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Section 1: 10-Q (10-Q)

Document


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2019
 

¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from ___________ to ___________
 Commission file number 1-11294
Unum Group
(Exact name of registrant as specified in its charter)
 
Delaware
 
62-1598430
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1 FOUNTAIN SQUARE
 
 
CHATTANOOGA, TENNESSEE
 
37402
(Address of principal executive offices)
 
(Zip Code)
423.294.1011
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
(Check one):
 
Large accelerated filer
x
 
Accelerated filer
¨
 
 
 
 
 
 
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
 
 
 
 
 
 
 
 
 
 
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.  ¨
 
 
211,880,640 shares of the registrant's common stock were outstanding as of April 29, 2019.

 





 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.
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.
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.
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.
Our ability to execute on our technology systems upgrades or replacements.
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, 2018.

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

 
March 31
 
December 31
 
2019
 
2018
 
(in millions of dollars)
 
(Unaudited)
 
 
Assets
 
 
 
 
 
 
 
Investments
 
 
 
Fixed Maturity Securities - at fair value (amortized cost: $40,474.2; $40,275.2)
$
44,782.6

 
$
43,011.7

Mortgage Loans
2,206.6

 
2,295.0

Policy Loans
3,673.3

 
3,729.9

Other Long-term Investments
696.7

 
702.9

Short-term Investments
1,194.4

 
968.1

Total Investments
52,553.6

 
50,707.6

 
 
 
 
Other Assets
 
 
 
Cash and Bank Deposits
62.1

 
94.0

Accounts and Premiums Receivable
1,712.2

 
1,615.5

Reinsurance Recoverable
4,717.7

 
4,662.4

Accrued Investment Income
742.2

 
690.6

Deferred Acquisition Costs
2,298.2

 
2,309.4

Goodwill
351.0

 
350.3

Property and Equipment
548.2

 
546.9

Deferred Income Tax
30.2

 
109.9

Other Assets
906.3

 
789.0

 
 
 
 
Total Assets
$
63,921.7

 
$
61,875.6

    
 See notes to consolidated financial statements.

3



CONSOLIDATED BALANCE SHEETS - Continued

Unum Group and Subsidiaries

 
March 31
 
December 31
 
2019
 
2018
 
(in millions of dollars)
 
(Unaudited)
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
Liabilities
 
 
 
Policy and Contract Benefits
$
1,708.6

 
$
1,695.7

Reserves for Future Policy and Contract Benefits
46,109.4

 
44,841.9

Unearned Premiums
417.7

 
363.3

Other Policyholders’ Funds
1,608.2

 
1,594.8

Income Tax Payable
268.3

 
24.0

Long-term Debt
2,958.7

 
2,971.3

Other Liabilities
1,790.3

 
1,762.8

 
 
 
 
Total Liabilities
54,861.2

 
53,253.8

 
 
 
 
Commitments and Contingent Liabilities - Note 11

 

 
 
 
 
Stockholders' Equity
 
 
 
Common Stock, $0.10 par
 
 
 
Authorized: 725,000,000 shares
 
 
 
Issued: 305,565,569 and 305,104,548 shares
30.5

 
30.5

Additional Paid-in Capital
2,328.5

 
2,321.7

Accumulated Other Comprehensive Loss
(502.3
)
 
(814.2
)
Retained Earnings
10,083.1

 
9,863.1

Treasury Stock - at cost: 93,275,293 and 90,551,513 shares
(2,879.3
)
 
(2,779.3
)
 
 
 
 
Total Stockholders' Equity
9,060.5

 
8,621.8

 
 
 
 
Total Liabilities and Stockholders' Equity
$
63,921.7

 
$
61,875.6


See notes to consolidated financial statements.

4



CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Unum Group and Subsidiaries

 
Three Months Ended March 31
 
2019
 
2018
 
(in millions of dollars, except share data)
Revenue
 
 
 
Premium Income
$
2,338.7

 
$
2,250.0

Net Investment Income
594.7

 
602.3

Realized Investment Gain (Loss)
 
 
 
Other-Than-Temporary Impairment Loss on Fixed Maturity Securities

 
(1.0
)
Net Realized Investment Gain (Loss), Excluding Other-Than-Temporary Impairment Loss on Fixed Maturity Securities
1.1

 
(1.2
)
Net Realized Investment Gain (Loss)
1.1

 
(2.2
)
Other Income
53.1

 
49.5

Total Revenue
2,987.6

 
2,899.6

 
 
 
 
Benefits and Expenses
 
 
 
Benefits and Change in Reserves for Future Benefits
1,840.8

 
1,807.9

Commissions
290.1

 
282.3

Interest and Debt Expense
42.1

 
40.2

Deferral of Acquisition Costs
(173.7
)
 
(169.3
)
Amortization of Deferred Acquisition Costs
170.6

 
151.5

Compensation Expense
226.5

 
221.7

Other Expenses
237.9

 
224.2

Total Benefits and Expenses
2,634.3

 
2,558.5

 
 
 
 
Income Before Income Tax
353.3

 
341.1

 
 
 
 
Income Tax (Benefit)
 
 
 
Current
54.3

 
89.4

Deferred
18.1

 
(21.8
)
Total Income Tax
72.4

 
67.6

 
 
 
 
Net Income
$
280.9

 
$
273.5

 
 
 
 
Net Income Per Common Share
 
 
 
Basic
$
1.31

 
$
1.23

Assuming Dilution
$
1.31

 
$
1.23


See notes to consolidated financial statements.

5



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Unum Group and Subsidiaries
 
 
Three Months Ended March 31
 
2019
 
2018
 
(in millions of dollars)
Net Income
$
280.9

 
$
273.5

 
 
 
 
Other Comprehensive Income (Loss)
 
 
 
Change in Net Unrealized Gain on Securities Before Adjustment (net of tax expense (benefit) of $326.8; $(274.9))
1,245.1

 
(1,042.1
)
Change in Adjustment to Deferred Acquisition Costs and Reserves for Future Policy and Contract Benefits, Net of Reinsurance (net of tax expense (benefit) of $(245.5); $212.1)
(932.8
)
 
807.9

Change in Net Gain on Hedges (net of tax benefit of $5.8; $2.3)
(20.5
)
 
(8.8
)
Change in Foreign Currency Translation Adjustment (net of tax expense of $0.3; $ -)
17.3

 
47.5

Change in Unrecognized Pension and Postretirement Benefit Costs (net of tax expense of $0.7; $0.7)
2.8

 
3.1

Total Other Comprehensive Income (Loss)
311.9

 
(192.4
)
 
 
 
 
Comprehensive Income
$
592.8

 
$
81.1


See notes to consolidated financial statements.


6



CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)

Unum Group and Subsidiaries

 
Three Months Ended March 31
 
2019
 
2018
 
(in millions of dollars)
Common Stock
 
 
 
Balance at Beginning of Year and End of Period
$
30.5

 
$
30.5

 
 
 
 
Additional Paid-in Capital
 
 
 
Balance at Beginning of Year
2,321.7

 
2,303.3

Common Stock Activity
6.8

 
(0.9
)
Balance at End of Period
2,328.5

 
2,302.4

 
 
 
 
Accumulated Other Comprehensive Loss
 
 
 
Balance at Beginning of Year
(814.2
)
 
127.5

Adjustment to Adopt Accounting Standard Update - Note 2

 
(17.5
)
Balance at Beginning of Year, as Adjusted
(814.2
)
 
110.0

Other Comprehensive Income (Loss)
311.9

 
(192.4
)
Balance at End of Period
(502.3
)
 
(82.4
)
 
 
 
 
Retained Earnings
 
 
 
Balance at Beginning of Year
9,863.1

 
9,542.2

Adjustment to Adopt Accounting Standard Update - Note 2
(3.4
)
 
14.5

Balance at Beginning of Year, as Adjusted
9,859.7

 
9,556.7

Net Income
280.9

 
273.5

Dividends to Stockholders (per common share: $0.26; $0.23)
(57.5
)
 
(52.4
)
Balance at End of Period
10,083.1

 
9,777.8

 
 
 
 
Treasury Stock
 
 
 
Balance at Beginning of Year
(2,779.3
)
 
(2,428.6
)
Purchases of Treasury Stock
(100.0
)
 
(100.2
)
Balance at End of Period
(2,879.3
)
 
(2,528.8
)
 
 
 
 
Total Stockholders' Equity at End of Period
$
9,060.5

 
$
9,499.5


See notes to consolidated financial statements.
 

7



CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Unum Group and Subsidiaries
 
 
Three Months Ended March 31
 
2019
 
2018
 
(in millions of dollars)
Cash Flows from Operating Activities
 
 
 
Net Income
$
280.9

 
$
273.5

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
 
 
 
Change in Receivables
(10.7
)
 
(29.4
)
Change in Deferred Acquisition Costs
(3.1
)
 
(17.8
)
Change in Insurance Reserves and Liabilities
90.7

 
183.8

Change in Income Taxes
253.1

 
56.4

Change in Other Accrued Liabilities
(35.8
)
 
(110.4
)
Non-cash Components of Net Investment Income
(95.6
)
 
(95.2
)
Net Realized Investment (Gain) Loss
(1.1
)
 
2.2

Depreciation
27.4

 
24.6

Other, Net
11.0

 
12.2

Net Cash Provided by Operating Activities
516.8

 
299.9

 
 
 
 
Cash Flows from Investing Activities
 
 
 
Proceeds from Sales of Fixed Maturity Securities
361.0

 
84.8

Proceeds from Maturities of Fixed Maturity Securities
369.6

 
469.8

Proceeds from Sales and Maturities of Other Investments
133.3

 
82.3

Purchases of Fixed Maturity Securities
(822.0
)
 
(835.4
)
Purchases of Other Investments
(53.2
)
 
(90.0
)
Net Sales (Purchases) of Short-term Investments
(217.9
)
 
450.9

Net Decrease in Payables for Collateral on Investments
(107.9
)
 
(14.0
)
Net Purchases of Property and Equipment
(28.1
)
 
(29.1
)
Net Cash Provided (Used) by Investing Activities
(365.2
)
 
119.3

 
 
 
 
Cash Flows from Financing Activities
 
 
 
Long-term Debt Repayments
(15.0
)
 
(15.0
)
Issuance of Common Stock
1.4

 
1.3

Repurchase of Common Stock
(100.0
)
 
(105.7
)
Dividends Paid to Stockholders
(55.7
)
 
(52.4
)
Other, Net
(14.2
)
 
(15.9
)
Net Cash Used by Financing Activities
(183.5
)
 
(187.7
)
 
 
 
 
Net Increase (Decrease) in Cash and Bank Deposits
(31.9
)
 
231.5

 
 
 
 
Cash and Bank Deposits at Beginning of Year
94.0

 
77.4

 
 
 
 
Cash and Bank Deposits at End of Period
$
62.1

 
$
308.9


See notes to consolidated financial statements.

8


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Unum Group and Subsidiaries
March 31, 2019
Note 1 - Basis of Presentation



The accompanying consolidated financial statements of Unum Group and its subsidiaries (the Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes included in our annual report on Form 10-K for the year ended December 31, 2018.
   
In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of full year performance.

Note 2 - Accounting Developments

Accounting Updates Adopted in 2019:
Accounting Standards Codification (ASC)
 
Description
 
Date of Adoption
 
Effect on Financial Statements
 
 
 
 
 
 
 
ASC 220 "Income Statement - Reporting Comprehensive Income"
 
This update allowed entities to make an accounting policy election to reclassify the disproportionate tax effects arising as a result of the recognition of the enactment of the tax bill, H.R.1, An Act to Provide Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, more commonly known as the Tax Cuts and Jobs Act (TCJA) from accumulated other comprehensive income to retained earnings. Tax effects that are disproportionate in accumulated other comprehensive income for reasons other than the TCJA may not be reclassified. This update required additional disclosures on whether an entity elects to reclassify the disproportionate tax effects and its policy for releasing tax effects from accumulated other comprehensive income. This guidance was applied in the period of adoption.
 
January 1, 2019
 
The adoption of this update expanded certain of our disclosures but had no impact on our financial position or results of operations because we did not make the optional accounting policy election to reclassify the disproportionate tax effects resulting from the TCJA from accumulated other comprehensive income to retained earnings. We use an aggregate portfolio approach to release disproportionate tax effects when disposing of an entire business segment’s portfolio.
 
 
 
 
 
 
 
ASC 310 "Receivables - Nonrefundable Fees and Other Costs"
 
This update shortened the amortization period to the earliest call date for certain callable debt securities held at a premium. This update did not impact securities held at a discount. The guidance was applied in the period of adoption.
 
January 1, 2019
 
The adoption of this update did not have a material impact on our financial position or results of operations.
 
 
 
 
 
 
 
ASC 718 "Compensation - Stock Compensation"
 
This update generally aligned the accounting guidance for share-based payments issued to non-employees with guidance for share-based payments issued to employees. Specifically, the update required non-employee share-based payments to be measured using the grant date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered rather than being remeasured through the performance completion date. Additionally, for non-employee share-based payments that contain performance conditions, the update changed the criteria regarding the recognition of compensation cost to when achievement of a performance condition is probable rather than upon actual achievement of the performance condition. The guidance was applied in the period of adoption.
 
January 1, 2019
 
The adoption of this update did not have an impact on our financial position or results of operations.

9


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 2 - Accounting Developments - Continued


ASC
 
Description
 
Date of Adoption
 
Effect on Financial Statements
ASC 842 "Leases"
 
This update changed the accounting for leases, requiring lessees to report most leases on their balance sheets, regardless of whether the lease is classified as a finance lease or an operating lease. For lessees, the initial lease liability is equal to the present value of lease payments, and a corresponding asset, adjusted for certain items, is also recorded. Expense recognition for lessees remained similar to previous accounting requirements for capital and operating leases. For lessors, the guidance modified the classification criteria and the accounting for sales-type and direct financing leases. The guidance was applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings at the beginning of the period of adoption. In addition, the package of practical expedients available to leases that commenced prior to the date of adoption was applied.
 
January 1, 2019
 
See the summary table below for the financial statement impacts of this modified retrospective adoption on our financial statement line items at January 1, 2019. In addition, see Note 12 of the "Notes to Consolidated Financial Statements" contained herein in Item 1 for the additional disclosures required by the update.

Summary of Financial Statement Impacts of Accounting Updates Adopted in 2019:
 
Balance at December 31, 2018
 
Balance at January 1, 2019
 
Effect of Change
 
(in millions of dollars)
Adjustments due to ASC 842
 
 
 
 
 
Consolidated Balance Sheets
 
 
 
 
 
Assets
 
 
 
 
 
Other Assets
$
789.0

 
$
906.7

 
$
117.7

Deferred Income Tax
109.9

 
109.5

 
(0.4
)
 
 
 
 
 
 
Liabilities
 
 
 
 
 
Other Liabilities
1,762.8

 
1,884.8

 
122.0

Income Tax Payable
24.0

 
22.7

 
(1.3
)
 
 
 
 
 
 
Stockholders' Equity
 
 
 
 
 
Retained Earnings
9,863.1

 
9,859.7

 
(3.4
)

Summary of Financial Statement Impacts of Accounting Updates adopted in 2018:

Effective January 1, 2018, we adopted an update under ASC 825 that changed the accounting and disclosure requirements for certain financial instruments. These changes included a requirement to measure equity investments, other than those that resulted in consolidation or are accounted for under the equity method, at fair value through net income unless the investment qualifies for certain practicability exceptions. The guidance was applied using a modified retrospective approach through a cumulative-effect reduction to accumulated other comprehensive income of $17.5 million with a corresponding increase to retained earnings of $14.5 million, a decrease to other long-term investments of $3.8 million, and a decrease to deferred income tax liability of $0.8 million.


10


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 2 - Accounting Developments - Continued


Accounting Updates Outstanding:
ASC
 
Description
 
Date of Adoption
 
Effect on Financial Statements
 
 
 
 
 
 
 
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 through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. For available-for-sale fixed maturity securities, the update is applied prospectively. Other-than-temporary impairment losses recognized on available-for-sale fixed maturity securities prior to adoption of the update cannot be reversed. Early adoption is permitted.
 
January 1, 2020
 
We have determined that this guidance is primarily applicable to our mortgage loan investments and reinsurance recoverables. We are currently developing and implementing systems to support the expected credit loss projections for these asset types. We continue to evaluate the expected impact on our financial position, results of operations, and disclosures.
 
 
 
 
 
 
 
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 will not have a material effect on our financial position or results of operations.

11


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 2 - Accounting Developments - Continued


ASC
 
Description
 
Date of Adoption
 
Effect on Financial Statements
 
 
 
 
 
 
 
ASC 820 "Fair Value Measurement"
 
This update amended the fair value measurement guidance by removing or clarifying certain existing disclosure requirements, while also adding new disclosure requirements. Specifically, this update removed certain disclosures related to Level 1 and Level 2 transfers and also removed the discussion regarding valuation processes of Level 3 fair value measurements. The update modifies guidance related to investments in certain entities that calculate net asset value to explicitly require disclosure regarding timing of liquidation of the investee's assets and timing of redemption restrictions. The update adds disclosures around the changes in unrealized gains and losses in other comprehensive income for recurring Level 3 investments held at the end of the reporting period and adds disclosures regarding certain unobservable inputs on Level 3 fair value measurements. The guidance was applied retrospectively or prospectively depending on the specific requirement of the update. Entities are permitted to early adopt any removed or modified disclosures and may delay adoption of the additional disclosures until their effective date.
 
December 31, 2018 for the removal and modification of certain disclosures and January 1, 2020 for the addition of certain disclosures.
 
We elected to early adopt the removal and modification of disclosures, as permitted by the update. We have elected to delay the adoption of the additional disclosures until the effective date. The adoption of this update will modify our disclosures but will not have an impact on our financial position or results of operations.
 
 
 
 
 
 
 
ASC 715 "Compensation - Retirement Benefits"
 
This update amends the defined benefit pension and other postretirement benefit guidance by removing or clarifying certain existing disclosure requirements, while also adding new disclosure requirements. Specifically, this update removes the requirement to disclose the effects of a one-percentage point change in the assumed healthcare cost trend and the requirement to disclose amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost of the next year. This update adds a requirement to describe the reasons for significant gains and losses related to changes in the benefit obligation for the period. The update also clarifies that the projected benefit obligation (PBO) and accumulated benefit obligation (ABO) and fair value of plan assets are to be disclosed for plans with PBOs or ABOs in excess of plan assets. The guidance is to be applied retrospectively and early adoption is permitted.
 
December 31, 2020
 
We have not yet determined the expected impact on our disclosures.

12


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
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 are currently evaluating the impact of the update and expect that the adoption may have a material impact on our financial position and results of operations. The update will also significantly expand our disclosures.

13


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments


Fair Value Measurements for Financial Instruments Carried at Fair Value

We report fixed maturity securities, which are classified as available-for-sale securities, derivative financial instruments, and unrestricted equity securities at fair value in our consolidated balance sheets. We report our investments in private equity partnerships at our share of the partnerships' net asset value per share or its equivalent (NAV) as a practical expedient for fair value.

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

We classify financial instruments in accordance with a fair value hierarchy consisting of three levels based on the observability of valuation inputs:

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.

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

14


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued


pricing vendors to ensure we are in agreement with their current methodologies. When markets are less active, brokers may rely more on models with inputs based on the information available only to the broker. Our internal investment management professionals, which include portfolio managers and analysts, monitor securities priced by brokers and evaluate their prices for reasonableness based on benchmarking to available primary and secondary market information. In weighing a broker quote as an input to fair value, we place less reliance on quotes that do not reflect the result of market transactions. We also consider the nature of the quote, particularly whether the quote is a binding offer. If prices in an inactive market do not reflect current prices for the same or similar assets, adjustments may be necessary to arrive at fair value. When relevant market data is unavailable, which may be the case during periods of market uncertainty, the income approach can, in suitable circumstances, provide a more appropriate fair value. During 2019, we have applied valuation approaches and techniques on a consistent basis to similar assets and liabilities and consistent with those approaches and techniques used at year end 2018.

Fixed Maturity and Equity Securities

We use observable and unobservable inputs in measuring the fair value of our fixed maturity and equity securities. For securities categorized as Level 1, fair values equal active Trade Reporting and Compliance Engine (TRACE) pricing or unadjusted broker market maker prices. For securities categorized as Level 2 or Level 3, inputs that may be used in valuing each class of securities at any given time period are disclosed below. Actual inputs used to determine fair values will vary for each reporting period depending on the availability of inputs which may, at times, be affected by the lack of market liquidity.

 
 
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
 
 
 
 
 
 
 
 
 
 
 
 

15


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
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
 
 
 
 
 
 
 
 

16


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued


 
 
Level 2
 
Level 3
Instrument
 
Observable Inputs
 
Unobservable Inputs
 
 
 
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
 
 
 
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


17


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued


The management of our investment portfolio includes establishing pricing policy and reviewing the reasonableness of sources and inputs used in developing pricing. We review all prices obtained to ensure they are consistent with a variety of observable market inputs and to verify the validity of a security's price.  In the event we receive a vendor's market price that does not appear reasonable based on our market analysis, we may challenge the price and request further information about the assumptions and methodologies used by the vendor to price the security. We may change the vendor price based on a better data source such as an actual trade. We also review all price changes from the prior month which fall outside a predetermined corridor. The overall valuation process for determining fair values may include adjustments to valuations obtained from our pricing sources when they do not represent a valid exit price. These adjustments may be made when, in our judgment and considering our knowledge of the financial conditions and industry in which the issuer operates, certain features of the financial instrument require that an adjustment be made to the value originally obtained from our pricing sources. These features may include the complexity of the financial instrument, the market in which the financial instrument is traded, counterparty credit risk, credit structure, concentration, or liquidity. Additionally, an adjustment to the price derived from a model typically reflects our judgment of the inputs that other participants in the market for the financial instrument being measured at fair value would consider in pricing that same financial instrument. In the event an asset is sold, we test the validity of the fair value determined by our valuation techniques by comparing the selling price to the fair value determined for the asset in the immediately preceding month end reporting period.
Certain of our investments do not have readily determinable market prices and/or observable inputs or may at times be affected by the lack of market liquidity. For these securities, we use internally prepared valuations combining matrix pricing with vendor purchased software programs, including valuations based on estimates of future profitability, to estimate the fair value. Additionally, we may obtain prices from independent third-party brokers to aid in establishing valuations for certain of these securities. Key assumptions used by us to determine fair value for these securities include risk free interest rates, risk premiums, performance of underlying collateral (if any), and other factors involving significant assumptions which may or may not reflect those of an active market.

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

At March 31, 2019, 22.6 percent of our fixed maturity securities were valued using active trades from TRACE pricing or broker market maker prices for which there was current market activity in that specific security (comparable to receiving one binding quote).  The prices obtained were not adjusted, and the assets were classified as Level 1.

The remaining 77.4 percent of our fixed maturity securities were valued based on non-binding quotes or other observable and unobservable inputs, as discussed below:

64.2 percent of our fixed maturity securities were valued based on prices from pricing services that generally use observable inputs such as prices for securities or comparable securities in active markets in their valuation techniques. These assets were classified as Level 2. 

3.4 percent of our fixed maturity securities were valued based on one or more non-binding broker quotes, if validated by observable market data, or on TRACE prices for identical or similar assets absent current market activity. When only one price is available, it is used if observable inputs and analysis confirms that it is appropriate. These assets, for which we were able to validate the price using other observable market data, were classified as Level 2.

9.8 percent of our fixed maturity securities were valued based on prices of comparable securities, matrix pricing, market models, and/or internal models or were valued based on non-binding quotes with no other observable market data. These assets were classified as either Level 2 or Level 3, with the categorization dependent on whether there was other observable market data.  


18


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued


Derivatives

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

We consider transactions in inactive markets to be less representative of fair value. We use all available observable inputs when measuring fair value, but when significant unobservable inputs are used, we classify these assets or liabilities as Level 3.

Private Equity Partnerships

Our private equity partnerships represent funds that are primarily invested in private credit, private equity, and real assets, as described below. Distributions received from the funds arise from income generated by the underlying investments as well as the liquidation of the underlying investments. There is generally not a public market for these investments.

The following table presents additional information about our private equity partnerships, including commitments for additional investments which may or may not be funded:

 
 
March 31, 2019
Investment Category
 
Fair Value
 
Redemption Term / Redemption Notice
 
Unfunded Commitments
 
 
(in millions of dollars)
 
 
 
(in millions of dollars)
Private Credit
(a)
$
170.5

 
Not redeemable
 
$
93.8

 
 
26.5

 
Initial 2 year lock on each new investment / Quarterly after 2 year lock with 90 days notice
 
10.3

Total Private Credit
 
197.0

 
 
 
104.1

 
 
 
 
 
 
 
Private Equity
(b)
132.4

 
Not redeemable
 
161.5

 
 
 
 
 
 
 
Real Assets
(c)
135.0

 
Not redeemable
 
99.4

 
 
30.3

 
Quarterly / 90 days notice
 

Total Real Assets
 
165.3

 
 
 
99.4

 
 
 
 
 
 
 
Total Partnerships
 
$
494.7

 
 
 
$
365.0



19


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued


 
 
December 31, 2018
Investment Category
 
Fair Value
 
Redemption Term / Redemption Notice
 
Unfunded Commitments
 
 
(in millions of dollars)
 
 
 
(in millions of dollars)
Private Credit
(a)
$
168.6

 
Not redeemable
 
$
99.5

 
 
25.7

 
Initial 2 year lock on each new investment / Quarterly after 2 year lock with 90 days notice
 
10.3

Total Private Credit
 
194.3

 
 
 
109.8

 
 
 
 
 
 
 
Private Equity
(b)
128.3

 
Not redeemable
 
169.5

 
 
 
 
 
 
 
Real Assets
(c)
131.0

 
Not redeemable
 
106.0

 
 
30.2

 
Quarterly / 90 days notice
 

Total Real Assets
 
161.2

 
 
 
106.0

 
 
 
 
 
 
 
Total Partnerships
 
$
483.8

 
 
 
$
385.3


(a)
Private Credit - The limited partnerships described in this category employ various investment strategies, generally providing direct lending or other forms of debt financing including first-lien, second-lien, mezzanine, and subordinated loans. The limited partnerships have credit exposure to corporates, physical assets, and/or financial assets within variety of industries (including manufacturing, healthcare, energy, business services, technology, materials, and retail) in North America and, to a lesser extent, outside of North America.  Unless specifically disclosed in the table above, these limited partnerships do not allow for redemptions. As of March 31, 2019, the estimated remaining life of the investments that do not allow for redemptions is approximately 44 percent in the next 3 years, 20 percent during the period from 3 to 5 years, 33 percent during the period from 5 to 10 years, and 3 percent during the period from 10 to 15 years.

(b)
Private Equity - The limited partnerships described in this category employ various strategies generally investing in controlling or minority control equity positions directly in companies and/or assets across various industries (including manufacturing, healthcare, energy, business services, technology, materials, and retail), primarily in private markets within North America and, to a lesser extent, outside of North America.  Unless specifically disclosed in the table above, these limited partnerships do not allow for redemptions. As of March 31, 2019, the estimated remaining life of the investments that do not allow for redemptions is approximately 46 percent in the next 3 years, 52 percent during the period from 5 to 10 years, and 2 percent during the period from 10 to 15 years.

(c)
Real Assets - The limited partnerships described in this category employ various strategies, which include investing in the equity and/or debt financing of physical assets, including infrastructure (energy, power, water/wastewater, communications), transportation (including airports, ports, toll roads, aircraft, railcars) and real estate in North America, Europe, South America, and Asia.  Unless specifically disclosed in the table above, these limited partnerships do not allow for redemption. As of March 31, 2019, the estimated remaining life of the investments that do not allow for redemptions is approximately 2 percent in the next 3 years, 18 percent during the period from 3 to 5 years, 75 percent during the period from 5 to 10 years, and 5 percent during the period from 10 to 15 years.








20


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued


The following tables present information about assets and liabilities measured at fair value on a recurring basis by fair value level, based on the observability of the inputs used:
 
March 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
NAV
 
Total
 
(in millions of dollars)
Assets
 
 
 
 
 
 
 
 
 
Fixed Maturity Securities
 
 
 
 
 
 
 
 
 
United States Government and Government Agencies and Authorities
$
466.9

 
$
1,378.9

 
$

 
$

 
$
1,845.8

States, Municipalities, and Political Subdivisions

 
2,540.4

 

 

 
2,540.4

Foreign Governments

 
976.1

 
31.6

 

 
1,007.7

Public Utilities
731.2

 
6,499.3

 
224.0

 

 
7,454.5

Mortgage/Asset-Backed Securities

 
1,556.1

 

 

 
1,556.1

All Other Corporate Bonds
8,942.5

 
20,899.4

 
496.0

 

 
30,337.9

Redeemable Preferred Stocks

 
19.2

 
21.0

 

 
40.2

Total Fixed Maturity Securities
10,140.6

 
33,869.4

 
772.6

 

 
44,782.6

 
 
 
 
 
 
 
 
 
 
Other Long-term Investments
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
 
Foreign Exchange Contracts

 
24.5

 

 

 
24.5

Credit Default Swaps

 
0.1

 

 

 
0.1

Equity Securities
27.5

 
0.2

 
4.6

 

 
32.3

Private Equity Partnerships

 

 

 
494.7

 
494.7

Total Other Long-term Investments
27.5

 
24.8

 
4.6

 
494.7

 
551.6

Total Financial Instrument Assets Carried at Fair Value
$
10,168.1

 
$
33,894.2

 
$
777.2

 
$
494.7

 
$
45,334.2

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Other Liabilities
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
 
Interest Rate Swaps and Forwards
$

 
$
3.8

 
$

 
$

 
$
3.8

Foreign Exchange Contracts

 
31.9

 

 

 
31.9

Embedded Derivative in Modified Coinsurance Arrangement

 

 
25.6

 

 
25.6

Total Derivatives

 
35.7

 
25.6

 

 
61.3

Total Financial Instrument Liabilities Carried at Fair Value
$

 
$
35.7

 
$
25.6

 
$

 
$
61.3


21


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued


 
December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
NAV
 
Total
 
(in millions of dollars)
Assets
 
 
 
 
 
 
 
 
 
Fixed Maturity Securities
 
 
 
 
 
 
 
 
 
United States Government and Government Agencies and Authorities
$
513.4

 
$
1,301.0

 
$

 
$

 
$
1,814.4

States, Municipalities, and Political Subdivisions

 
2,424.2

 

 

 
2,424.2

Foreign Governments

 
952.3

 
31.4

 

 
983.7

Public Utilities
286.4

 
7,041.7

 
84.7

 

 
7,412.8

Mortgage/Asset-Backed Securities

 
1,582.7

 

 

 
1,582.7

All Other Corporate Bonds
4,232.1

 
23,026.1

 
1,495.8

 

 
28,754.0

Redeemable Preferred Stocks

 
18.8

 
21.1

 

 
39.9

Total Fixed Maturity Securities
5,031.9

 
36,346.8

 
1,633.0

 

 
43,011.7

 
 
 
 
 
 
 
 
 
 
Other Long-term Investments
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
 
Foreign Exchange Contracts

 
30.4

 

 

 
30.4

Credit Default Swaps

 
0.5

 

 

 
0.5

Equity Securities

 
24.6

 
4.6

 

 
29.2

Private Equity Partnerships

 

 

 
483.8

 
483.8

Total Other Long-term Investments

 
55.5

 
4.6

 
483.8

 
543.9

Total Financial Instrument Assets Carried at Fair Value
$
5,031.9

 
$
36,402.3

 
$
1,637.6

 
$
483.8

 
$
43,555.6

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Other Liabilities
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 
 
Interest Rate Swaps
$

 
$
5.2

 
$

 
$

 
$
5.2

Foreign Exchange Contracts

 
32.8

 

 

 
32.8

Embedded Derivative in Modified Coinsurance Arrangement

 

 
31.1

 

 
31.1

Total Derivatives

 
38.0

 
31.1

 

 
69.1

Total Financial Instrument Liabilities Carried at Fair Value
$

 
$
38.0

 
$
31.1

 
$

 
$
69.1



22


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued


Changes in assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) are as follows:
 
Three Months Ended March 31, 2019
 
 
 
Total Realized and
Unrealized Investment
Gains (Losses) Included in
 
 
 
 
 
Level 3 Transfers
 
 
 
Fair Value Beginning
of Period
 
Earnings
 
Other
Comprehensive
Income or Loss
 
Purchases
 
Sales
 
Into
 
Out of
 
Fair Value End of
Period
 
(in millions of dollars)
Fixed Maturity Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign Governments
$
31.4

 
$

 
$
0.2

 
$

 
$

 
$

 
$

 
$
31.6

Public Utilities
84.7

 

 
7.9

 

 
(0.4
)
 
208.6

 
(76.8
)
 
224.0

All Other Corporate Bonds
1,495.8

 

 
13.3

 

 
(29.4
)
 
36.1

 
(1,019.8
)
 
496.0

Redeemable Preferred Stocks
21.1

 

 
(0.1
)
 

 

 

 

 
21.0

Total Fixed Maturity Securities
1,633.0

 

 
21.3

 

 
(29.8
)
 
244.7

 
(1,096.6
)
 
772.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities
4.6

 

 

 

 

 

 

 
4.6

Embedded Derivative in Modified Coinsurance Arrangement
(31.1
)
 
5.5

 

 

 

 

 

 
(25.6
)
 

23


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued


 
Three Months Ended March 31, 2018
 
 
 
Total Realized and
Unrealized Investment
Gains (Losses) Included in
 
 
 
 
 
Level 3 Transfers
 
 
 
Fair Value Beginning
of Period
 
Earnings
 
Other
Comprehensive
Income or Loss
 
Purchases
 
Sales
 
Into
 
Out of
 
Fair Value End of
Period
 
(in millions of dollars)
Fixed Maturity Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
States, Municipalities, and Political Subdivisions
$

 
$

 
$
(0.8
)
 
$

 
$
(0.1
)
 
$
36.6

 
$

 
$
35.7

Foreign Governments

 

 
(0.4
)
 

 

 
32.7

 

 
32.3

Public Utilities
207.7

 

 
(6.7
)
 

 
(1.1
)
 
200.9

 
(116.6
)
 
284.2

Mortgage/Asset-Backed Securities

 

 

 

 

 
0.5

 

 
0.5

All Other Corporate Bonds
1,150.1

 

 
(22.1
)
 

 
(11.7
)
 
466.0

 
(595.1
)
 
987.2

Redeemable Preferred Stocks
22.8

 

 
(0.6
)
 

 

 

 

 
22.2

Total Fixed Maturity Securities
1,380.6

 

 
(30.6
)
 

 
(12.9
)
 
736.7

 
(711.7
)
 
1,362.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Equity Securities
1.1

 

 

 

 

 

 

 
1.1

Embedded Derivative in Modified Coinsurance Arrangement
(15.9
)
 
(1.7
)
 

 

 

 

 

 
(17.6
)

Realized and unrealized investment gains and losses presented in the preceding tables represent gains and losses only for the time during which the applicable financial instruments were classified as Level 3. The transfers between levels resulted primarily from a change in observability of three inputs used to determine fair values of the securities transferred: (1) transactional data for new issuance and secondary trades, (2) broker/dealer quotes and pricing, primarily related to changes in the level of activity in the market and whether the market was considered orderly, and (3) comparable bond metrics from which to perform an analysis. For fair value measurements of financial instruments that were transferred either into or out of Level 3, we reflect the transfers using the fair value at the beginning of the period. We believe this allows for greater transparency, as all changes in fair value that arise during the reporting period of the transfer are disclosed as a component of our Level 3 reconciliation. Gains (losses) which are included in earnings and are attributable to the change in fair value of assets or liabilities valued using significant unobservable inputs and still held at period end were $5.5 million and $(1.7) million for the three months ended March 31, 2019 and 2018, respectively. These amounts relate entirely to the change in fair value of an embedded derivative in a modified coinsurance arrangement and are reported as a component of realized investment gains and losses.
 

24


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued


The table below provides quantitative information regarding the significant unobservable inputs used in Level 3 fair value measurements derived from internal models. Certain securities classified as Level 3 are excluded from the table below due to limitations in our ability to obtain the underlying inputs used by external pricing sources.
 
March 31, 2019
 
Fair Value
 
Valuation Method
 
Unobservable Input
 
Range/Weighted Average
 
(in millions of dollars)
Fixed Maturity Securities
 
 
 
 
 
 
 
All Other Corporate Bonds - Private
$
208.2

 
Market Approach
 
Lack of Marketability
Volatility of Credit
Market Convention

(a)
(b)
(c)

0.25% - 0.25% / 0.25%
0.20% - 12.54% / 1.00%
Priced at Par
Equity Securities - Private
4.6

 
Market Approach
 
Market Convention
(c)
Priced at Cost or Owner's Equity
Embedded Derivative in Modified Coinsurance Arrangement
(25.6
)
 
Discounted Cash Flows
 
Projected Liability Cash Flows
(d)
Actuarial Assumptions
 
December 31, 2018
 
Fair Value
 
Valuation Method
 
Unobservable Input
 
Range/Weighted Average
 
(in millions of dollars)
Fixed Maturity Securities
 
 
 
 
 
 
 
All Other Corporate Bonds - Private
$
148.5

 
Market Approach
 
Lack of Marketability
Volatility of Credit
Market Convention

(a)
(b)
(c)

0.25% - 0.25% / 0.25%
0.25% - 10.99% / 1.00%
Priced at Par
Equity Securities - Private
4.6

 
Market Approach
 
Market Convention
(c)
Priced at Cost or Owner's Equity
Embedded Derivative in Modified Coinsurance Arrangement
(31.1
)
 
Discounted Cash Flows
 
Projected Liability Cash Flows
(d)
Actuarial Assumptions

(a)
Represents basis point adjustments to apply a discount due to the illiquidity of an investment
(b)
Represents basis point adjustments for credit-specific factors
(c)
Represents a decision to price based on par value, cost, or owner's equity when limited data is available
(d)
Represents various actuarial assumptions required to derive the liability cash flows including incidence, termination, and lapse rates

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


25


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued


Fair Value Measurements for Financial Instruments Not Carried at Fair Value

The methods and assumptions used to estimate fair values of financial instruments not carried at fair value are discussed as follows.

Mortgage Loans: Fair values are estimated using discounted cash flow analyses and interest rates currently being offered for similar loans to borrowers with similar credit ratings and maturities. Loans with similar characteristics are aggregated for purposes of the calculations.

Policy Loans: Fair values for policy loans, net of reinsurance ceded, are estimated using discounted cash flow analyses and interest rates currently being offered to policyholders with similar policies. Carrying amounts for ceded policy loans, which equal $3,390.2 million and $3,449.3 million as of March 31, 2019 and December 31, 2018, respectively, approximate fair value and are reported on a gross basis in our consolidated balance sheets. A change in interest rates for ceded policy loans will not impact our financial position because the benefits and risks are fully ceded to reinsuring counterparties.

Miscellaneous Long-term Investments: Carrying amounts for tax credit partnerships equal the unamortized balance of our contractual commitments and approximate fair value. Our shares of FHLB common stock are carried at cost, which approximates fair value.

Long-term Debt: Fair values for long-term debt are obtained from independent pricing services or discounted cash flow analyses based on current incremental borrowing rates for similar types of borrowing arrangements.

FHLB Funding Agreements: Funding agreements with the FHLB represent cash advances used for the purpose of investing in fixed maturity securities. Carrying amounts approximate fair value.

Unfunded Commitments to Investment Partnerships: Unfunded equity commitments represent amounts that we have committed to fund certain investment partnerships. These commitments are legally binding, subject to the partnerships meeting specified conditions. Carrying amounts of these financial instruments approximate fair value.


26


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Unum Group and Subsidiaries
March 31, 2019
Note 3 - Fair Values of Financial Instruments - Continued


The following table presents the carrying amounts and estimated fair values of our financial instruments not measured at fair value and indicates the level in the fair value hierarchy of the estimated fair value measurement based on the observability of the inputs used:
 
March 31, 2019
 
Estimated Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Carrying Value
 
(in millions of dollars)
Assets
 
 
 
 
 
 
 
 
 
Mortgage Loans
$

 
$
2,273.2

 
$

 
$
2,273.2

 
$
2,206.6

Policy Loans

 

 
3,780.5

 
3,780.5

 
3,673.3

Other Long-term Investments
 
 
 
 
 
 
 
 
 
Miscellaneous Long-term Investments

 
19.1

 
82.7

 
101.8

 
101.8

Total Financial Instrument Assets Not Carried at Fair Value
$

 
$
2,292.3

 
$
3,863.2

 
$
6,155.5

 
$
5,981.7

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Long-term Debt
$
2,847.6

 
$
317.1

 
$

 
$
3,164.7

 
$
2,958.7

Other Liabilities
 
 
 
 
 
 
 
 
 
Unfunded Commitments

 
2.3

 

 
2.3

 
2.3

Total Financial Instrument Liabilities Not Carried at Fair Value
$
2,847.6

 
$
319.4

 
$

 
$
3,167.0

 
$
2,961.0