Square Chattanooga, TN 37402 www.unum.com This product is printed on paper whose fiber has been certified by an independent 3rd party as ...