Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 - Unum Group | unm09302018ex322.htm |
EX-32.1 - EXHIBIT 32.1 - Unum Group | unm09302018ex321.htm |
EX-31.2 - EXHIBIT 31.2 - Unum Group | unm09302018ex312.htm |
EX-31.1 - EXHIBIT 31.1 - Unum Group | unm09302018ex311.htm |
EX-10.1 - EXHIBIT 10.1 - Unum Group | unm09302018ex101.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2018 |
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from ___________ to ___________ |
Commission file number 1-11294
Unum Group
(Exact name of registrant as specified in its charter)
Delaware | 62-1598430 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1 FOUNTAIN SQUARE | ||
CHATTANOOGA, TENNESSEE | 37402 | |
(Address of principal executive offices) | (Zip Code) |
423.294.1011
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | ||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ | ||
Emerging growth company | ¨ | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ¨ | ||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
218,748,493 shares of the registrant's common stock were outstanding as of October 23, 2018.
TABLE OF CONTENTS
Page | |||
Cautionary Statement Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Act) provides a "safe harbor" to encourage companies to provide prospective information, as long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those included in the forward-looking statements. Certain information contained in this Quarterly Report on Form 10-Q (including certain statements in the consolidated financial statements and related notes and Management's Discussion and Analysis), or in any other written or oral statements made by us in communications with the financial community or contained in documents filed with the Securities and Exchange Commission (SEC), may be considered forward-looking statements within the meaning of the Act. Forward-looking statements are those not based on historical information, but rather relate to our outlook, future operations, strategies, financial results, or other developments. Forward-looking statements speak only as of the date made. We undertake no obligation to update these statements, even if made available on our website or otherwise. These statements may be made directly in this document or may be made part of this document by reference to other documents filed by us with the SEC, a practice which is known as "incorporation by reference." You can find many of these statements by looking for words such as "will," "may," "should," "could," "believes," "expects," "anticipates," "estimates," "plans," "assumes," "intends," "projects," "goals,” "objectives," or similar expressions in this document or in documents incorporated herein.
These forward-looking statements are subject to numerous assumptions, risks, and uncertainties, many of which are beyond our control. We caution readers that the following factors, in addition to other factors mentioned from time to time, may cause actual results to differ materially from those contemplated by the forward-looking statements:
• | Sustained periods of low interest rates. |
• | Fluctuation in insurance reserve liabilities and claim payments due to changes in claim incidence, recovery rates, mortality and morbidity rates, and policy benefit offsets due to, among other factors, the rate of unemployment and consumer confidence, the emergence of new diseases, epidemics, or pandemics, new trends and developments in medical treatments, the effectiveness of our claims operational processes, and changes in governmental programs. |
• | Unfavorable economic or business conditions, both domestic and foreign, that may result in decreases in sales, premiums, or persistency, as well as unfavorable claims activity. |
• | Changes in or interpretations of laws and regulations, including tax laws and regulations. |
• | Investment results, including, but not limited to, changes in interest rates, defaults, changes in credit spreads, impairments, and the lack of appropriate investments in the market which can be acquired to match our liabilities. |
• | A cyber attack or other security breach could result in the unauthorized acquisition of confidential data. |
• | The failure of our business recovery and incident management processes to resume our business operations in the event of a natural catastrophe, cyber attack, or other event. |
• | Execution risk related to our technology needs. |
• | Increased competition from other insurers and financial services companies due to industry consolidation, new entrants to our markets, or other factors. |
• | Changes in our financial strength and credit ratings. |
• | Damage to our reputation due to, among other factors, regulatory investigations, legal proceedings, external events, and/or inadequate or failed internal controls and procedures. |
• | Actual experience in the broad array of our products that deviates from our assumptions used in pricing, underwriting, and reserving. |
• | Changes in accounting standards, practices, or policies. |
• | Effectiveness of our risk management program. |
• | Contingencies and the level and results of litigation. |
• | Availability of reinsurance in the market and the ability of our reinsurers to meet their obligations to us. |
• | Ineffectiveness of our derivatives hedging programs due to changes in the economic environment, counterparty risk, ratings downgrades, capital market volatility, changes in interest rates, and/or regulation. |
• | Fluctuation in foreign currency exchange rates. |
• | Ability to generate sufficient internal liquidity and/or obtain external financing. |
• | Recoverability and/or realization of the carrying value of our intangible assets, long-lived assets, and deferred tax assets. |
• | Terrorism, both within the U.S. and abroad, ongoing military actions, and heightened security measures in response to these types of threats. |
1
For further discussion of risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see Part 1, Item 1A of our annual report on Form 10-K for the year ended December 31, 2017.
All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
Unum Group and Subsidiaries
September 30 | December 31 | ||||||
2018 | 2017 | ||||||
(in millions of dollars) | |||||||
(Unaudited) | |||||||
Assets | |||||||
Investments | |||||||
Fixed Maturity Securities - at fair value (amortized cost: $39,913.2; $39,780.5) | $ | 43,071.3 | $ | 45,457.8 | |||
Mortgage Loans | 2,222.0 | 2,213.2 | |||||
Policy Loans | 3,720.2 | 3,571.1 | |||||
Other Long-term Investments | 694.2 | 646.8 | |||||
Short-term Investments | 1,238.2 | 1,155.1 | |||||
Total Investments | 50,945.9 | 53,044.0 | |||||
Other Assets | |||||||
Cash and Bank Deposits | 214.2 | 77.4 | |||||
Accounts and Premiums Receivable | 1,693.0 | 1,665.7 | |||||
Reinsurance Recoverable | 4,684.0 | 4,879.2 | |||||
Accrued Investment Income | 683.0 | 690.1 | |||||
Deferred Acquisition Costs | 2,276.9 | 2,184.6 | |||||
Goodwill | 346.0 | 338.6 | |||||
Property and Equipment | 521.0 | 504.8 | |||||
Income Tax Receivable | 19.0 | — | |||||
Deferred Income Tax | 157.4 | — | |||||
Other Assets | 709.4 | 628.7 | |||||
Total Assets | $ | 62,249.8 | $ | 64,013.1 |
See notes to consolidated financial statements.
3
CONSOLIDATED BALANCE SHEETS - Continued
Unum Group and Subsidiaries
September 30 | December 31 | ||||||
2018 | 2017 | ||||||
(in millions of dollars) | |||||||
(Unaudited) | |||||||
Liabilities and Stockholders' Equity | |||||||
Liabilities | |||||||
Policy and Contract Benefits | $ | 1,674.1 | $ | 1,605.2 | |||
Reserves for Future Policy and Contract Benefits | 45,092.7 | 45,601.6 | |||||
Unearned Premiums | 428.0 | 373.1 | |||||
Other Policyholders’ Funds | 1,551.4 | 1,595.0 | |||||
Income Tax Payable | — | 2.9 | |||||
Deferred Income Tax | — | 199.0 | |||||
Short-term Debt | — | 199.9 | |||||
Long-term Debt | 2,983.5 | 2,738.4 | |||||
Payables for Collateral on Investments | 238.2 | 396.2 | |||||
Other Liabilities | 1,763.7 | 1,726.9 | |||||
Total Liabilities | 53,731.6 | 54,438.2 | |||||
Commitments and Contingent Liabilities - Note 11 | |||||||
Stockholders' Equity | |||||||
Common Stock, $0.10 par | |||||||
Authorized: 725,000,000 shares | |||||||
Issued: 305,069,982 and 304,448,032 shares | 30.5 | 30.5 | |||||
Additional Paid-in Capital | 2,314.3 | 2,303.3 | |||||
Accumulated Other Comprehensive Income (Loss) | (868.5 | ) | 127.5 | ||||
Retained Earnings | 9,670.8 | 9,542.2 | |||||
Treasury Stock - at cost: 86,347,280 and 81,900,950 shares | (2,628.9 | ) | (2,428.6 | ) | |||
Total Stockholders' Equity | 8,518.2 | 9,574.9 | |||||
Total Liabilities and Stockholders' Equity | $ | 62,249.8 | $ | 64,013.1 |
See notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Unum Group and Subsidiaries
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(in millions of dollars, except share data) | |||||||||||||||
As Adjusted | As Adjusted | ||||||||||||||
Revenue | |||||||||||||||
Premium Income | $ | 2,251.8 | $ | 2,153.6 | $ | 6,722.8 | $ | 6,438.7 | |||||||
Net Investment Income | 619.2 | 609.0 | 1,845.1 | 1,831.9 | |||||||||||
Realized Investment Gain (Loss) | |||||||||||||||
Other-Than-Temporary Impairment Loss on Fixed Maturity Securities | — | — | (1.0 | ) | — | ||||||||||
Net Realized Investment Gain, Excluding Other-Than-Temporary Impairment Loss on Fixed Maturity Securities | 6.7 | 9.8 | 2.9 | 28.9 | |||||||||||
Net Realized Investment Gain | 6.7 | 9.8 | 1.9 | 28.9 | |||||||||||
Other Income | 50.1 | 46.7 | 147.9 | 148.1 | |||||||||||
Total Revenue | 2,927.8 | 2,819.1 | 8,717.7 | 8,447.6 | |||||||||||
Benefits and Expenses | |||||||||||||||
Benefits and Change in Reserves for Future Benefits | 2,578.9 | 1,765.6 | 6,190.9 | 5,266.6 | |||||||||||
Commissions | 276.8 | 262.4 | 832.6 | 793.9 | |||||||||||
Interest and Debt Expense | 42.7 | 40.1 | 125.3 | 119.8 | |||||||||||
Deferral of Acquisition Costs | (166.8 | ) | (154.8 | ) | (501.8 | ) | (470.1 | ) | |||||||
Amortization of Deferred Acquisition Costs | 136.9 | 123.7 | 428.6 | 403.5 | |||||||||||
Compensation Expense | 224.2 | 223.8 | 666.1 | 650.6 | |||||||||||
Other Expenses | 212.9 | 191.5 | 657.9 | 624.6 | |||||||||||
Total Benefits and Expenses | 3,305.6 | 2,452.3 | 8,399.6 | 7,388.9 | |||||||||||
Income (Loss) Before Income Tax Expense (Benefit) | (377.8 | ) | 366.8 | 318.1 | 1,058.7 | ||||||||||
Income Tax Expense (Benefit) | |||||||||||||||
Current | 2.7 | 139.4 | 172.7 | 301.8 | |||||||||||
Deferred | (95.8 | ) | (24.9 | ) | (128.9 | ) | 29.6 | ||||||||
Total Income Tax Expense (Benefit) | (93.1 | ) | 114.5 | 43.8 | 331.4 | ||||||||||
Net Income (Loss) | $ | (284.7 | ) | $ | 252.3 | $ | 274.3 | $ | 727.3 | ||||||
Net Income (Loss) Per Common Share | |||||||||||||||
Basic | $ | (1.30 | ) | $ | 1.12 | $ | 1.24 | $ | 3.20 | ||||||
Assuming Dilution | $ | (1.30 | ) | $ | 1.12 | $ | 1.24 | $ | 3.19 |
See notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
Unum Group and Subsidiaries
Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(in millions of dollars) | |||||||||||||||
Net Income (Loss) | $ | (284.7 | ) | $ | 252.3 | $ | 274.3 | $ | 727.3 | ||||||
Other Comprehensive Income (Loss) | |||||||||||||||
Change in Net Unrealized Gain (Loss) on Securities Before Adjustment (net of tax expense (benefit) of $(80.6); $39.2; $(525.0); $334.7) | (305.0 | ) | 66.1 | (1,982.1 | ) | 616.3 | |||||||||
Change in Adjustment to Deferred Acquisition Costs and Reserves for Future Policy and Contract Benefits, Net of Reinsurance (net of tax expense (benefit) of $(69.8); $(31.8); $276.1; $(261.7)) | (260.2 | ) | (66.9 | ) | 1,051.1 | (499.5 | ) | ||||||||
Change in Net Gain on Hedges (net of tax benefit of $4.4; $7.4; $8.3; $19.7) | (16.8 | ) | (13.8 | ) | (32.3 | ) | (36.8 | ) | |||||||
Change in Foreign Currency Translation Adjustment (net of tax benefit of $-; $-; $0.3; $-) | (15.2 | ) | 31.8 | (29.5 | ) | 88.7 | |||||||||
Change in Unrecognized Pension and Postretirement Benefit Costs (net of tax expense of $1.3; $1.5; $4.0; $4.3) | 4.9 | 2.2 | 14.3 | 6.6 | |||||||||||
Total Other Comprehensive Income (Loss) | (592.3 | ) | 19.4 | (978.5 | ) | 175.3 | |||||||||
Comprehensive Income (Loss) | $ | (877.0 | ) | $ | 271.7 | $ | (704.2 | ) | $ | 902.6 |
See notes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Unum Group and Subsidiaries
Nine Months Ended September 30 | |||||||
2018 | 2017 | ||||||
(in millions of dollars) | |||||||
Common Stock | |||||||
Balance at Beginning of Year and End of Period | $ | 30.5 | $ | 30.4 | |||
Additional Paid-in Capital | |||||||
Balance at Beginning of Year | 2,303.3 | 2,272.8 | |||||
Common Stock Activity | 11.0 | 22.4 | |||||
Balance at End of Period | 2,314.3 | 2,295.2 | |||||
Accumulated Other Comprehensive Income (Loss) | |||||||
Balance at Beginning of Year | 127.5 | (51.0 | ) | ||||
Adjustment to Adopt Accounting Standard Update - Note 2 | (17.5 | ) | — | ||||
Other Comprehensive Income (Loss) | (978.5 | ) | 175.3 | ||||
Balance at End of Period | (868.5 | ) | 124.3 | ||||
Retained Earnings | |||||||
Balance at Beginning of Year | 9,542.2 | 8,744.0 | |||||
Adjustment to Adopt Accounting Standard Update - Note 2 | 14.5 | — | |||||
Net Income | 274.3 | 727.3 | |||||
Dividends to Stockholders (per common share: $0.72; $0.63) | (160.2 | ) | (144.1 | ) | |||
Balance at End of Period | 9,670.8 | 9,327.2 | |||||
Treasury Stock | |||||||
Balance at Beginning of Year | (2,428.6 | ) | (2,028.2 | ) | |||
Purchases of Treasury Stock | (200.3 | ) | (300.3 | ) | |||
Balance at End of Period | (2,628.9 | ) | (2,328.5 | ) | |||
Total Stockholders' Equity at End of Period | $ | 8,518.2 | $ | 9,448.6 |
See notes to consolidated financial statements.
7
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Unum Group and Subsidiaries
Nine Months Ended September 30 | |||||||
2018 | 2017 | ||||||
(in millions of dollars) | |||||||
As Adjusted | |||||||
Cash Flows from Operating Activities | |||||||
Net Income | $ | 274.3 | $ | 727.3 | |||
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities | |||||||
Change in Receivables | (90.6 | ) | (119.0 | ) | |||
Change in Deferred Acquisition Costs | (73.2 | ) | (66.6 | ) | |||
Change in Insurance Reserves and Liabilities | 1,101.6 | 348.1 | |||||
Change in Income Taxes | (106.9 | ) | 81.4 | ||||
Change in Other Accrued Liabilities | 25.0 | (6.6 | ) | ||||
Non-cash Components of Net Investment Income | (120.9 | ) | (145.7 | ) | |||
Net Realized Investment Gain | (1.9 | ) | (28.9 | ) | |||
Depreciation | 74.9 | 78.4 | |||||
Other, Net | 1.2 | 8.2 | |||||
Net Cash Provided by Operating Activities | 1,083.5 | 876.6 | |||||
Cash Flows from Investing Activities | |||||||
Proceeds from Sales of Fixed Maturity Securities | 456.2 | 303.2 | |||||
Proceeds from Maturities of Fixed Maturity Securities | 2,234.9 | 1,848.5 | |||||
Proceeds from Sales and Maturities of Other Investments | 350.6 | 161.7 | |||||
Purchases of Fixed Maturity Securities | (2,840.0 | ) | (2,063.4 | ) | |||
Purchases of Other Investments | (448.5 | ) | (313.5 | ) | |||
Net Purchases of Short-term Investments | (87.0 | ) | (252.6 | ) | |||
Net Decrease in Payables for Collateral on Investments | (158.0 | ) | (7.7 | ) | |||
Net Purchases of Property and Equipment | (95.6 | ) | (64.7 | ) | |||
Net Cash Used by Investing Activities | (587.4 | ) | (388.5 | ) | |||
Cash Flows from Financing Activities | |||||||
Short-term Debt Repayments | (200.0 | ) | — | ||||
Issuance of Long-term Debt | 290.7 | — | |||||
Long-term Debt Repayments | (45.0 | ) | (48.5 | ) | |||
Issuance of Common Stock | 3.6 | 9.5 | |||||
Repurchase of Common Stock | (205.8 | ) | (307.2 | ) | |||
Dividends Paid to Stockholders | (160.2 | ) | (144.1 | ) | |||
Other, Net | (42.6 | ) | (28.1 | ) | |||
Net Cash Used by Financing Activities | (359.3 | ) | (518.4 | ) | |||
Net Increase (Decrease) in Cash and Bank Deposits | 136.8 | (30.3 | ) | ||||
Cash and Bank Deposits at Beginning of Year | 77.4 | 100.4 | |||||
Cash and Bank Deposits at End of Period | $ | 214.2 | $ | 70.1 |
See notes to consolidated financial statements.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Unum Group and Subsidiaries
September 30, 2018
Note 1 - Basis of Presentation
The accompanying consolidated financial statements of Unum Group and its subsidiaries (the Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes included in our annual report on Form 10-K for the year ended December 31, 2017.
In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of full year performance.
Note 2 - Accounting Developments
Accounting Updates Adopted in 2018:
Accounting Standards Codification (ASC) | Description | Date of Adoption | Effect on Financial Statements | |||
ASC 230 "Statement of Cash Flows" | This update provided clarifying guidance intended to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The update addressed eight specific cash flow issues that relate to various types of transactions. The guidance is to be applied retrospectively. | January 1, 2018 | The adoption of this update resulted in the reclassification of certain cash inflows from investing activities to cash inflows from operating activities within our consolidated statements of cash flows. This reclassification related to cash distributions from equity method investees and the bifurcation of those distributions as either returns on investment or returns of investment. The adoption of this update had no effect on our financial position or results of operations. See the summary tables contained herein for the financial statement impacts of this retrospective adoption. | |||
ASC 606 "Revenue from Contracts with Customers" | These updates superseded virtually all existing guidance regarding the recognition of revenue from customers. Specifically excluded from the scope of these updates are insurance contracts, although our fee-based service products are included within the scope. Our fee-based service products, which are primarily sold in our Unum US segment, are reported in other income within our consolidated statements of operations and represent less than one percent of our total revenue. The core principle of this guidance is that revenue recognition should depict the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Accordingly, we continue to recognize revenue for these fee-based service products as services are rendered. The guidance is to be applied retrospectively for all periods presented or retrospectively with a cumulative-effect adjustment at the date of adoption. | January 1, 2018 | The adoption of these updates did not have an impact on our financial position or results of operations and did not result in expanded disclosures due to the immaterial nature of our fee-based service products relative to our overall business. |
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2018
Note 2 - Accounting Developments - Continued
ASC | Description | Date of Adoption | Effect on Financial Statements | |||
ASC 715 "Compensation - Retirement Benefits" | This update required the service cost component of net periodic pension and postretirement benefit costs to be included as a component of compensation costs in an entity's statement of income. Other components of net periodic pension and postretirement benefit costs are required to be presented separately from the service cost along with a disclosure identifying the line items in which these costs are presented in the statement of income. The amendments in this update are to be applied retrospectively or prospectively depending on the specific requirement of the update. | January 1, 2018 | The adoption of this update resulted in the reclassification of service cost from the other expenses line item to the compensation expense line item on our consolidated statements of operations but had no effect on our financial position or results of operations. We elected to use the practical expedient for the retrospective application of this update. See the summary tables contained herein for the financial statement impacts of this retrospective adoption. | |||
ASC 740 "Income Taxes" | This update eliminated the exception that required the tax effect of intra-entity asset transfers other than inventory to be deferred until the transferred asset is sold to a third party or otherwise recovered through use. It required recognition of tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. The guidance is to be applied retrospectively. | January 1, 2018 | The adoption of this update did not have an impact on our financial position or results of operations. | |||
ASC 815 "Derivatives and Hedge Accounting" | This update provided targeted improvements to accounting for hedging activities for both nonfinancial and financial risk components, aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements, eases certain documentation and effectiveness assessment requirements, and enhances transparency through expanded disclosures. For cash flow and net investment hedges existing at the date of adoption, the guidance is to be applied using a modified retrospective approach through a cumulative-effect adjustment to accumulated other comprehensive income with a corresponding adjustment to retained earnings as of the beginning of the fiscal year the guidance is adopted. The amended presentation and disclosure guidance is required prospectively. Early adoption is permitted. | January 1, 2018 | We elected to early adopt this update. The adoption of this update did not have an impact on our financial position or results of operations; however, it expanded our disclosures. This update will also simplify hedge documentation requirements and expand available hedging strategies. |
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2018
Note 2 - Accounting Developments - Continued
ASC | Description | Date of Adoption | Effect on Financial Statements | |||
ASC 825 "Financial Instruments - Overall" | This update changed the accounting and disclosure requirements for certain financial instruments. These changes include a requirement to measure equity investments, other than those that result in consolidation or are accounted for under the equity method, at fair value through net income unless the investment qualifies for certain practicability exceptions. In addition, the update clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale fixed maturity securities. Changes also included the modification of certain disclosures around the fair value of financial instruments, including the requirement for separate presentation of financial assets and liabilities by measurement category, as well as the elimination of certain disclosures around methods and significant assumptions used to estimate fair value. The guidance is to be applied using a modified retrospective approach through a cumulative-effect adjustment to accumulated other comprehensive income with a corresponding adjustment to retained earnings as of the beginning of the fiscal year the guidance is adopted. | January 1, 2018 | See the summary tables contained herein for the financial statement impacts of this modified retrospective adoption on our financial statement line items at January 1, 2018. |
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2018
Note 2 - Accounting Developments - Continued
Summary of Financial Statement Impacts of Accounting Updates Adopted in 2018:
For the Nine Months Ended September 30, 2017 | |||||||||||
Historical Accounting Method | As Adjusted | Effect of Change | |||||||||
(in millions of dollars) | |||||||||||
Adjustments due to ASC 230 | |||||||||||
Consolidated Statements of Cash Flow | |||||||||||
Cash Flows from Operating Activities | |||||||||||
Other, Net | $ | (2.4 | ) | $ | 8.2 | $ | 10.6 | ||||
Cash Flows from Investing Activities | |||||||||||
Proceeds from Sales and Maturities of Other Investments | 172.3 | 161.7 | (10.6 | ) |
For the Three Months Ended September 30, 2017 | For the Nine Months Ended September 30, 2017 | ||||||||||||||||||||||
Historical Accounting Method | As Adjusted | Effect of Change | Historical Accounting Method | As Adjusted | Effect of Change | ||||||||||||||||||
(in millions of dollars) | (in millions of dollars) | ||||||||||||||||||||||
Adjustments due to ASC 715 | |||||||||||||||||||||||
Consolidated Statements of Operations | |||||||||||||||||||||||
Compensation Expense | $ | 221.8 | $ | 223.8 | $ | 2.0 | $ | 644.7 | $ | 650.6 | $ | 5.9 | |||||||||||
Other Expenses | 193.5 | 191.5 | (2.0 | ) | 630.5 | 624.6 | (5.9 | ) |
Balance at December 31, 2017 | Balance at January 1, 2018 | Effect of Change | |||||||||
(in millions of dollars) | |||||||||||
Adjustments due to ASC 825 | |||||||||||
Consolidated Balance Sheets | |||||||||||
Assets | |||||||||||
Investments | |||||||||||
Other Long-term Investments | $ | 646.8 | $ | 643.0 | $ | (3.8 | ) | ||||
Liabilities | |||||||||||
Deferred Income Tax | 199.0 | 198.2 | (0.8 | ) | |||||||
Stockholders' Equity | |||||||||||
Accumulated Other Comprehensive Income (Loss) | 127.5 | 110.0 | (17.5 | ) | |||||||
Retained Earnings | 9,542.2 | 9,556.7 | 14.5 |
For the adoption of these updates, certain reclassifications have been made to prior year amounts in order to conform to current year presentation.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2018
Note 2 - Accounting Developments - Continued
Accounting Updates Outstanding:
ASC | Description | Date of Adoption | Effect on Financial Statements | |||
ASC 220 "Income Statement - Reporting Comprehensive Income" | This update allows entities to make an optional accounting policy election to reclassify the stranded tax effects arising as a result of the recognition of the enactment of the tax bill, H.R.1, An Act to Provide Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, more commonly known as the Tax Cuts and Jobs Act (TCJA) from accumulated other comprehensive income to retained earnings. Tax effects that are stranded in accumulated other comprehensive income for reasons other than the TCJA may not be reclassified. This update requires additional disclosures on whether an entity elects to reclassify the stranded tax effects and its policy for releasing tax effects from accumulated other comprehensive income. This guidance may be applied in the period of adoption or retrospectively to each period in which the effect of the change in federal income tax rate in the TCJA is recognized, with early adoption permitted. | January 1, 2019 | The adoption of this update will expand certain of our disclosures but will have no impact on our financial position or results of operations because we do not intend to make the optional accounting policy election to reclassify the stranded tax effects resulting from the TCJA from accumulated other comprehensive income to retained earnings. | |||
ASC 310 "Receivables - Nonrefundable Fees and Other Costs" | This update shortens the amortization period to the earliest call date for certain callable debt securities held at a premium. This update does not impact securities held at a discount. The guidance is to be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Early adoption is permitted. | January 1, 2019 | We have determined the population of our callable debt securities that are within the scope of this update and do not expect this update to have a material impact on our financial position or results of operations. | |||
ASC 718 "Compensation - Stock Compensation" | This update generally aligns the accounting guidance for share-based payments issued to non-employees with guidance for share-based payments issued to employees. Specifically, the update requires non-employee share-based payments to be measured using the grant date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered rather than being remeasured through the performance completion date. Additionally, for non-employee share-based payments that contain performance conditions, the update will change the criteria regarding the recognition of compensation cost to when achievement of a performance condition is probable rather than upon actual achievement of the performance condition. The guidance is to be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption, with early adoption permitted. For purposes of determining the cumulative effect adjustment, the guidance shall be applied only to equity-classified non-employee share-based payments for which a measurement date has not been established and liability-classified non-employee share-based payments that have not been settled as of the date of adoption. | January 1, 2019 | The adoption of this update is not expected to have a material effect on our financial position or results of operations. |
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2018
Note 2 - Accounting Developments - Continued
ASC | Description | Date of Adoption | Effect on Financial Statements | |||
ASC 842 "Leases" | This update changes the accounting for leases, requiring lessees to report most leases on their balance sheets, regardless of whether the lease is classified as a finance lease or an operating lease. For lessees, the initial lease liability is equal to the present value of lease payments, and a corresponding right-of-use asset, adjusted for certain items, is also recorded. Expense recognition for lessees will remain similar to current accounting requirements for capital and operating leases. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The guidance is to be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings at either the beginning of the earliest comparative period presented or at the beginning of the period of adoption. The guidance also allows practical expedients related to adoption considerations for leases that commenced before the date of adoption. Early adoption is permitted. | January 1, 2019 | The adoption of this update will not have a material impact on our financial position or results of operations, however, it will result in the recognition of a lease liability and a corresponding right-of-use asset on our balance sheet related to our operating leases. We expect to adopt the guidance using a modified retrospective approach at the beginning of the period of adoption and intend to apply practical expedients to leases that commenced prior to the date of adoption. This guidance will also expand our disclosures. | |||
ASC 326 "Financial Instruments - Credit Losses" | This update amends the guidance on the impairment of financial instruments. The update adds an impairment model known as the current expected credit loss model that is based on expected losses rather than incurred losses and will generally result in earlier recognition of allowances for losses. The current expected credit loss model applies to financial instruments such as mortgage loans, fixed maturity securities classified as held-to-maturity, and certain receivables. The update also modifies the other-than-temporary impairment model used for available-for-sale fixed maturity securities such that credit losses are recognized as an allowance rather than as a reduction in the amortized cost of the security. The reversal of previously recognized credit losses on available-for-sale fixed maturity securities is allowed under specified circumstances. Additional disclosures will also be required, including information used to develop the allowance for losses. The guidance is to be applied to most instruments in scope using a modified retrospective approach at the beginning of the earliest comparative period presented with early adoption permitted. For available-for-sale fixed maturity securities, the update is applied prospectively. Other-than-temporary impairment losses recognized on available-for-sale fixed maturity securities prior to adoption of the update cannot be reversed. | January 1, 2020 | We have not yet determined the expected impact on our financial position or results of operations. |
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2018
Note 2 - Accounting Developments - Continued
ASC | Description | Date of Adoption | Effect on Financial Statements | |||
ASC 350 "Intangibles - Goodwill and Other" | This update eliminates the requirement to calculate the implied fair value of goodwill (the second step in the current two-step test) to measure a goodwill impairment charge. Instead, entities should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the excess of the carrying amount over the fair value, with the loss not to exceed the total amount of goodwill allocated to that reporting unit. The guidance is to be applied prospectively, with early adoption permitted for goodwill impairment tests performed on testing dates after January 1, 2017. | January 1, 2020 | The adoption of this update is not expected to have a material effect on our financial position or results of operations. | |||
ASC 820 "Fair Value Measurement" | This update amends the fair value measurement guidance by removing or clarifying certain existing disclosure requirements, while also adding new disclosure requirements. Specifically, this update removes certain disclosures related to Level 1 and Level 2 transfers and also removes the discussion regarding valuation processes of Level 3 fair value measurements. The update modifies guidance related to investments in certain entities that calculate net asset value to explicitly require disclosure regarding timing of liquidation of the investee's assets and timing of redemption restrictions. The update adds disclosures around the changes in unrealized gains and losses in other comprehensive income for recurring Level 3 investments held at the end of the reporting period and adds disclosures regarding certain unobservable inputs on Level 3 fair value measurements. The guidance is to be applied retrospectively or prospectively depending on the specific requirement of the update. Entities are permitted to early adopt any removed or modified disclosures and may delay adoption of the additional disclosures until their effective date. | January 1, 2020 | We have not yet determined the expected impact on our disclosures. | |||
ASC 715 "Compensation - Retirement Benefits" | This update amends the defined benefit pension and other postretirement benefit guidance by removing or clarifying certain existing disclosures requirements, while also adding new disclosure requirements. Specifically, this update removes the requirement to disclose the effects of a one-percentage point change in the assumed healthcare cost trend and the requirement to disclose amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost of the next year. This update adds a requirement to describe the reasons for significant gains and losses related to changes in the benefit obligation for the period. The update also clarifies that the projected benefit obligation (PBO) and accumulated benefit obligation (ABO) and fair value of plan assets are to be disclosed for plans with PBOs or ABOs in excess of plan assets. The guidance is to be applied retrospectively and early adoption is permitted. | December 31, 2020 | We have not yet determined the expected impact on our disclosures. |
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2018
Note 2 - Accounting Developments - Continued
ASC | Description | Date of Adoption | Effect on Financial Statements | |||
ASC 944 "Financial Services - Insurance" | This update significantly amends the accounting and disclosure requirements for long-duration insurance contracts. These changes include a requirement to review, and if necessary, update cash flow assumptions used to measure the liability for future policy benefits for traditional and limited-payment contracts at least annually, with changes recognized in earnings. In addition, an entity will be required to update the discount rate assumption at each reporting date using a yield that is reflective of an upper-medium grade fixed-income instrument, with changes recognized in other comprehensive income. These changes result in the elimination of the provision for risk of adverse deviation and premium deficiency (or loss recognition) testing. The update also requires that an entity measure all market risk benefits associated with deposit contracts at fair value, with changes recognized in earnings except for the portion attributable to a change in the instrument-specific credit risk, which is to be recognized in other comprehensive income. This update also simplifies the amortization of deferred acquisition costs by requiring amortization on a constant level basis over the expected term of the related contracts. Deferred acquisition costs are required to be written off for unexpected contract terminations but are no longer subject to an impairment test. Significant additional disclosures will also be required, which include disaggregated rollforwards of certain liability balances and the disclosure of qualitative and quantitative information about expected cash flows, estimates, and assumptions. The application of this guidance will vary based upon the specific requirements of the update but will generally result in either a modified retrospective or full retrospective approach with changes applied as of the beginning of the earliest period presented. Early adoption is permitted. | January 1, 2021 | We have not yet determined the expected impact on our financial position or results of operations. |
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2018
Note 3 - Fair Values of Financial Instruments
Fair Value Measurements for Financial Instruments Carried at Fair Value
We report fixed maturity securities, which are classified as available-for-sale securities, derivative financial instruments, and unrestricted equity securities at fair value in our consolidated balance sheets. We report our investments in private equity partnerships at our share of the partnerships' net asset value (NAV) as a practical expedient for fair value.
The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and less judgment utilized in measuring fair value. An active market for a financial instrument is a market in which transactions for an asset or a similar asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and should be used to measure fair value whenever available. Conversely, financial instruments rarely traded or not quoted have less observability and are measured at fair value using valuation techniques that require more judgment. Pricing observability is generally impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction, and overall market conditions.
We classify financial instruments in accordance with a fair value hierarchy consisting of three levels based on the observability of valuation inputs:
• | Level 1 - the highest category of the fair value hierarchy classification wherein inputs are unadjusted and represent quoted prices in active markets for identical assets or liabilities at the measurement date. |
• | Level 2 - valued using inputs (other than prices included in Level 1) that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument's anticipated life. |
• | Level 3 - the lowest category of the fair value hierarchy and reflects the judgment of management regarding what market participants would use in pricing assets or liabilities at the measurement date. Financial assets and liabilities categorized as Level 3 are generally those that are valued using unobservable inputs to extrapolate an estimated fair value. |
Valuation Methodologies of Financial Instruments Measured at Fair Value
Valuation techniques used for assets and liabilities accounted for at fair value are generally categorized into three types. The market approach uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities. The income approach converts future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount. The cost approach is based upon the amount that currently would be required to replace the service capacity of an asset, or the current replacement cost.
We use valuation techniques that are appropriate in the circumstances and for which sufficient data are available that can be obtained without undue cost and effort. In some cases, a single valuation technique will be appropriate (for example, when valuing an asset or liability using quoted prices in an active market for identical assets or liabilities). In other cases, multiple valuation techniques will be appropriate. If we use multiple valuation techniques to measure fair value, we evaluate and weigh the results, as appropriate, considering the reasonableness of the range indicated by those results. A fair value measurement is the point within that range that is most representative of fair value in the circumstances.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2018
Note 3 - Fair Values of Financial Instruments - Continued
The selection of the valuation method(s) to apply considers the definition of an exit price and depends on the nature of the asset or liability being valued. For assets and liabilities accounted for at fair value, we generally use valuation techniques consistent with the market approach, and to a lesser extent, the income approach. We believe the market approach provides more observable data than the income approach, considering the type of investments we hold. Our fair value measurements could differ significantly based on the valuation technique and available inputs. When using a pricing service, we obtain the vendor's pricing documentation to ensure we understand their methodologies. We periodically review and approve the selection of our pricing vendors to ensure we are in agreement with their current methodologies. When markets are less active, brokers may rely more on models with inputs based on the information available only to the broker. Our internal investment management professionals, which include portfolio managers and analysts, monitor securities priced by brokers and evaluate their prices for reasonableness based on benchmarking to available primary and secondary market information. In weighing a broker quote as an input to fair value, we place less reliance on quotes that do not reflect the result of market transactions. We also consider the nature of the quote, particularly whether the quote is a binding offer. If prices in an inactive market do not reflect current prices for the same or similar assets, adjustments may be necessary to arrive at fair value. When relevant market data is unavailable, which may be the case during periods of market uncertainty, the income approach can, in suitable circumstances, provide a more appropriate fair value. During 2018, we have applied valuation approaches and techniques on a consistent basis to similar assets and liabilities and consistent with those approaches and techniques used at year end 2017.
Fixed Maturity and Equity Securities
We use observable and unobservable inputs in measuring the fair value of our fixed maturity and equity securities. For securities categorized as Level 1, fair values equal active Trade Reporting and Compliance Engine (TRACE) pricing or unadjusted broker market maker prices. For securities categorized as Level 2 or Level 3, inputs that may be used in valuing each class of securities at any given time period are disclosed below. Actual inputs used to determine fair values will vary for each reporting period depending on the availability of inputs which may, at times, be affected by the lack of market liquidity.
Level 2 | Level 3 | ||||
Instrument | Observable Inputs | Unobservable Inputs | |||
United States Government and Government Agencies and Authorities | |||||
Valuation Method | Principally the market approach | Not applicable | |||
Valuation Techniques / Inputs | Prices obtained from external pricing services | ||||
States, Municipalities, and Political Subdivisions | |||||
Valuation Method | Principally the market approach | Principally the market approach | |||
Valuation Techniques / Inputs | Prices obtained from external pricing services | Analysis of similar bonds, adjusted for comparability | |||
Relevant reports issued by analysts and rating agencies | Non-binding broker quotes | ||||
Audited financial statements | Security and issuer level spreads | ||||
Foreign Governments | |||||
Valuation Method | Principally the market approach | Principally the market approach | |||
Valuation Techniques / Inputs | Prices obtained from external pricing services | Analysis of similar bonds, adjusted for comparability | |||
Non-binding broker quotes | Non-binding broker quotes | ||||
Call provisions | Security and issuer level spreads | ||||
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2018
Note 3 - Fair Values of Financial Instruments - Continued
Level 2 | Level 3 | ||||
Instrument | Observable Inputs | Unobservable Inputs | |||
Public Utilities | |||||
Valuation Method | Principally the market and income approaches | Principally the market and income approaches | |||
Valuation Techniques / Inputs | TRACE pricing | Change in benchmark reference | |||
Prices obtained from external pricing services | Analysis of similar bonds, adjusted for comparability | ||||
Non-binding broker quotes | Discount for size - illiquidity | ||||
Benchmark yields | Non-binding broker quotes | ||||
Transactional data for new issuances and secondary trades | Lack of marketability | ||||
Security cash flows and structures | Security and issuer level spreads | ||||
Recent issuance / supply | Volatility of credit | ||||
Matrix pricing | Matrix pricing | ||||
Security and issuer level spreads | |||||
Security creditor ratings/maturity/capital structure/optionality | |||||
Public covenants | |||||
Comparative bond analysis | |||||
Relevant reports issued by analysts and rating agencies | |||||
Audited financial statements | |||||
Mortgage/Asset-Backed Securities | |||||
Valuation Method | Principally the market and income approaches | Principally the market approach | |||
Valuation Techniques / Inputs | Prices obtained from external pricing services | Analysis of similar bonds, adjusted for comparability | |||
Non-binding broker quotes | Non-binding broker quotes | ||||
Security cash flows and structures | Security and issuer level spreads | ||||
Underlying collateral | |||||
Prepayment speeds/loan performance/delinquencies | |||||
Relevant reports issued by analysts and rating agencies | |||||
Audited financial statements | |||||
All Other Corporate Bonds | |||||
Valuation Method | Principally the market and income approaches | Principally the market and income approaches | |||
Valuation Techniques / Inputs | TRACE pricing | Change in benchmark reference | |||
Prices obtained from external pricing services | Analysis of similar bonds, adjusted for comparability | ||||
Non-binding broker quotes | Discount for size - illiquidity |
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2018
Note 3 - Fair Values of Financial Instruments - Continued
Level 2 | Level 3 | ||||
Instrument | Observable Inputs | Unobservable Inputs | |||
All Other Corporate Bonds - Continued | |||||
Benchmark yields | Non-binding broker quotes | ||||
Transactional data for new issuances and secondary trades | Lack of marketability | ||||
Security cash flows and structures | Security and issuer level spreads | ||||
Recent issuance / supply | Volatility of credit | ||||
Matrix pricing | Matrix pricing | ||||
Security and issuer level spreads | |||||
Security creditor ratings/maturity/capital structure/optionality | |||||
Public covenants | |||||
Comparative bond analysis | |||||
Relevant reports issued by analysts and rating agencies | |||||
Audited financial statements | |||||
Redeemable Preferred Stocks | |||||
Valuation Method | Principally the market approach | Principally the market approach | |||
Valuation Techniques / Inputs | Non-binding broker quotes | Non-binding broker quotes | |||
Benchmark yields | |||||
Comparative bond analysis | |||||
Call provisions | |||||
Relevant reports issued by analysts and rating agencies | |||||
Audited financial statements | |||||
Equity Securities | |||||
Valuation Method | Principally the market approach | Principally the market and income approaches | |||
Valuation Techniques / Inputs | Prices obtained from external pricing services | Financial statement analysis | |||
Non-binding broker quotes | Non-binding broker quotes |
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2018
Note 3 - Fair Values of Financial Instruments - Continued
The management of our investment portfolio includes establishing pricing policy and reviewing the reasonableness of sources and inputs used in developing pricing. We review all prices obtained to ensure they are consistent with a variety of observable market inputs and to verify the validity of a security's price. In the event we receive a vendor's market price that does not appear reasonable based on our market analysis, we may challenge the price and request further information about the assumptions and methodologies used by the vendor to price the security. We may change the vendor price based on a better data source such as an actual trade. We also review all price changes from the prior month which fall outside a predetermined corridor. The overall valuation process for determining fair values may include adjustments to valuations obtained from our pricing sources when they do not represent a valid exit price. These adjustments may be made when, in our judgment and considering our knowledge of the financial conditions and industry in which the issuer operates, certain features of the financial instrument require that an adjustment be made to the value originally obtained from our pricing sources. These features may include the complexity of the financial instrument, the market in which the financial instrument is traded, counterparty credit risk, credit structure, concentration, or liquidity. Additionally, an adjustment to the price derived from a model typically reflects our judgment of the inputs that other participants in the market for the financial instrument being measured at fair value would consider in pricing that same financial instrument. In the event an asset is sold, we test the validity of the fair value determined by our valuation techniques by comparing the selling price to the fair value determined for the asset in the immediately preceding month end reporting period.
Certain of our investments do not have readily determinable market prices and/or observable inputs or may at times be affected by the lack of market liquidity. For these securities, we use internally prepared valuations combining matrix pricing with vendor purchased software programs, including valuations based on estimates of future profitability, to estimate the fair value. Additionally, we may obtain prices from independent third-party brokers to aid in establishing valuations for certain of these securities. Key assumptions used by us to determine fair value for these securities include risk free interest rates, risk premiums, performance of underlying collateral (if any), and other factors involving significant assumptions which may or may not reflect those of an active market.
The parameters and inputs used to validate a price on a security may be adjusted for assumptions about risk and current market conditions on a quarter to quarter basis, as certain features may be more significant drivers of valuation at the time of pricing. Changes to inputs in valuations are not changes to valuation methodologies; rather, the inputs are modified to reflect direct or indirect impacts on asset classes from changes in market conditions.
At September 30, 2018, 20.5 percent of our fixed maturity securities were valued using active trades from TRACE pricing or broker market maker prices for which there was current market activity in that specific security (comparable to receiving one binding quote). The prices obtained were not adjusted, and the assets were classified as Level 1.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2018
Note 3 - Fair Values of Financial Instruments - Continued
The remaining 79.5 percent of our fixed maturity securities were valued based on non-binding quotes or other observable and unobservable inputs, as discussed below:
• | 66.1 percent of our fixed maturity securities were valued based on prices from pricing services that generally use observable inputs such as prices for securities or comparable securities in active markets in their valuation techniques. These assets were classified as Level 2. |
• | 3.6 percent of our fixed maturity securities were valued based on one or more non-binding broker quotes, if validated by observable market data, or on TRACE prices for identical or similar assets absent current market activity. When only one price is available, it is used if observable inputs and analysis confirms that it is appropriate. These assets, for which we were able to validate the price using other observable market data, were classified as Level 2. |
• | 9.8 percent of our fixed maturity securities were valued based on prices of comparable securities, matrix pricing, market models, and/or internal models or were valued based on non-binding quotes with no other observable market data. These assets were classified as either Level 2 or Level 3, with the categorization dependent on whether there was other observable market data. |
Derivatives
Fair values for derivatives other than embedded derivatives in modified coinsurance arrangements are based on market quotes or pricing models and represent the net amount of cash we would have paid or received if the contracts had been settled or closed as of the last day of the period. We analyze credit default swap spreads relative to the average credit spread embedded within the LIBOR-setting syndicate in determining the effect of credit risk on our derivatives' fair values. If net counterparty credit risk for a derivative asset is determined to be material and is not adequately reflected in the LIBOR-based fair value obtained from our pricing sources, we adjust the valuations obtained from our pricing sources. For purposes of valuing net counterparty risk, we measure the fair value of a group of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position or transfer a net short position for a particular risk exposure in an orderly transaction between market participants at the measurement date under current market conditions. In regard to our own credit risk component, we adjust the valuation of derivative liabilities wherein the counterparty is exposed to our credit risk when the LIBOR-based valuation of our derivatives obtained from pricing sources does not effectively include an adequate credit component for our own credit risk.
Fair values for our embedded derivative in a modified coinsurance arrangement are estimated using internal pricing models and represent the hypothetical value of the duration mismatch of assets and liabilities, interest rate risk, and third party credit risk embedded in the modified coinsurance arrangement.
We consider transactions in inactive markets to be less representative of fair value. We use all available observable inputs when measuring fair value, but when significant unobservable inputs are used, we classify these assets or liabilities as Level 3.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2018
Note 3 - Fair Values of Financial Instruments - Continued
Private Equity Partnerships
Our private equity partnerships represent funds that are primarily invested in private credit, private equity, and real assets, as described below. Distributions received from the funds arise from income generated by the underlying investments as well as the liquidation of the underlying investments. There is generally not a public market for these investments.
The following table presents additional information about our private equity partnerships as of September 30, 2018, including commitments for additional investments which may or may not be funded:
Investment Category | Fair Value | Redemption Term / Redemption Notice | Unfunded Commitments | |||||||
(in millions of dollars) | (in millions of dollars) | |||||||||
Private Credit | (a) | $ | 162.5 | Not redeemable | $ | 71.8 | ||||
20.1 | Initial 2 year lock on each new investment / Quarterly after 2 year lock with 90 days notice | 8.8 | ||||||||
Total Private Credit | 182.6 | 80.6 | ||||||||
Private Equity | (b) | 126.5 | Not redeemable | 186.4 | ||||||
Real Assets | (c) | 127.4 | Not redeemable | 84.6 | ||||||
30.2 | Quarterly / 90 days notice | — | ||||||||
Total Real Assets | 157.6 | 84.6 | ||||||||
Total Partnerships | $ | 466.7 | $ | 351.6 |
(a) | Private Credit - The limited partnerships described in this category employ various investment strategies, generally providing direct lending or other forms of debt financing including first-lien, second-lien, mezzanine, and subordinated loans. The limited partnerships have credit exposure to corporates, physical assets, and/or financial assets within a variety of industries (including manufacturing, healthcare, energy, business services, technology, materials, and retail) in North America and, to a lesser extent, outside of North America. As of September 30, 2018, the estimated remaining life of the investments that do not allow for redemptions is approximately 24 percent in the next 3 years, 46 percent during the period from 3 to 5 years, 27 percent during the period from 5 to 10 years, and 3 percent after the period of 15 years. |
(b) | Private Equity - The limited partnerships described in this category employ various strategies generally investing in controlling or minority control equity positions directly in companies and/or assets across various industries (including manufacturing, healthcare, energy, business services, technology, materials, and retail), primarily in private markets within North America and, to a lesser extent, outside of North America. As of September 30, 2018, the estimated remaining life of the investments that do not allow for redemptions is approximately 26 percent in the next 3 years, 26 percent during the period from 3 to 5 years, 45 percent during the period from 5 to 10 years, 1 percent during the period from 10 to 15 years, and 2 percent after the period of 15 years. |
(c) | Real Assets - The limited partnerships described in this category employ various strategies, which include investing in the equity and/or debt financing of physical assets, including infrastructure (energy, power, water/wastewater, communications), transportation (including airports, ports, toll roads, aircraft, railcars) and real estate in North America, Europe, South America, and Asia. As of September 30, 2018, the estimated remaining life of the investments that do not allow for redemptions is approximately 2 percent in the next 3 years, 21 percent during period from 3 to 5 years, 74 percent during the period from 5 to 10 years, and 3 percent during the period from 10 to 15 years. |
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2018
Note 3 - Fair Values of Financial Instruments - Continued
The following tables present information about financial instruments measured at fair value on a recurring basis by fair value level, based on the observability of the inputs used:
September 30, 2018 | |||||||||||||||||||
Level 1 | Level 2 | Level 3 | NAV | Total | |||||||||||||||
(in millions of dollars) | |||||||||||||||||||
Assets | |||||||||||||||||||
Fixed Maturity Securities | |||||||||||||||||||
United States Government and Government Agencies and Authorities | $ | 679.6 | $ | 1,099.9 | $ | — | $ | — | $ | 1,779.5 | |||||||||
States, Municipalities, and Political Subdivisions | — | 2,256.1 | 63.9 | — | 2,320.0 | ||||||||||||||
Foreign Governments | — | 766.8 | 31.6 | — | 798.4 | ||||||||||||||
Public Utilities | 333.7 | 6,933.8 | 122.4 | — | 7,389.9 | ||||||||||||||
Mortgage/Asset-Backed Securities | — | 1,626.5 | 0.5 | — | 1,627.0 | ||||||||||||||
All Other Corporate Bonds | 7,798.7 | 20,425.6 | 891.8 | — | 29,116.1 | ||||||||||||||
Redeemable Preferred Stocks | — | 18.9 | 21.5 | — | 40.4 | ||||||||||||||
Total Fixed Maturity Securities | 8,812.0 | 33,127.6 | 1,131.7 | — | 43,071.3 | ||||||||||||||
Other Long-term Investments | |||||||||||||||||||
Derivatives | |||||||||||||||||||
Foreign Exchange Contracts | — | 20.4 | — | — | 20.4 | ||||||||||||||
Credit Default Swaps | — | 0.5 | — | — | 0.5 | ||||||||||||||
Equity Securities | 14.9 | 12.6 | 1.1 | — | 28.6 | ||||||||||||||
Private Equity Partnerships | — | — | — | 466.7 | 466.7 | ||||||||||||||
Total Other Long-term Investments | 14.9 | 33.5 | 1.1 | 466.7 | 516.2 | ||||||||||||||
Total Financial Instrument Assets Carried at Fair Value | $ | 8,826.9 | $ | 33,161.1 | $ | 1,132.8 | $ | 466.7 | $ | 43,587.5 | |||||||||
Liabilities | |||||||||||||||||||
Other Liabilities | |||||||||||||||||||
Derivatives | |||||||||||||||||||
Interest Rate Swaps and Forwards | $ | — | $ | 7.3 | $ | — | $ | — | $ | 7.3 | |||||||||
Foreign Exchange Contracts | — | 39.2 | — | — | 39.2 | ||||||||||||||
Embedded Derivative in Modified Coinsurance Arrangement | — | — | 13.8 | — | 13.8 | ||||||||||||||
Total Derivatives | — | 46.5 | 13.8 | — | 60.3 | ||||||||||||||
Total Financial Instrument Liabilities Carried at Fair Value | $ | — | $ | 46.5 | $ | 13.8 | $ | — | $ | 60.3 |
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2018
Note 3 - Fair Values of Financial Instruments - Continued
December 31, 2017 | |||||||||||||||||||
Level 1 | Level 2 | Level 3 | NAV | Total | |||||||||||||||
(in millions of dollars) | |||||||||||||||||||
Assets | |||||||||||||||||||
Fixed Maturity Securities | |||||||||||||||||||
United States Government and Government Agencies and Authorities | $ | 460.1 | $ | 1,022.4 | $ | — | $ | — | $ | 1,482.5 | |||||||||
States, Municipalities, and Political Subdivisions | — | 2,336.9 | — | — | 2,336.9 | ||||||||||||||
Foreign Governments | — | 863.9 | — | — | 863.9 | ||||||||||||||
Public Utilities | 154.2 | 7,874.6 | 207.7 | — | 8,236.5 | ||||||||||||||
Mortgage/Asset-Backed Securities | — | 1,973.6 | — | — | 1,973.6 | ||||||||||||||
All Other Corporate Bonds | 3,556.1 | 25,816.2 | 1,150.1 | — | 30,522.4 | ||||||||||||||
Redeemable Preferred Stocks | — | 19.2 | 22.8 | — | 42.0 | ||||||||||||||
Total Fixed Maturity Securities | 4,170.4 | 39,906.8 | 1,380.6 | — | 45,457.8 | ||||||||||||||
Other Long-term Investments | |||||||||||||||||||
Derivatives | |||||||||||||||||||
Foreign Exchange Contracts | — | 19.5 | — | — | 19.5 | ||||||||||||||
Equity Securities | 0.2 | 10.4 | 1.1 | — | 11.7 | ||||||||||||||
Private Equity Partnerships | — | — | — | 407.2 | 407.2 | ||||||||||||||
Total Other Long-term Investments | 0.2 | 29.9 | 1.1 | 407.2 | 438.4 | ||||||||||||||
Total Financial Instrument Assets Carried at Fair Value | $ | 4,170.6 | $ | 39,936.7 | $ | 1,381.7 | $ | 407.2 | $ | 45,896.2 | |||||||||
Liabilities | |||||||||||||||||||
Other Liabilities | |||||||||||||||||||
Derivatives | |||||||||||||||||||
Interest Rate Swaps | $ | — | $ | 5.1 | $ | — | $ | — | $ | 5.1 | |||||||||
Foreign Exchange Contracts | — | 46.9 | — | — | 46.9 | ||||||||||||||
Credit Default Swaps | — | 0.2 | — | — | 0.2 | ||||||||||||||
Embedded Derivative in Modified Coinsurance Arrangement | — | — | 15.9 | — | 15.9 | ||||||||||||||
Total Derivatives | — | 52.2 | 15.9 | — | 68.1 | ||||||||||||||
Total Financial Instrument Liabilities Carried at Fair Value | $ | — | $ | 52.2 | $ | 15.9 | $ | — | $ | 68.1 |
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2018
Note 3 - Fair Values of Financial Instruments - Continued
Transfers of assets between Level 1 and Level 2 are as follows:
Three Months Ended September 30 | |||||||||||||||
2018 | 2017 | ||||||||||||||
Transfers into | |||||||||||||||
Level 1 from Level 2 | Level 2 from Level 1 | Level 1 from Level 2 | Level 2 from Level 1 | ||||||||||||
(in millions of dollars) | |||||||||||||||
Fixed Maturity Securities | |||||||||||||||
United States Government and Government Agencies and Authorities | $ | 225.5 | $ | 38.1 | $ | 751.9 | $ | — | |||||||
Public Utilities | 77.7 | 323.4 | 236.7 | 387.5 | |||||||||||
All Other Corporate Bonds | 2,650.2 | 2,519.1 | 3,022.8 | 2,944.7 | |||||||||||
Total Fixed Maturity Securities | $ | 2,953.4 | $ | 2,880.6 | $ | 4,011.4 | $ | 3,332.2 | |||||||
Nine Months Ended September 30 | |||||||||||||||
2018 | 2017 | ||||||||||||||
Transfers into | |||||||||||||||
Level 1 from Level 2 | Level 2 from Level 1 | Level 1 from Level 2 | Level 2 from Level 1 | ||||||||||||
(in millions of dollars) | |||||||||||||||
Fixed Maturity Securities | |||||||||||||||
United States Government and Government Agencies and Authorities | $ | 233.4 | $ | — | $ | 465.8 | $ | — | |||||||
Public Utilities | 244.0 | 57.4 | 463.6 | 67.1 | |||||||||||
All Other Corporate Bonds | 4,710.3 | 1,200.1 | 4,966.7 | 1,249.9 | |||||||||||
Total Fixed Maturity Securities | $ | 5,187.7 | $ | 1,257.5 | $ | 5,896.1 | $ | 1,317.0 | |||||||
Equity Securities | $ | — | $ | 0.2 | $ | — | $ | — |
Transfers between Level 1 and Level 2 occurred due to the change in availability of either a TRACE or broker market maker price. Depending on current market conditions, the availability of these Level 1 prices can vary from period to period. For fair value measurements of financial instruments that were transferred either into or out of Level 1 or 2, we reflect the transfers using the fair value at the beginning of the period.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
September 30, 2018
Note 3 - Fair Values of Financial Instruments - Continued
Changes in assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are as follows:
Three Months Ended September 30, 2018 | |||||||||||||||||||||||||||||||
Total Realized and Unrealized Investment Gains (Losses) Included in | Level 3 Transfers | ||||||||||||||||||||||||||||||
Fair Value Beginning of Period | Earnings | Other Comprehensive Income or Loss | Purchases | Sales | Into | Out of | Fair Value End of Period | ||||||||||||||||||||||||
(in millions of dollars) | |||||||||||||||||||||||||||||||
Fixed Maturity Securities | |||||||||||||||||||||||||||||||
States, Municipalities, and Political Subdivisions | $ | 36.5 | $ | — | $ | (1.5 | ) | $ | — | $ | — | $ | 28.9 | $ | — | $ | 63.9 | ||||||||||||||
Foreign Governments | 31.5 | — | 0.1 | — | — | — | — |