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2012 ANNUAL REPORT

Table of contents

  • Page 1
    2012 ANNUAL REPORT

  • Page 2
    Financial Highlights Unum Group Af Adjufted(1) 2012 2011 2010 2009 2008 Income Per Share (2) After-tax Operating Income(3) Net Realized Inveftment Gain (Loff) Non-operating Retirement-related Loff Deferred Acquifition Coftf and Referve Chargef for Clofed Block Special Tax Itemf Net Income Book ...

  • Page 3
    To Our Shareholders, Customers and Colleagues Thomas R. Watjen President and Chief Executive Officer I'm pleased to report that 2012 was another very good year for our company. Our continued focus on the disciplined execution of our business plan resulted in strong operating and financial ...

  • Page 4
    ..., and the shortfall in Unum UK was offset by solid performance around the rest of the company. Among the year's highlights:* • Revenues of $10.5 billion, a 2.3 percent year-over-year increase driven by premium growth in all our active businesses; • Net investment income of $2.5 billion, which...

  • Page 5
    ... foundations have shifted, government resources have been strained, and costs have climbed. When people need them most, benefits such as disability, accident, critical illness and life insurance protect against financial hardships that can derail the stability of individuals and families. Few people...

  • Page 6
    ...be extremely strong - indicating our close connection to the marketplace; for the value they bring to individuals and their families during their time of need, but also the impact private financial protection insurance can have on the public policy debates in both of our markets, as you will see on...

  • Page 7
    ... of private sector employees lack long term disability coverage, according to the Bureau of Labor Statistics. And life insurance ownership is at its lowest level since World War II. The most widespread income protections - workers' compensation, Social Security Disability Insurance and personal...

  • Page 8
    ... to profitably expand the market for our financial protection products and services. we offer. It's unlikely that the public sector can fill this void considering the funding issues affecting those programs in the U.S. and U.K. At the same time, the vast majority of life and disability insurance is...

  • Page 9
    ... The private sector, government and advocacy organizations can and must work together to increase the awareness of the need for employer-sponsored benefits and to make these valuable benefits more accessible to individuals and families. UNUM 2012 ANNUAL REPORT 7 We will continue to take the actions...

  • Page 10
    ...2,000 lives cases) and our Unum UK group income protection business. In 2012, premium income in these markets increased nearly five percent. This growth has not come at the cost of sound business principles - or our customer service. We apply rigorous underwriting and expense management practices to...

  • Page 11
    ... Markets Total Company 4Q11 1Q12 2Q12 3Q12 4Q12 Before-tax Operating Earnings by Segment* Full Year 2002 Closed Block 16% Unum UK 7% Full Year 2012 Closed Block 7% Unum US Group Disability 27% Unum UK 10% Unum US Group Disability 22% Colonial Life 13% Unum US Group Life & AD&D 21% Colonial Life...

  • Page 12
    ... capital position. With more than $50 billion under active management, our investment portfolio is designed to match the long-term nature of our business, and has enabled us to continue 0.45 0.00 0.12 2008 0.64 0.30 0.02 2009 2010 0.30 0.05 2011 0.30 0.05 2012 2007 10 UNUM 2012 ANNUAL REPORT

  • Page 13
    ... share buybacks. In 2012, we repurchased $500 million of stock, bringing to $2.2 billion the value of share repurchases we have made over the last five years. We've also increased dividends annually since 2008, including a 24 percent increase last year. Rating agencies have taken notice. Upgrades in...

  • Page 14
    ... as possible and providing a fair and thorough evaluation. Recognized for Leadership 100% 90% 80% 70% 64% 60% 2005 2006 2007 81% High Customer Satisfaction Employees Proud to Work at Unum Positive Corporate Image -Brokers 94% 96% 94% 93% 2008 2009 2010 2011 12 UNUM 2012 ANNUAL REPORT

  • Page 15
    ... occurs. More than 20 million people at 170,000 companies rely on Unum's products and services - including a third of Fortune 500 companies - and we paid out more than $6 billion in benefits last year to individuals and families who were impacted by lifechanging events. UNUM 2012 ANNUAL REPORT 13

  • Page 16
    ... we salute the hard work of top non-managers throughout the company with an annual development and training event at Walt Disney World in Florida. We also have a number of recognition opportunities for managers and others at every level of the company. $13 million In 2012, Unum and itf employeef in...

  • Page 17
    ...attractive long-term partner for our customers. They help us live up to our commitments to policyholders and shareholders alike by providing forwardthinking solutions backed by a strong and diverse company. Beft Placef to Work in Infurance 2009-2012 Beft Placef to Work in Maine, Tenneffee and South...

  • Page 18
    ... McGarry Executive Vice President, Individual Disability and Long-term Care Closed Block Operations Richard P. McKenney Executive Vice President and Chief Financial Officer Peter O'Donnell President and Chief Executive Officer, Unum UK Diane M. Garofalo Senior Vice President, Human Resources Breege...

  • Page 19
    ...Cash Flows 94 Notes to Consolidated Financial Statements 159 Reports of Independent Registered Public Accounting Firm and Management's Annual Report on Internal Control Over Financial Reporting 162 Cautionary Statement Regarding Forward-Looking Statements 163 Appendix UNUM 2012 ANNUAL REPORT 17

  • Page 20
    ... of dollars, except share data) 2012 2011 2010 As Adjusted (1) 2009 2008 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 (2) Commissions Interest...

  • Page 21
    ... charge of $573.6 million in 2011 related to our long-term care closed block business and a reserve charge of $183.5 million in 2011 related to our individual disability closed block business. See Note 5 of the "Notes to Consolidated Financial Statements" contained herein for further discussion...

  • Page 22
    ... group disability risk results. Unum UK sales decreased 5.1 percent in 2012 compared to 2011, as measured in Unum UK's local currency, with lower group life, group critical illness, and individual disability product line sales, partially offset by higher sales in group long-term disability. Premium...

  • Page 23
    ... Closed Block segment reported a decrease in segment operating income of 22.9 percent in 2012 relative to 2011, excluding the charges discussed in "2011 Long-term Care Review and Individual Disability Closed Block Reserves" contained herein. Also excluding these charges, individual disability risk...

  • Page 24
    ... 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 25
    ...our individual 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...

  • Page 26
    ...the expected future claims and claim expenses we will pay and the expected future premiums we will receive, with a provision for profit allowed. Policy reserves for our Closed Block segment include certain older policy forms for individual disability, individual and group long-term care, and certain...

  • Page 27
    .... 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 35.9 percent and 47.0 percent, respectively, of our total claim reserves at December 31, 2012...

  • Page 28
    ... 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 29
    ... new investment yield. 2. The claim resolution rate, used for both policy reserves and incurred and IBNR claim reserves, is the probability that a disability or long-term care claim will close due to recovery or death of the insured. It is important because it is used to estimate how long benefits...

  • Page 30
    ....5 million in our Closed Block individual disability line of business claim reserves. Experience in 2012 remained generally consistent with our updated mortality assumption. See "Claim Reserve Increase for Individual Disability Closed Block Business" contained herein. 28 UNUM 2012 ANNUAL REPORT

  • Page 31
    ...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 the gross premium...

  • Page 32
    ... 31 2012 2011 Unum US Group Disability Group Life and Accidental Death & 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...

  • Page 33
    ...value. We hold an immaterial amount of equity securities, which are also reported at fair value. Definition of Fair Value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and...

  • Page 34
    ... • Security credit ratings/maturity/capital structure/optionality • Corporate actions • Underlying collateral • Prepayment speeds/loan performance/delinquencies/weighted average life/seasoning • Public covenants • Comparative bond analysis • Derivative spreads • Relevant reports...

  • Page 35
    ... 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. UNUM 2012 ANNUAL REPORT 33

  • Page 36
    ... at December 31, 2011. The changes were based on observable market spreads. Newly issued private placement securities have historically offered yield premiums higher than a similar interest rate spread on comparable newly issued public securities. • Additional basis points were added as deemed...

  • Page 37
    ...Market conditions • Rating agency and governmental actions • Bid and offering prices and the level of trading activity • Adverse changes in estimated cash flows for securitized investments • Changes in fair value subsequent to the balance sheet date • Any other key measures for the related...

  • Page 38
    ... (interest) 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...

  • Page 39
    ...long-term rate of return on the pension plan assets of +/-50 basis points would change our 2012 pension plan expense by approximately $7.0 million before tax, but would not materially change our OPEB plan expense. A lower rate of return on plan assets increases our expense. UNUM 2012 ANNUAL REPORT...

  • Page 40
    ... based on current law, to partially offset these payments. The expected subsidy included in our consolidated balance sheets is immaterial. We discontinued offering retiree life insurance to future retirees effective December 31, 2012. We will still provide this benefit to those employees who retired...

  • Page 41
    ... "Notes to Consolidated Financial Statements" contained herein for further discussion. Income Taxes We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. In 2011, as part of an Internal Revenue Service (IRS) settlement, we released...

  • Page 42
    ... December 31 (in millions of dollars) 2012 % Change 2011 % Change 2010 Revenue Premium Income Net Investment Income Net Realized Investment Gain (Loss) Other Income Total Revenue Benefits and Expenses Benefits and Change in Reserves for Future Benefits Commissions Interest and Debt Expense Deferral...

  • Page 43
    ... our Unum UK group life line of business and in our Closed Block long-term care line of business. Risk results in our Unum US segment for 2012 were generally consistent with the level reported in 2011, and the benefit ratio for Colonial Life was only slightly elevated in 2012 compared to 2011. Risk...

  • Page 44
    ...reflect the impact of the tax law change related to postretirement prescription drug coverage. Also lowering our income tax rate in 2012 and 2011 relative to the preceding year is an increase in the level of our investments in low-income housing tax credit partnerships. In January 2013, the American...

  • Page 45
    ...for Long-term Care Closed Block, Net of Tax Reserve Charge for Individual Disability Closed Block, Net of Tax Tax Reduction from IRS Settlement Tax Related to U.K. Repatriation Tax Related to Healthcare Reform Legislation Non-operating Retirement-related Loss, Net of Tax Net Realized Investment Gain...

  • Page 46
    ... case size and timing of sales submissions. See "Segment Results" as follows for a discussion of sales by segment. Segment Results Our reporting segments are comprised of the following: Unum US, Unum UK, Colonial Life, Closed Block, and Corporate. Effective January 1, 2012, we adopted an accounting...

  • Page 47
    ... Unum US segment includes group long-term and short-term disability insurance, group life and accidental death and dismemberment products, and supplemental and voluntary lines of business, which are comprised of individual disability - recently issued insurance and voluntary benefits products. Unum...

  • Page 48
    ...except ratios) 2012 % Change 2011 % Change 2010 Operating Revenue Premium Income Group Long-term Disability Group Short-term Disability Total Premium Income Net Investment Income Other Income Total Benefits and Expenses Benefits and Change in Reserves for Future Benefits...46 UNUM 2012 ANNUAL REPORT

  • Page 49
    ... services products of $77.9 million and $74.9 million in 2011 and 2010, respectively. The benefit ratio was slightly higher in 2011 compared to 2010 due to an increase in group long-term and short-term disability incidence rates and a decrease in the claim reserve discount rate for group long-term...

  • Page 50
    ... of dollars, except ratios) 2012 % Change 2011 % Change 2010 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 51
    ... indicators for Unum US supplemental and voluntary product lines. Year Ended December 31 (in millions of dollars, except ratios) 2012 % Change 2011 % Change 2010 Operating Revenue Premium Income Individual Disability - Recently Issued Voluntary Benefits Total Premium Income Net Investment Income...

  • Page 52
    ... premiums and other fees, and an increase in the level of prepayment income on mortgage-backed securities, partially offset by a decline in yield on invested assets. The interest adjusted loss ratio for the individual disability - recently issued line of business was higher in 2012 compared to 2011...

  • Page 53
    ... 2012 % Change 2011 % Change 2010 Sales by Product Group Disability, Group Life, and AD&D Group Long-term Disability Group Short-term Disability Group Life AD&D Subtotal Supplemental and Voluntary Individual Disability - Recently Issued Voluntary Benefits Subtotal Total Sales Sales by Market Sector...

  • Page 54
    ... customers. The number of new accounts added in the voluntary benefits product line was 2.9 percent higher in 2011 than the number of new accounts added during 2010. Sales in our individual disability - recently issued line of business, which are primarily concentrated in the multi-life market...

  • Page 55
    ... insurance for group long-term disability, group life, and supplemental and voluntary lines of business. The supplemental and voluntary lines of business are comprised of individual disability, critical illness, and voluntary benefits products. Unum UK's products are sold primarily in the United...

  • Page 56
    ... life product lines. Group long-term disability premium income was lower in 2012 compared to 2011 due to a decline in premium persistency resulting primarily from premium rate increases, partially offset by an increase in premium income due to growth in existing customer accounts. Group life premium...

  • Page 57
    ... for the Unum UK segment. Year Ended December 31 (in millions) 2012 % Change 2011 % Change 2010 Sales by Product Group Long-term Disability Group Life Supplemental and Voluntary Total Sales Sales by Market Sector Group Disability and Group Life Core Market (< 500 lives) Large Case Market Subtotal...

  • Page 58
    ... customers, partially offset by higher core market sales. Supplemental and voluntary sales were lower in 2012 compared to the 2011 due primarily to lower sales in our group critical illness and individual disability product lines. Sales in Unum UK's group long-term disability and group life product...

  • Page 59
    ..., except ratios) 2012 % Change 2011 % Change 2010 Operating Revenue Premium Income Accident, Sickness, and Disability Life Cancer and Critical Illness Total Premium Income Net Investment Income Other Income Total Benefits and Expenses Benefits and Change in Reserves for Future Benefits Commissions...

  • Page 60
    ... management. Sales Year Ended December 31 (in millions of dollars) 2012 % Change 2011 % Change 2010 Sales by Product Accident, Sickness, and Disability Life Cancer and Critical Illness Total Sales Sales by Market Sector Commercial Core Market (< 1,000 lives) Large Case Market Subtotal Public...

  • Page 61
    ... our customers. Closed Block Segment The Closed Block segment consists of our closed individual disability and individual and group long-term care lines of business, as well as certain other insurance products. The individual disability line of business generally consists of those policies in...

  • Page 62
    ... the Closed Block segment. Year Ended December 31 (in millions of dollars, except ratios) 2012 % Change 2011 % Change 2010 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 63
    ..., risk results were unfavorable compared to 2010 due to increases in active life reserves, which were driven by favorable premium persistency relative to assumptions for certain issue years. Claim incidence rates for long-term care were also higher in 2011 compared to 2010. UNUM 2012 ANNUAL REPORT...

  • Page 64
    ... under the terms of existing group policies. Profitability of our long-tailed products is affected by claims experience related to mortality and morbidity, investment returns, and persistency. We believe that the interest adjusted loss ratios for the individual disability and long-term care lines of...

  • Page 65
    ... of assets invested at long-term interest rates, a decrease in bond call premiums, and a decrease in investment income attributable to tax credit partnerships. Other income was higher in 2011 compared to 2010 due to $17.5 million of interest income related to the IRS settlement, as previously...

  • Page 66
    ..., 3 percent in tax credit partnerships, 35 percent in private placements, and 10 percent in commercial mortgage loans. The remaining assets can be held in publicly traded investment-grade corporate securities, mortgage/asset backed securities, bank loans, government and government agencies, and...

  • Page 67
    ... principal amount invested in our tax credit partnerships, and lower income on our Unum UK inflation index-linked bonds. These declines were partially offset by a higher level of invested assets, higher bond call premiums, an increase in income from private equity partnership investments, and higher...

  • Page 68
    ...$10.0 Million or Greater from Sale of Fixed Maturity Securities During 2012, we recognized a loss of $11.2 million on the sale of securities issued by a large U.S. department store chain. In 2011 the company's management was replaced by a new team of executives that embarked on a radically different...

  • Page 69
    ...a change in credit spreads in the overall investment market. The fair value of this embedded derivative was $(83.9) million at December 31, 2012, compared to $(135.7) million at December 31, 2011, and is reported in other liabilities in our consolidated balance sheets. Fixed Maturity Securities The...

  • Page 70
    ...Investment-Grade Fixed Maturity Securities Length of Time in Unrealized Loss Position 2012 (in millions of dollars) December 31 September 30 June 30 March 31 2011... $ 7.6 6.2 4.4 3.0 17.8 8.2 35.6 82.8 $ 4.8 9.5 7.9 6.5 15.7 - 24.6 69.0 $ 3.3 11.9 8.5 0.7 13.0 - 37.3 74.7 68 UNUM 2012 ANNUAL REPORT

  • Page 71
    ... are rated investment-grade absent the guaranty insurance policy. At December 31, 2012, we held $212.8 million fair value ($204.9 million amortized cost) of perpetual debentures, or "hybrid" securities, that generally have no fixed maturity date. Interest on these securities due on any payment date...

  • Page 72
    ... losses on these investments as of December 31, 2012. Portugal We have no direct exposure to Portuguese financial institutions. In May 2011, Portugal received a support package valued at â,¬78 billion from the International Monetary Fund/European Union. We believe there is risk that Portugal will...

  • Page 73
    ... 31, 2012. Risk Management While we have no direct sovereign holdings in the aforementioned countries, we have performed comprehensive stress testing and scenario analyses on all of our corporate holdings of issuers domiciled in these countries. We have performed stress tests under a number of...

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

  • Page 75
    ... for 2011 compared to both the prior and subsequent years was due primarily to decreases in the deferred tax liability related to the 2011 deferred acquisition cost charge and reserve charges for our long-term care and individual disability closed blocks of business. UNUM 2012 ANNUAL REPORT 73

  • Page 76
    ... Holdings made principal payments of $60.0 million, $74.4 million, and $58.3 million, respectively, on its floating rate, senior secured non-recourse notes. During 2012, 2011, and 2010, we repurchased 23.6 million, 25.4 million, and 16.4 million shares of Unum Group's common stock at costs of $500...

  • 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
    ... captive insurance company. Northwind Holdings' ability to meet its payment obligations under the notes will be dependent principally upon its receipt of dividends from Northwind Re. The ability of Northwind Re to pay dividends to Northwind Holdings will depend on its 76 UNUM 2012 ANNUAL REPORT

  • Page 79
    ... claims of Provident, Paul Revere and Unum America (the ceding insurers) reinsured by Northwind Re. None of Unum Group, the ceding insurers, Northwind Re or any other affiliate of Northwind Holdings is an obligor or guarantor with respect to the notes. The balance outstanding on these notes was $500...

  • Page 80
    ... Financial Statements" and "Critical Accounting Estimates" contained herein for additional information. Miscellaneous liabilities include commissions due and accrued, deferred compensation liabilities, state premium taxes payable, amounts due to reinsurance companies, accounts payable, obligations...

  • Page 81
    ... balance sheets, of $83.7 million and $5.1 million to fund tax credit partnership investments and transferable state tax credits, respectively, with a corresponding recognition of other long-term investments and other assets, respectively. These commitments are represented in the purchase obligation...

  • Page 82
    ... credit ratings for Unum Group and the financial strength ratings for each of our traditional 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...

  • Page 83
    ... not expect any negative actions from any of the four rating agencies related to either Unum Group's current issuer credit ratings or the financial strength ratings of its insurance subsidiaries. However, in the event that we are unable to meet the rating agency specific guideline values to maintain...

  • Page 84
    ... changes in tax laws, rating agency decisions, and/or unexpected changes in liquidity needs. Although our policy benefits are primarily in the form of claim payments and we therefore have minimal exposure to the policy withdrawal risk associated with deposit products such as individual life policies...

  • Page 85
    ..., 2012 (in millions of dollars) Notional Amount of Derivatives Fair Value Hypothetical FV + 100 BP Change in FV Assets Fixed Maturity Securities (1) Mortgage Loans Policy Loans, Net of Reinsurance Ceded Liabilities Unrealized Adjustment to Reserves, Net of Reinsurance Ceded and Other (2) Long-term...

  • Page 86
    ... into dollars except for a limited number of transactions, we view foreign currency translation as a financial reporting issue and not a reflection of operations or profitability in the U.K. Assuming the pound to dollar exchange rate decreased 10 percent from the December 31, 2012 and 2011 levels...

  • Page 87
    ... 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 Board Business units are primarily responsible...

  • Page 88
    ... 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 89
    ..., maintaining pricing discipline, sound reserving practices, and high quality claims management. Detailed underwriting guidelines and claim policies are tools used to manage our insurance risk exposure. We also monitor exposures against internally prescribed limits, and we diversify to reduce...

  • Page 90
    ...of dollars) 2012 2011 As Adjusted Assets Investments Fixed Maturity Securities - at fair value (amortized cost: $37,751.5; $36,640.7) Mortgage Loans Policy Loans Other Long-term Investments Short-term Investments Total Investments Other Assets Cash and Bank Deposits Accounts and Premiums Receivable...

  • Page 91
    ...2012 2011 As Adjusted Liabilities and Stockholders' Evuity Liabilities Policy and Contract Benefits Reserves for Future Policy and Contract Benefits Unearned Premiums Other Policyholders' Funds Income Tax Payable Deferred Income Tax Short-term Debt Long-term... $59,555.2 UNUM 2012 ANNUAL REPORT 89

  • Page 92
    ... Statements of Income Year Ended December 31 (in millions of dollars, except share data) 2012 2011 As Adjusted 2010 Revenue Premium Income Net Investment Income Realized Investment Gain (Loss) Other-Than-Temporary Impairment Loss on Fixed Maturity Securities Other Net Realized Investment...

  • Page 93
    ... to Reserves for Future Policy and Contract Benefits, Net of Reinsurance and Other (net of tax benefit of $325.6; $701.5; $499.6) Change in Foreign Currency Translation Adjustment (net of tax expense of 0.6) Change in Unrecognized Pension and Postretirement Benefit Costs (net of tax benefit of...

  • Page 94
    ...Statements of Stockholders' Equity Year Ended December 31 (in millions of dollars) 2012 2011 As Adjusted 2010 Common Stock Balance at Beginning of Year Common Stock....0) (1,530.1) (500.6) (2,030.7) $ 8,612.6 (1,110.2) (419.9) (1,530.1) $ 8,169.7 (1,110.2) $ 8,484.9 92 UNUM 2012 ANNUAL REPORT

  • Page 95
    ... 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 96
    ...- 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 Block and Corporate...

  • Page 97
    ...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 98
    ...at fair value. We hold an immaterial amount of equity securities, which are also reported at fair value. We define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value...

  • Page 99
    .... Internal replacement transactions, principally on group contracts, that result in a policy that is substantially changed are accounted for as an extinguishment of the original policy and the issuance of a new policy. Unamortized deferred acquisition costs on the original UNUM 2012 ANNUAL REPORT...

  • Page 100
    ... 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 upon assumptions as to interest, persistency, morbidity, and mortality that were appropriate at the date...

  • Page 101
    ...insurance risk in accordance with applicable accounting standards. If we determine that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, we record the agreement using the deposit method of accounting. UNUM 2012 ANNUAL REPORT...

  • Page 102
    ... statements of income. For the years ended December 31, 2012, 2011, and 2010, premium tax expense was $136.0 million, $134.9 million, and $129.4 million, respectively. Stock-Based Compensation: The cost of stock-based compensation is generally measured based on the grant-date fair value of the award...

  • Page 103
    ... 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 104
    ... Costs Deferred Income Tax Net Unrealized Gain on Securities Not Other-Than-Temporarily Impaired Foreign Currency Translation Adjustment Retained Earnings 605.8 (121.5) 7,031.2 614.8 (117.6) 6,611.0 9.0 3.9 (420.2) $ 2,300.9 261.2 $ 1,677.1 44.7 $(623.8) (216.5) 102 UNUM 2012 ANNUAL REPORT

  • Page 105
    ... results of operations. ASC 860 "Transfers and Servicing." In June 2009, the FASB issued an update to eliminate the exceptions for qualifying special-purpose entities from the consolidation guidance and eliminate the exception that permitted sale accounting for certain mortgage securitizations when...

  • Page 106
    ... Amount 2011 Fair 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 Long-term...

  • Page 107
    ... overall management of interest rate risk, which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts. Long-term Debt: Fair values for long-term debt are obtained from independent pricing services or discounted...

  • Page 108
    ... • Security credit ratings/maturity/capital structure/optionality • Corporate actions • Underlying collateral • Prepayment speeds/loan performance/delinquencies/weighted average life/seasoning • Public covenants • Comparative bond analysis • Derivative spreads • Relevant reports...

  • Page 109
    ... are those valued using inputs (other than prices included in Level 1) that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument's anticipated life. UNUM 2012 ANNUAL REPORT 107

  • Page 110
    ... 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 111
    ... 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 112
    ... Level 2 Level 2 from Level 1 2011 Fixed Maturity Securities United States Government and Government Agencies and Authorities States, Municipalities, and Political Subdivisions Foreign Governments Public Utilities All Other Corporate Bonds Total Fixed Maturity Securities $ - - - 47.1 1,068.6 $1,115...

  • Page 113
    ...Transfers Earnings Income or Loss Purchases Sales Into Out of End of Year Fixed Maturity Securities States, Municipalities, and Political Subdivisions Public Utilities Mortgage/Asset-Backed Securities All Other Corporate Bonds Redeemable Preferred Stocks....7) (39.4) UNUM 2012 ANNUAL REPORT 111

  • Page 114
    ... 5.74%-5.84%/5.81% Mortgage/Asset-Backed Securities - Private All Other Corporate Bonds - Private 0.5 391.8 Change in Benchmark Reference Comparability Adjustment Discount for Size Lack of Marketability Volatility of Credit Market Convention Change in Benchmark Reference Comparability Adjustment...

  • Page 115
    ...of dollars) United States Government and Government Agencies and Authorities States, Municipalities, and Political Subdivisions Foreign Governments Public Utilities Mortgage/Asset-Backed Securities All Other Corporate Bonds Redeemable Preferred Stocks Total Fixed Maturity Securities $ 1,020.9 1,498...

  • Page 116
    ...) Fair Value Fair Value 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 $ - 51.6 192.0 94...

  • Page 117
    ... 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, 2012, the fair value of...

  • Page 118
    ...Market conditions • Rating agency and governmental actions • Bid and offering prices and the level of trading activity • Adverse changes in estimated cash flows for securitized investments • Changes in fair value subsequent to the balance sheet date • Any other key measures for the related...

  • Page 119
    ... are reported as other long-term investments in our consolidated balance sheets. At December 31, 2012, we had no commitments to fund the underlying partnerships, nor did we fund any amounts to the partnerships during the years ended December 31, 2012, 2011, or 2010. UNUM 2012 ANNUAL REPORT 117

  • Page 120
    ..., 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 118 UNUM 2012 ANNUAL REPORT

  • Page 121
    ... 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: December 31 (in millions of dollars) 2012 2011 Internal Rating Aa...

  • Page 122
    ... Financial Statements Impaired mortgage loans are as follows: December 31, 2012 (in millions of dollars) Recorded Investment Unpaid Principal Balance Related Allowance With No Related Allowance Recorded With an Allowance Recorded Total $ 4.3 13.1 $17.4 $ 4.3 14.6 $18.9 December 31, 2011...

  • Page 123
    ... 2012 2011 2010 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 124
    ... 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. Our cash flow hedging programs are as follows: • Interest rate swaps...

  • Page 125
    ... 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 $170.5 million and $173.7 million at December 31, 2012 and 2011, respectively. UNUM 2012 ANNUAL REPORT 123

  • Page 126
    ...table summarizes the timing of anticipated settlements of interest rate swaps outstanding under our cash flow hedging programs at December 31, 2012, whereby we receive a fixed rate and pay a variable rate. The weighted average variable interest rates assume current market conditions. (in millions of...

  • Page 127
    ...or loss on the related interest rate swaps. We use receive fixed, pay variable interest rate swaps to hedge the changes in fair value of certain of our 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...

  • Page 128
    Notes To Consolidated Financial Statements 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, 2012 Asset Derivatives (in millions of ...

  • Page 129
    ... on our embedded derivative in a modified coinsurance arrangement, as reported in our consolidated statements of income. Year Ended December 31 (in millions of dollars) 2012 2011 2010 Gain (Loss) Recognized in Net Realized Investment Gain (Loss) $51.8 $(39.4) $21.1 UNUM 2012 ANNUAL REPORT 127

  • Page 130
    ... decline in long-term interest rates which occurred late in the third quarter of 2011 due to the European Union debt crisis and the Federal Reserve Board's actions, including the announcement of "Operation Twist." We also considered an updated industry study for long-term care experience which...

  • Page 131
    ... to our long-term assumptions. Our claims management performance during 2012 for Unum US group long-term disability exceeded our long-term assumptions for claim resolution rates. For the Closed Block individual disability and long-term care lines of business, the claims management performance in...

  • Page 132
    ... current year reporting. 2012 Year Ended December 31 2011 2010 Statutory Income Tax Prior Year Taxes Foreign Items Tax Credits Other Items, Net Effective Tax 35.0% (0.9) (2.0) (2.7) (1.0) 28.4% 35.0% (11.0) (0.3) (5.9) (3.1) 14.7% 35.0% 0.4 (1.3) (0.6) (0.1) 33.4% 130 UNUM 2012 ANNUAL REPORT

  • Page 133
    ...to adjust deferred tax assets and liabilities through income on the date of enactment of a rate change. As a result, we recorded income tax benefits of $9.3 million and $6.8 million, respectively, for the two percent tax rate reductions enacted during each of the years 2012 and 2011 and $2.7 million...

  • Page 134
    ... Revenue Service (IRS) settlements, advance payments of taxes, and claims for refund. We file federal and state income tax returns in the United States and in foreign jurisdictions. We are under continuous examination by the IRS with regard to our U.S. federal income tax returns. The IRS audit...

  • Page 135
    ... the tax law change. As of December 31, 2012, we had no net operating loss carryforward for U.S. income taxes. We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. As of December 31, 2012, we had no valuation allowance. In 2011, as...

  • Page 136
    ... 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 Company of America (Unum America), and The Paul Revere Life Insurance Company...

  • Page 137
    ...such capital stock, and (c) Tailwind Holdings' rights under the transaction documents related to the Tailwind notes to which Tailwind Holdings is a party. At December 31, 2012, the amount in the Tailwind DSCA was $21.5 million. None of Unum Group, Unum America, Tailwind Re, or any other affiliate of...

  • Page 138
    ...benefit plan for eligible employees in our U.K. operation. The U.K. defined 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...

  • Page 139
    ... $(10.7) $ 10.7 $15.3 We discontinued offering retiree life insurance to future retirees effective December 31, 2012 but continue to provide this benefit to employees who retired prior to that date. The curtailment gain of $4.2 million and the prior service credit of $5.0 million, both of which are...

  • Page 140
    ... there are general guidelines that ensure prudent investment action is taken. Such guidelines include the prevention of the plan from using derivatives for speculative purposes and limiting the concentration of risk in any one type of investment. Assets for life insurance benefits payable to certain...

  • Page 141
    ... Inputs (Level 3) (in millions of dollars) Total Invested Assets Equity Securities: U.S. Large Cap U.S. Mid Cap U.S. Small Cap International Emerging Markets Fixed Income Securities: U.S. Government and Agencies Corporate Alternative Investments: Private Equity Funds of Funds Hedge Funds of Funds...

  • Page 142
    ... fund managers in the period subsequent to the valuation date and prior to issuance of the financial statements. We made no adjustments to the NAV for 2012 or 2011. Redemptions on the hedge funds of funds can be made on either a quarterly or bi-annual basis, depending on the fund, with prior notice...

  • Page 143
    ... Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (in millions of dollars) Total Assets Life Insurance Contracts $ - $ - $11.7 $11.7 The fair value is represented by the actuarial present value of future cash flows of the contracts. UNUM 2012 ANNUAL REPORT 141

  • Page 144
    ...End of Year Life Insurance Contracts $11.9 $0.2 $14.7 $(15.1) $11.7 For the years ended December 31, 2012 and 2011, the actual return on plan assets relates solely to investments still held at the reporting date. There were no transfers into or out of level 3 during 2012 or 2011. Measurement...

  • Page 145
    Our rate of compensation increase assumption is generally based on periodic studies of compensation trends. For measurement purposes at December 31, 2012 and 2011, the annual rate of increase in the per capita cost of covered postretirement health care benefits assumed for the next calendar year was...

  • Page 146
    ... these benefits, which are comprised of retiree life, medical, and dental benefits. It is our practice to use general assets to pay medical and dental claims as they come due in lieu of utilizing plan assets for the medical and dental benefit portions of our OPEB plan. 144 UNUM 2012 ANNUAL REPORT

  • Page 147
    .... 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 148
    ... 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, stock awards, dividend equivalent awards, or any other right or interest relating to stock. Awards granted before the termination...

  • Page 149
    ... 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, and...

  • Page 150
    ... of treasury bonds at the date of grant. Expense Compensation expense for the stock plans, as reported in our consolidated statements of income, is as follows: 2012 Year Ended December 31 2011 (in millions of dollars) 2010 Nonvested Stock Awards and Cash-Settled Awards Stock Options Other Total...

  • Page 151
    ..., 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 consists of individual disability, group and individual long-term care, and other insurance products no longer...

  • Page 152
    ...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. Certain components of the net periodic benefit cost for our pensions and...

  • Page 153
    ... Issued Voluntary Benefits 477.6 626.0 4,456.5 Unum UK Group Long-term Disability Group Life Supplemental and Voluntary 409.7 221.3 63.6 694.6 Colonial Life Accident, Sickness, and Disability Life Cancer and Critical Illness 724.5 209.7 260.3 1,194.5 Closed Block Individual Disability Long-term Care...

  • Page 154
    ...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, 2012 Premium Income Net Investment Income Other Income Operating Revenue... 468.5 152 UNUM 2012 ANNUAL REPORT

  • Page 155
    ...Unum UK Colonial Life Closed Block Total Year Ended December 31, 2012 Beginning of Year Capitalized Amortization Adjustment Related to Unrealized Investment Gains/Losses Foreign Currency End of Year Year Ended December 31, 2011 Beginning of Year Capitalized Amortization Impairment of Long-term Care...

  • Page 156
    ... 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. 154 UNUM 2012 ANNUAL REPORT

  • Page 157
    ... situated vs. Unum Life Insurance Company of America, was filed in the United States District Court for the District of Maine. This class action alleges that we breached fiduciary duties owed to certain beneficiaries under certain group life insurance policies when we paid life insurance proceeds...

  • Page 158
    ... Perdue v. Colonial Life & Accident Insurance Company were filed in the Circuit Court of Putnam County, West Virginia. These two separate complaints allege violations of the West Virginia Uniform Unclaimed Property Act by failing to identify and report all unclaimed insurance policy proceeds due to...

  • Page 159
    ... 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, Tailwind Holdings and Northwind Holdings, wholly-owned subsidiaries of Unum Group, will depend on their satisfaction of applicable...

  • Page 160
    ... our long-term care closed block 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 161
    ... Acquiring or Renewing Insurance Contracts," effective January 1, 2012. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Unum Group and subsidiaries' internal control over financial reporting as of December 31, 2012, based on...

  • Page 162
    ...Reporting The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. The Company's internal control over financial reporting encompasses the processes...

  • Page 163
    ... reporting as of December 31, 2012, based on the COSO criteria. 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, 2012 and 2011, and the related...

  • Page 164
    ...of our derivatives hedging programs due to changes in the economic environment, counterparty risk, ratings downgrades, capital market volatility, changes in interest rates, and/or regulation. • Increased competition from other insurers and financial services companies due to industry consolidation...

  • Page 165
    ... of Non-GAAP Financial Measures Year Ended December 31, 2012 Average After-Tax Allocated Operating Return Equity Income (Loss) On Equity (in millions, except ratios) Unum US Unum UK Colonial Life Total Active Businesses Closed Block Corporate Total $4,024.1 811.2 1,064.4 5,899.7 2,234.2 (892...

  • Page 166
    ... Group Disability Group Life and Accidental Death and Dismemberment Supplemental and Voluntary Total Unum US Unum UK Colonial Life Closed Block Corporate Total Operating Income by Segment Net Realized Investment Loss Income Tax Income from Continuing Operations Before Cumulative Effect of Accounting...

  • Page 167
    ... INFORMATION CORPORATE OFFICES 1 Fountain Square Chattanooga, TN 37402 423 294 1011 2211 Congress Street Portland, ME 04122 207 575 2211 1200 Colonial Life Blvd. Columbia, SC 29210 803 798 7000 Milton Court Dorking, Surrey RH4 3LZ England 011 44 1306 887766 1 Mercantile Street Worcester, MA...

  • Page 168
    Unum Group 1 Fountain Square Chattanooga, TN 37402 www.unum.com © 2013 Unum sroup. All rights reserved. Unum is a registered trademark and marketing brand of Unum sroup and its insuring subsidiaries. All the paper used in this annual report is Elemental Chlorine Free. The papers used for the ...